Deutsche Bank to pay $7.2 billion to settle US subprime mortgage case

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Zurich: Deutsche Bank AG said it reached a $7.2 billion agreement to resolve a years-long US investigation into its dealings in mortgage-backed securities, removing a major legal hurdle that fuelled investor angst.

Deutsche Bank will pay a $3.1 billion civil penalty and provide $4.1 billion in relief to consumers under a settlement in principle with US authorities, which was announced by the Frankfurt-based bank in a statement early Friday. The deal compares with a Justice Department opening request of $14 billion.

While the agreement removes a significant uncertainty, Germany’s biggest lender still faces Justice Department investigations of other matters and potentially expensive civil suits. Chief executive officer John Cryan has made resolving litigation a priority as he seeks to restore confidence in the lender.

Deutsche Bank expects pretax charges of about $1.2 billion this quarter because of the civil penalty. “The financial consequences, if any, of the consumer relief are subject to the final terms of the settlement, and are not currently expected to have a material impact on 2016 financial results,” the bank said.

The bank will publish preliminary 2016 results as scheduled on 2 February, it said.

Crisis probes

Deutsche Bank had set aside €5.9 billion ($6.2 billion) for all of its outstanding legal costs as of 30 September, when its common equity Tier 1 ratio, a measure of financial strength, stood at 11.1%. The bank targets a level of at least 12.5% in 2018. Each $1 billion of litigation costs not covered by provisions would lower the ratio by 20-25 basis points, Bloomberg Intelligence analyst Arjun Bowry has estimated.

In a related case, the Justice Department sued Barclays Plc for fraud over its sale of mortgage bonds after the bank balked at paying the amount the government sought in negotiations. The lawsuit announced on Thursday is rare for big banks, which typically settle with the government rather than risk drawn-out litigation and a possible trial.

The Obama administration is pressing to wrap up investigations of Wall Street firms for creating and selling the subprime mortgage bonds that fueled the 2008 financial crisis. Authorities have already extracted more than $46 billion in fines from six US financial institutions over their dealings in mortgage-backed securities. Bank of America Corp., which had the largest such settlement, agreed to pay $16.7 billion over bonds that were worth four times those of Deutsche Bank.

Record low

Concern about whether Deutsche Bank had enough capital roiled markets and pushed the stock to a record low after it said in September that the US Justice Department had made the opening request of $14 billion and that it had no intention of paying that amount.

The consumer relief will include “loan modifications” and other assistance to homeowners and borrowers over at least five years, the bank said.

The agreement doesn’t resolve probes into whether the bank manipulated foreign-currency rates and precious metals prices and whether it facilitated transactions that helped investors illegally transfer billions of dollars out of Russia. Deutsche Bank also faces civil lawsuits related to claims that its traders manipulated key interbank interest rates. It isn’t clear how much more wrapping up these cases will cost.

Deutsche Bank already has paid more than $9 billion in fines and legal settlements worldwide since the start of 2008, according to data compiled by Bloomberg. That includes settlements related to violations of US sanctions, rigging of interest-rate benchmarks and allegations that it defrauded US-backed mortgage issuers Fannie Mae and Freddie Mac.

Year of struggle

A slump in earnings, negative interest rates and challenging markets have caused the bank to continue to struggle this year. Cryan’s strategy, announced in October 2015, called for cost cuts and the elimination of dividends for two years to preserve capital. Deutsche Bank has said it may not be profitable in 2016 as it focuses on moving past its legal battles.

At least four other European banks remain under investigation over the role of their mortgage-backed securities business: Credit Suisse Group AG, UBS Group AG, HSBC Holdings Plc, and Royal Bank of Scotland Group Plc. In addition to Bank of America, US banks that have settled include Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley. Wells Fargo & Co. and Moody’s Corp. have disclosed US investigations into their mortgage-backed securities dealings and have said they’re cooperating.