Deutsche Bank Roundup: Where We Are Now
Shares of Deutsche Bank hit record lows last week, as the German lender struggled to come to terms with US regulators over its involvement in the subprime mortgage crisis. Despite receiving a large boost in the final session of Q3, the company’s share price was back on the defensive Monday as investors continued to speculate about its future.
Deutsche stock has collapsed nearly 50% since the start of the year, with losses accelerating in September after the US Department of Justice (BOJ) fined the German lender $14 billion for mis-selling mortgage-backed securities.1 Such a fine translates to half of the company’s reported revenue and more than twice its 2015 operating income.2
The threat of such a massive fine has pushed the bank’s shares to record lows. The selloff has been relentless, and is expected to continue unless the lender can reach a more reasonable settlement with US regulators. Hopes that Deutsche would be able to negotiate a smaller fine on Friday drove the stock to double-digit percentage gains. However, as of Monday, a deal remained elusive, making the company vulnerable to further decline.
The German lender has already said it will fight the fine, announcing that it has “no intent” to pay “anywhere near the number cited.”
“The negotiations are only the beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts,” Deutsche Bank said.
As of June 30, the bank had €5.5 billion ($6.17 billion) in litigation reserves.3
While Deutsche executives aren’t looking to get off easy, they are trying to negotiate a settlement similar to their US peers. JPMorgan Chase struck a $9 billion settlement with the DOJ, while Citigroup got off with a $7 billion fine. Goldman Sachs and Morgan Stanley paid fines of $5.1 billion and $3.2 billion, respectively. The only exception to the rule is Bank of America, which forked over a massive $16.7 billion to the DOJ to end US mortgage probes.4
Despite its recent crisis, Deutsche Bank’s woes go back several years. Since the fallout from the global financial crisis, the bank has gone through multiple CEOs in an attempt to rebrand itself. For 2015, the company reported a record-setting loss of €6.8 billion ($7.62 billion). Back in May, Berenberg Bank warned that the German lender’s problems may be “insurmountable.”5
One month later, the International Monetary Fund (IMF) released a report claiming that Deutsche Bank “appears to be the most important net contributor to systemic risks in the global banking system.”6
As one might expect, the spillover from the bank’s crisis has been severe. Bank shares from Wall Street to Europe have been adversely impacted, as skittish investors await a more fruitful resolution to the crisis. The German government has also refused to help, partly because bailing out the bank would be politically dangerous for Angela Merkel’s faltering regime. However, according to analysts, the German government is likely the only entity that can actually save the bank. Despite contradictory reports indicating that Berlin was considering a rescue plan, the German government has remained on the sidelines.7
Without a resolution to its $14 billion fine, Deutsche Bank will continue to rattle the markets. That’s why the bank is racing to reach a settlement with US lawmakers. The clock is ticking, and so is what’s left of investors’ confidence.8
1 Georgina Prodhan, Kathrin Jones and Lawrence Delevinge (October 3, 2016). “Deutsche Bank shares slip again in race to reach U.S. settlement.” Reuters.
2 Research Team (October 4, 2016). “10 Things Investors Need To Know About Deutsche Bank AG.” Economic Calendar.
3 Evelyn Cheng (September 30, 2016). ‘Why you should be skeptical of that $5.4 billion Deutsche Bank settlement.” CNBC.
4 Antoine Gara (September 16, 2016). “Deutsche Bank Shares Sink On $14 Billion DoJ Mortgage Settlement Standoff.” Forbes.
5 Jeff Desjardins (July 8, 2016). “Chart: The Epic Collapse of Deutsche Bank.” Visual Capitalist.
6 Evelyn Cheng (September 28, 2016). “Deutsche Bank crisis: How we got here, and where we are.” Market Insider.
7 Matt Clinch (September 29, 2016). “Deutsche Bank can only be saved by the German government, strategist says.” CNBC.
8 Georgina Prodhan, Kathrin Jones and Lawrence Delevinge (October 3, 2016). “Deutsche Bank shares slip again in race to reach U.S. settlement.” Reuters.
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