Deutsche Bank settlement overshadows US equities

NEW YORK: Deutsche Bank will likely cast a pall over equity markets next week as the largest German lender navigates a possible multi-billion dollar settlement with the United States Department of Justice (DoJ) over the sale of mortgage-backed bonds.

Deutsche shares traded in the US hit a record low on Thursday, falling as much as 24 per cent since the DoJ asked the bank to pay $14 billion to settle charges related to its sale of toxic mortgage bonds before the financial crisis.

But the stock had its best day in five years Friday, on record volume, after a news agency reported that Deutsche was nearing a much-lower $5.4 billion settlement with the DoJ.

Analysts at Morgan Stanley estimated Deutsche could pay about $6 billion to settle with the DoJ. Stocks on Wall Street broadly tracked Deutsche over the past few days and will likely continue to do so, analysts say.

Market capitalisation

“While it is in the headlines, it is an overhang,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

“Once they come to some resolution on the difference between what they are charged, $14 billion, and what they are going to pay, call it $5 or $6 billion, the market is going to be afraid there is a problem,” Hogan said.

The report said that Deutsche’s market capitalisation of near $18 billion makes it much smaller than its United S tates peers like Bank of America , at $155 billion, or Citi, at $133 billion.

However its trading relationships with the world’s largest financial institutions make a potential breakdown at Deutsche a bigger risk to the wider financial system than any other global bank, the International Monetary Fund said in June.