Europe banks gird for US$17bn fine over US mortgages

By Steve Slater

LONDON, Sept 15 (IFR) - Five of Europe's biggest banks face a potential collective fine of more than US$17bn related to the mis-selling of US mortgages, and some of the penalties could be dished out in the next month, analysts said.

Royal Bank of Scotland (LSE: RBS.L - news) faces the biggest potential hit of US$9.6bn from the US mortgage issue, according to analysts at JP Morgan (Other OTC: MGHL - news) on Thursday.

Based on recent settlements with other banks, Deutsche Bank (LSE: 0H7D.L - news) could be fined US$3bn-$3.5bn and Credit Suisse US$2bn.

UBS (LSE: 0QNR.L - news) faces a settlement of US$2bn, while Barclays (LSE: BARC.L - news) is expected to pay out less than US$1bn, the analysts said. UBS and Barclays (Swiss: BARC.SW - news) have already paid some fines related to US mortgages, but there are several authorities looking at the issue, including the Federal Housing Finance Agency (FHFA) and Department of Justice (DoJ).

The fines relate to allegations that banks mis-sold US mortgage-backed bonds during the housing bubble and misled clients about the quality of the assets, which rapidly lost value when the mortgage market collapsed.

Banks are keen to settle the issue, and some settlements are expected to come in October before the US presidential election in November. The FHFA has pursued 18 banks for wrongdoing, and settled with many of them already.

But there remains a high degree of uncertainty about the scale of potential fines, and some banks will face renewed concern about their capital strength if the fines are bigger than expected, JP Morgan analyst Kian Abouhossein wrote in the note.

All the banks have significant litigation reserves, which they are likely to top up this year.

Deutsche had US$6.2bn of litigation reserves at the end of June, and Abouhossein estimated it will top that up by US$2.1bn this year and US$1.1bn in 2017.

A US mortgage fine of more than US$4bn would be a worry for Deutsche, as it could also face a penalty of US$1bn-$4bn related to alleged misconduct in its Russian operations, he said.

"We see capital as key with any material charge creating capital at risk potentially leading to similar concerns as we saw in early 2016," Abouhossein said.

JP Morgan's estimate for RBS includes a payment of US$5bn for the FHFA, US$3bn for other authorities including the DoJ and US$1.6bn for related lawsuits. The range of analysts' estimates for RBS's potential fine have ranged from US$5bn to as much as US$13bn.

RBS had US$10bn of litigation and redress reserves at the end of June and the scale of the US fine will be a key driver for the investment case for the bank, Abouhossein said.