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Deutsche Bank (DB) Shares Crumble on DoJ's $14B Claim

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Deutsche Bank AG (DB - Free Report) plunged 7% to $13.76 in after-hours trading on the NYSE following the bank’s confirmation late Thursday about the proposed $14-billion settlement by the U.S. Department of Justice (“DoJ”) tied with mortgage practices.  

However, the German banking giant is not willing to pay the amount sought by the DoJ. The bank noted in its release, “Deutsche Bank has no intent to settle these potential civil claims 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." The bank has been invited by the DoJ for submission of a counter proposal.

The concerned case pertains to Deutsche Bank’s issuance and underwriting of residential mortgage-backed securities (RMBS) and related securitization activities during the period between 2005 and 2007. The bank disclosed that it has commenced negotiations with the DoJ to settle civil claims that the U.S. authority may consider related to the case.

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 financial crisis. Notably, Bank of America Corporation’s (BAC - Free Report) $17-billion settlement in 2014 marked the largest accord so far. In April this year, The Goldman Sachs Group, Inc. (GS - Free Report) agreed to a $5.1 billion settlement and admitted to wrongdoing. Other banks that have settled include Citigroup Inc. and JPMorgan Chase & Co. 

Deutsche Bank in Trouble Tides

While the “opening position by the DoJ” of $14 billion may not be the final amount, any substantial amount will certainly add burden for Deutsche Bank. The bank has shouldered significant legal settlement in the past as well that have affected its financials. Notably, marking the company’s first full-year loss since 2008, it reported net loss of €6.8 billion in 2015, reflecting the impact of several one-time items, including huge litigation charges.  

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.  

Chief Executive Officer John Cryan, who is expediting restructuring efforts to boost the bank’s performance, had stated earlier that though litigation issues will remain a headwind, he expects to resolve the company’s significant cases this year. As of June 30, the bank had €5.5 billion ($6.2 billion) in its litigation reserves.

Apart from legal headwinds, profitability of Deutsche Bank 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 lost around 39% on the NYSE, year to date, reflecting investors’ concern over the bank’s growth prospects.

 

DEUTSCHE BK AG Price


Deutsche Bank currently carries a Zacks Rank #5 (Strong Sell). Barclays PLC (BCS - Free Report) is a better-ranked stock in the foreign banks space, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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