When US authorities started pursuing banks for their role in slicing, dicing and packaging the arcane products that sparked the financial crisis, they initially focused on domestic lenders. Now it is Europe’s banks that are in the crosshairs.
Two days before Christmas, Deutsche Bank and Credit Suisse have agreed to settle with the US Department of Justice over the alleged mis-selling of mortgage-backed securities in the run-up to the financial crisis.
Between them, the duo’s settlements amount to almost $12.5bn — and bring the penalties meted out by the DoJ on the industry as a whole to $58bn, making it one of the largest financial scandals ever.
That number will rise further. Other European lenders are expected to reach settlements with the DoJ next year. And Barclays is poised to resolve its case through litigation, after saying on Thursday that it had failed to reach a deal with the DoJ and is now being pursued in the civil courts.
For Deutsche and Credit Suisse, however, the settlements — of $7.2bn and $5.28bn, respectively — are a chance to draw a line under what has become an increasingly worrisome topic for shareholders.
Although Deutsche’s bill, of which $3.1bn must be paid out in cash now, and the remaining $4.1bn provided through customer relief, is higher, it is the German bank’s shareholders who seem more relieved.
Since it emerged in September that the DoJ had made an initial demand for $14bn to settle the dispute, investors have been fretting over a variety of nightmare scenarios, including, in the worst case, a state bailout of Germany’s biggest bank. Such concerns have now receded.
“We see the announcement . . . as very positive,” said analyst Kian Abouhossein of JPMorgan, adding that the settlement “removes a major overhang” from the bank and has a “manageable” impact on capital in the short term.
Yet while the better than expected deal gives Deutsche some much needed breathing space, the bank still faces enough other challenges that many analysts think it is still likely to raise capital next year.
The bank’s common equity tier one ratio is likely to end 2016 at about 11 per cent. This is well above the regulatory minimum, but behind most of Deutsche’s peers and well short of its target of 12.5 per cent by 2018.
The ratio could also come under pressure from the bank’s other legal headaches, most notably an investigation into $10bn of potentially suspicious trades involving Deutsche’s Russian business, and tougher capital rules being debated by global regulators.
Before Deutsche can raise capital however, it will need to convince investors that it has a viable business model, a task that is arguably now its biggest challenge.
“For us to participate [in a capital increase], Deutsche needs to set out a glass-clear strategy for the future, which also provides acceptable returns,” said Ingo Speich, a portfolio manager at Union Investment, one of Deutsche’s top 25 shareholders. “At the moment, the strategy hasn’t convinced investors.”
Others agree. “We would consider participating [in a capital increase], but only if there are adjustments to Deutsche’s strategy, and only if these include further cost savings. They have to shrink the investment bank, and run it in a more focused way,” said one top 10 investor.
While the spectre of the DoJ fine was never as menacing for Credit Suisse as it was for Deutsche, the bank’s shares still fell 1 per cent, in contrast to a 1 per cent rise for Deutsche, as its $5.28bn settlement was higher than expected.
Overall, however, analysts said that the deal was positive since it removes the last big litigation issue that has to be dealt with by the Swiss bank, which is in the midst of a significant restructuring.
“This will be another distraction out of the way for [chief executive Tidjane] Thiam,” said Chris Wheeler of Atlantic Equities. Mr Abouhossein stressed that the cash portion of the fine was below $3bn, the level at which he thought a cash fine would pose problems for Credit Suisse’s capital.
Having decided not to settle, the fate of Barclays, the third bank that was to have been part of the DoJ’s omnibus deal, is still open.
Some observers think that the bank’s unwillingness to settle stems from the fact that, unlike Deutsche, which still has the investigation into its Russian business hanging over it, Barclays has no other significant outstanding cases and so can afford to play hardball.
Analysts at Royal Bank of Canada had estimated that Barclays would pay less than its rivals because it issued fewer of the controversial securities. However, they added that it would “take some time now to get clarity on this issue”, which means a further period of uncertainty for the bank’s shareholders.
The same applies for the likes of British lender Royal Bank of Scotland and Switzerland’s biggest bank, UBS, which are among the institutions that could reach deals with the DoJ at some point next year.
While many expect the US administration under president-elect Donald Trump to be more laissez-faire than the outgoing one, for now the DoJ appears to be pressing on.
“We will continue holding both banks and their executives responsible for their role in contributing to this unfortunate period in our history,” the head of the DoJ’s civil division, Benjamin Mizer, said on Thursday.