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Deutsche Bank (DB) to Settle RMBS Probe with DoJ for $7.2B
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Deutsche Bank AG (DB - Free Report) announced that it has reached a settlement with the U.S. Department of Justice (DoJ), tied with the issuance and underwriting of residential mortgage-backed securities (RMBS) and allied securitization activities during 2005–2007. The bank has agreed to pay $7.2 billion in principle over toxic securities in the run-up to the 2008 financial meltdown.
Per the agreement, the German banking giant will pay a civil monetary penalty of $3.1 billion and provide $4.1 billion in consumer relief in the U.S. The consumer relief is likely to be in the form of loan modifications and other assistance to homeowners and borrowers, over at least a five-year period.
However, the bank cautioned that the settlement is subject to change in its final documentation. The agreement is expected to be finalized in early 2017, before the newly elected U.S. President – Donald Trump – takes office.
The agreement follows months-long DoJ negotiation in Sep 2016, when the regulator asked Deutsche Bank to pay $14 billion in settlement, raising concerns about whether the bank would be able to negotiate it down. This caused the bank’s stock to plummet and raised questions about its stability as well as the risks it poses to the financial system.
Notably, the agreement is less than the $14-billion penalty and provides some relief to the bank’s shareholders who were earlier worried about a much heavier fine.
Financial Impact
The bank estimates to record pre-tax charges of nearly $1.17 billion in fourth-quarter 2016 because of the civil monetary penalty. On the other hand, the consumer relief fine is not expected to have a material impact on financial results during the current year.
Deutsche Bank has shouldered significant legal settlements in the past as well, which have affected its financials. Notably, marking the company’s first full-year loss since 2008, it reported a net loss of €6.8 billion in 2015, reflecting the effect of several one-time items, including huge litigation charges.
The U.S authorities have claimed billions of dollars from banks tied with RMBS misconduct. Banks were charged for misleading investors into buying shoddy mortgage-backed securities, which eventually led to the financial crisis. Notably, Bank of America Corporation’s (BAC - Free Report) $17-billion settlement in 2014 marked the largest accord so far. The Goldman Sachs Group, Inc. (GS - Free Report) , Citigroup Inc. (C - Free Report) and JPMorgan Chase & Co. are some other banks that have settled with the regulators over RMBS charges.
Bottom Line
Deutsche Bank is making progress in several areas, including building capital strength, reorganizing its investment banking and retail businesses and further investing in controls and resilience. However, investors are likely to remain apprehensive about the stock’s performance due to frequent legal hassles and also the consequent costs to settle the charges, which are likely to weigh heavily on the company’s financials.
The company continues to struggle with numerous other cases, such as alleged manipulation of foreign exchange rates, rigging bench mark rates and investigations over suspicious ‘mirror’ trades in Russia.
Apart from legal headwinds, the bank’s profitability also remains threatened by the stressed operating environment with negative interest rates, sluggish European economy and global headwinds. Management continues to see a challenging revenue environment in 2016, specially post Brexit.
Shares of the company have declined 23.2% year to date, significantly underperforming the Zacks categorized Foreign Banks industry’s gain of 6.2%.
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Deutsche Bank (DB) to Settle RMBS Probe with DoJ for $7.2B
Deutsche Bank AG (DB - Free Report) announced that it has reached a settlement with the U.S. Department of Justice (DoJ), tied with the issuance and underwriting of residential mortgage-backed securities (RMBS) and allied securitization activities during 2005–2007. The bank has agreed to pay $7.2 billion in principle over toxic securities in the run-up to the 2008 financial meltdown.
Per the agreement, the German banking giant will pay a civil monetary penalty of $3.1 billion and provide $4.1 billion in consumer relief in the U.S. The consumer relief is likely to be in the form of loan modifications and other assistance to homeowners and borrowers, over at least a five-year period.
However, the bank cautioned that the settlement is subject to change in its final documentation. The agreement is expected to be finalized in early 2017, before the newly elected U.S. President – Donald Trump – takes office.
The agreement follows months-long DoJ negotiation in Sep 2016, when the regulator asked Deutsche Bank to pay $14 billion in settlement, raising concerns about whether the bank would be able to negotiate it down. This caused the bank’s stock to plummet and raised questions about its stability as well as the risks it poses to the financial system.
Notably, the agreement is less than the $14-billion penalty and provides some relief to the bank’s shareholders who were earlier worried about a much heavier fine.
Financial Impact
The bank estimates to record pre-tax charges of nearly $1.17 billion in fourth-quarter 2016 because of the civil monetary penalty. On the other hand, the consumer relief fine is not expected to have a material impact on financial results during the current year.
Deutsche Bank has shouldered significant legal settlements in the past as well, which have affected its financials. Notably, marking the company’s first full-year loss since 2008, it reported a net loss of €6.8 billion in 2015, reflecting the effect of several one-time items, including huge litigation charges.
The U.S authorities have claimed billions of dollars from banks tied with RMBS misconduct. Banks were charged for misleading investors into buying shoddy mortgage-backed securities, which eventually led to the financial crisis. Notably, Bank of America Corporation’s (BAC - Free Report) $17-billion settlement in 2014 marked the largest accord so far. The Goldman Sachs Group, Inc. (GS - Free Report) , Citigroup Inc. (C - Free Report) and JPMorgan Chase & Co. are some other banks that have settled with the regulators over RMBS charges.
Bottom Line
Deutsche Bank is making progress in several areas, including building capital strength, reorganizing its investment banking and retail businesses and further investing in controls and resilience. However, investors are likely to remain apprehensive about the stock’s performance due to frequent legal hassles and also the consequent costs to settle the charges, which are likely to weigh heavily on the company’s financials.
The company continues to struggle with numerous other cases, such as alleged manipulation of foreign exchange rates, rigging bench mark rates and investigations over suspicious ‘mirror’ trades in Russia.
Apart from legal headwinds, the bank’s profitability also remains threatened by the stressed operating environment with negative interest rates, sluggish European economy and global headwinds. Management continues to see a challenging revenue environment in 2016, specially post Brexit.
Deutsche Bank currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Shares of the company have declined 23.2% year to date, significantly underperforming the Zacks categorized Foreign Banks industry’s gain of 6.2%.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>