Deutsche Bank to settle US mortgage probe for S$10.4b

WASHINGTON (BLOOMBERG) - Deutsche Bank said it has reached a US$7.2 billion (S$10.44 billion) agreement to resolve a years-long US investigation into its dealings in mortgage-backed securities, removing a major legal hurdle for the bank.

Deutsche Bank will pay a US$3.1 billion civil penalty and provide US$4.1 billion in relief to consumers under a settlement in principle with US authorities, which was announced by the Frankfurt-based bank in a statement early on Friday (Dec 23).

Concern about whether Deutsche Bank had enough capital to withstand the payment had roiled markets and pushed the stock to a record low after it said in September that the US Justice Department had made an opening request of US$14 billion and that it had no intention of paying that amount.

The Obama administration is pressing to wrap up investigations of Wall Street firms for creating and selling the subprime mortgage bonds that fueled the 2008 financial crisis. The authorities have already extracted more than US$46 billion in fines from six US financial institutions over their dealings in mortgage-backed securities.

But on Thursday, the US Justice Department said it has sued Barclays for fraud over its sale of mortgage bonds after the bank balked at paying the amount the government sought in settlement negotiations.

The lawsuit is rare for big banks, which typically negotiate a settlement with the government rather than risk drawn-out litigation and a possible trial. The breakdown in talks suggests that the bank is willing to take its chances with incoming enforcement officials in the Trump administration.

While the agreement removes significant uncertainty hanging over Deutsche Bank, Germany's biggest lender remains under Justice Department investigation in several other matters and also faces potentially expensive civil suits. Chief executive officer John Cryan has made resolving major litigation a priority as he seeks to restore confidence in the Frankfurt-based lender.

Deutsche Bank expects to record pre-tax charges of about US$1.2 billion this quarter because of the civil penalty.

"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.

The bank's preliminary results for 2016 will be published as scheduled on Feb 2, it said.

Deutsche Bank had set aside 5.9 billion euros (S$8.9 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 capital ratio of at least 12.5 per cent in 2018.