Deutsche Bank probe settled for $9.75B

Agreement may spare bank from having to raise capital

Deutsche Bank AG said it reached a $9.75-billion agreement to resolve a years-long U.S. investigation into its dealings in mortgage-backed securities, removing a legal hurdle that fuelled investor angst.

Deutsche Bank will pay a $4.2-billion civil penalty and provide $5.55 billion in relief to consumers under a settlement in principle with U.S. authorities, according to a statement early Friday. The fine will cut pre-tax profit by $1.63 billion this quarter as the firm taps existing legal reserves to blunt much of that cost. The relief may drag on earnings for years.

The deal is far below the U.S. Justice Department’s initial request of almost $19 billion, which had spooked stock and bond holders earlier this year, rattling entire markets. The agreement reached by negotiators will probably spare the bank from having to raise capital, said George Boubouras, the chief investment officer of Melbourne-based Contango Asset Management Ltd.

“It’ll be a relief to investors,” said Boubouras, whose firm oversees about $636 million of equity investments.

Ahead of Friday’s statement, analysts at Keefe, Bruyette & Woods had estimated a fine exceeding $12 billion would cause the bank’s capital to fall to dangerous levels requiring action.

Germany’s biggest bank still faces U.S. probes into other matters and potentially expensive civil suits — liabilities that chief executive officer John Cryan has set out to resolve as he seeks to restore confidence.

Deutsche Bank had set aside € 5.9 billion (8.35 billion) for all of its outstanding legal costs as of Sept. 30, when its common equity Tier 1 ratio, a measure of financial strength, stood at 11.1 per cent. The bank targets a level of at least 12.5 per cent in 2018. Each $1.35 billion of litigation costs not covered by provisions would lower the ratio by 20-25 basis points, Bloomberg Intelligence analyst Arjun Bowry has estimated.

Friday’s statement indicates that about $2.71 billion of the stockpile was earmarked for the mortgage-securities case. The consumer relief doesn’t have to be provisioned in the same way as the civil penalty because it will be provided through loan modifications or other assistance over five years or more. In other settlements, banks haven’t typically booked immediate charges for relief, instead incurring costs as a longerterm drag on profits.

“The financial consequences, if any, of the consumer relief are subject to the final terms of the settlement, and are not currently expected to have a material impact on 2016 financial results,” the bank said in its statement. The Obama administration is pressing to wrap up investigations of Wall Street firms for creating and selling the subprime mortgage bonds that fuelled the 2008 financial crisis. Authorities have already extracted more than $62 billion in fines from six U.S. financial institutions over their dealings in mortgagebacked securities. Bank of America Corp., which had the largest such settlement, agreed to pay $22.62 billion over bonds that were worth four times those of Deutsche Bank.

Deutsche Bank said in September that the U.S. Justice Department had made the opening $19 billion request and that executives had no intention of paying that amount. The news spurred concern about whether the firm had enough capital.

The agreement doesn’t resolve probes into whether Deutsche Bank manipulated foreign-currency rates and precious metals prices and whether it facilitated transactions that helped investors illegally transfer billions out of Russia. Deutsche Bank also faces civil lawsuits related to claims that its traders manipulated key interbank interest rates.