Deutsche capital worries return as US mega-fine looms

By Steve Slater

LONDON, Sept 16 (IFR) - Deutsche Bank (LSE: 0H7D.L - news) faces the prospect of having to tap shareholders for more cash after the US Department of Justice asked Germany's flagship lender to pay US$14bn to settle an investigation into alleged mis-selling of mortgage-backed securities.

The DoJ move was only the first salvo in what could be a lengthy negotiation over the size of the fine, but it raised fears the final penalty will be far higher than expected.

Deutsche Bank said on Friday it has "no intent" to settle the issue at "anywhere near the number cited".

"The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts," it said.

Several banks, including Citigroup (NYSE: C - news) and Goldman Sachs (NYSE: GS-PB - news) , have faced similar initial requests from the DoJ and ended paying far smaller amounts, people familiar with the matter have said. But France's BNP Paribas (LSE: 0HB5.L - news) still paid almost US$9bn in July 2014 for violating US trade sanctions, and bankers said Deutsche needs to tread carefully.

The Department of Justice declined to comment.

A fine of more than US$4bn could force Deutsche Bank to once again raise capital from shareholders, analysts said. That would be its fourth rights issue since 2010, which have raised almost 22bn, including 8.5bn in the most recent one in June 2014.

Deutsche Bank shares slumped 7% to 12.18 on Friday.

With (Other OTC: WWTH - news) its shares trading at less than one-third of book value, and little sign of a turnaround, some analysts and bankers reckon the German government may need to step in to participate in any fundraising, given the strain on its capital.

Its Additional Tier 1 bonds plummeted as the threat of a hefty fine renewed concerns about the bank's ability to pay coupons on the securities.

A 1.75bn 6% perpetual non-call April 2022 lost over six points in early trading, dropping to a cash price bid of 76.85 from 82.96, though it steadied back to 78.98, according to Tradeweb prices.

Deutsche had litigation reserves of 5.5bn at the end of June.

BNP Paribas analysts estimated about 2bn was likely to have been set aside for the RMBS fine. They estimated any fine of more than 6bn would likely lead to AT1 coupon deferrals.

Every 1bn loss is also equivalent to around 25bp in CET1 capital, the analysts estimated. On a fully loaded basis, the bank had 60.7bn of regulatory capital at the end of June, including 43.5bn of common equity Tier 1 capital and 12.6bn of Tier 2 capital. The bank's fully loaded CET1 ratio was 10.8% at the end of June, below most rivals and short of its target of 12.5% by 2018.

RBS SWEATS

Several other European banks are also being targeted for alleged mis-selling of US RMBS, including Royal Bank of Scotland, which analysts had expected to pay a bigger fine than Deutsche. RBS (LSE: RBS.L - news) shares fell 4% on Friday.

Fines for the US mis-selling are complex because several authorities are involved, including the DoJ and the Federal Housing Finance Agency (FHFA).

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.

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, said JP Morgan analyst Kian Abouhossein.

"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 in a note on Thursday.

The bank's litigation bill since 2012 has already hit more than 12bn, including paying US$1.9bn in 2013 to settle claims over RMBS with US agencies Fannie Mae and Freddie Mac.

Deutsche chief executive John Cryan has said he wants to close the major litigation cases this year so the bank can move on with its turnaround plan.

RBS is also keen to put its looming US mortgages fine behind it.

Abouhossein estimated RBS could face a fine of US$9.6bn related to the issue. That includes a payment of US$5bn for the FHFA, and 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.

Based on recent settlements with other banks, Abouhossein estimated Deutsche Bank could be fined US$3bn-$3.5bn and Credit Suisse faced a fine of 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, he estimated. UBS and Barclays have already paid some fines related to US mortgages.

All the banks have significant litigation reserves, including US$10bn at RBS for litigation and redress payments. (Additional reporting by Helene Durrand, Arno Schuetze and Gareth Gore)