Shares in Deutsche Bank have plummeted more than 8% after the US Department of Justice (DoJ) proposed it should pay a 14 billion US dollar (£10.5 billion) settlement linked to the sale of mortgage-backed securities in the run-up to the financial crisis.
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Deutsche Bank shares traded in NY plunged 8.4% to $13.50 in pre-market action Friday after the company confirmed that Justice negotiators had staked out “an opening position” of $14 billion in their discussions.
The bank indicated that it has “no intent” to settle at the level cited.
Deutsche Bank is in the middle of a painful transition as it tries to meet tougher regulatory requirements, cut costs and settle multiple legal investigations.
Earlier this month RBS Chief Financial Officer Euan Stevenson told a conference that the bank now expected its negotiations with the DoJ to be in 2017.
Royal Bank of Scotland and Barclays also traded lower, given these banks are also in discussion with the DOJ over similar claims, Dickerson said in a note.
That did little to reassure markets, which have been punishing bank stocks across Europe after a run of weak industry profits.
Another investor source, who declined to be named, said efforts by the bank’s senior management team to set aside cash to cover the USA fines had been complicated by accounting rules, which prohibited provisioning in the absence of solid data to support the estimate or guidance on timing.
He said: “RBS could have to pay up to 13 billion United States dollars (£9.8 billion) to settle the claims”.
“I don’t share that assessment”, she said. Goldman Sachs made a settlement for $5.1 billion at the start of the current year.
The claim far outstrips the bank’s and investors’ expectations. Goldman Sachs Group agreed to a $5.1 billion settlement with the U.S. earlier this year, including a $2.4 billion civil penalty and $875 million in cash payments, to resolve U.S. allegations that it failed to properly vet mortgage-backed securities before selling them to investors as high-quality debt.
While promoted as relatively safe, such securities contained residential mortgages from borrowers who were unlikely to be able to repay their loans. Since the financial crisis, its share price has crashed by 92% as it staggers from one disaster to another.
The DoJ has invited the bank to submit a counter proposal. That followed a 6.7 billion-euro loss recorded in 2015.
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And this swoop on Deutsche could easily spell bad news for United Kingdom banks, specifically Royal Bank of Scotland (RBS), which is already under investigation by the DoJ on similar charges.
