Shares in Deutsche Bank, Germany’s largest bank, took a dive after news that the institution faces a $14bn (£10.5bn) charge over mis-selling mortgage securities in the US. Here are some of the questions raised by the bank’s latest spat with regulators.
Why is Deutsche Bank in trouble?
The prospect of a $14bn penalty from the US Department of Justice has rattled investor confidence in Deutsche. Sentiment was already weak following a turbulent start to the year when prospects of a slowdown in global growth and lower interest rates raised questions about the bank’s future profits and dented the share price. The penalty aims to settle allegations, dating back to 2005, about the way the bank selected mortgages, packaged them into bonds and sold on to investors. These bonds are known as residential mortgage-backed securities (RMBS).
Can Deutsche afford the bill?
Deutsche Bank has been quick to describe the fine as an “opening position” from Washington. It is easy to see why. It would be one of the largest ever fines levied by the US. It could also strain the bank’s finances. For 2015, the bank reported its first annual loss since 2008 and could be heading for another loss this year regardless of the threatened justice department fine. According to Tomas Kinmonth, an analyst at Dutch bank ABN Amro, a settlement on that scale could impede Deutsche’s ability to pay coupons – or regular interest payments to investors – on a special type of bond. “Not only are clouds over their profitability still above them, but the fine announcement will come as very unwanted news indeed,” said Kinmonth. The bonds are known as AT1s, which are intended to shore up Deutsche in a time of crisis.
The bank, though, has made clear it has no intention of agreeing to a fine at this level and has stressed it has the resources to keep making payments on the bonds until 2017, at least. However, one analyst told Reuters that any fine topping €5bn would force it to raise fresh funds in the financial markets by tapping shareholders for cash.
Is this the end of Deutsche Bank’s regulator troubles?
The bank has set aside €5.5bn for litigation costs but does not spell out exactly what that sum is for. It is battling more than 7,000 legal cases, although the ones gaining most attention are the RMBS case and one relating to activities in Russia, where the bank is facing an investigation into so-called mirror trades, where clients bought shares in Russia and simultaneously sold similar shares abroad in foreign currency. Regulators are investigating whether or not these trades skirted international sanctions against Russia by turning Russia-held roubles into dollars held outside the country.
Why have shares in RBS taken a dive as well?
For at least a year, the bailed-out UK bank has been warning the City it faces a penalty over RMBS. Only on Monday, finance director Ewen Stevenson told investors that its $5.6bn provision for various claims relating to these mortgage bonds might not be enough. “This provision does not include or reflect potential penalties and compensatory damages that may be imposed by US DoJ, which may be substantial,” Stevenson said. The potential scale of the penalty facing Deutsche has raised anxiety about the possible fine facing RBS, which is 73% owned by taxpayers and yet to make an annual profit since its bailout in 2008.
Could other European banks be affected?
Deutsche is the first European bank that appears to have started talks with the DoJ over RMBS. Barclays and the Swiss bank UBS are among others waiting for settlement talks to be concluded. Their shares also fell on Friday.
