In the aftermath of last week’s announcement of a $14 billion fine levied by the U.S. Department of Justice on Deutsche Bank in connection with the mis-selling of mortgage-backed securities (MBS) during the financial crisis, the bank's stock price has plunged by about 14%. In 2016, the market value of the German lender has nearly halved. The news last week also dragged down the share prices of other banks. (See also: Facing Fines, Deutsche Bank to Raise Billions.)
Deutsche Bank responded by stating, “[It] 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 graphic below highlights the reality that Deutsche Bank may have to pay triple the amount paid by Goldman Sachs for fraudulent practices bearing on the packaging, securitization, sale and issuance of residential MBS. Having said that, if Deutsche Bank pays the amount of $14 billion, it will still end up paying less than what Bank of America paid. The prospect of this massive fine has already invoked a rippling effect on the bank's investors, who are selling off the bank’s stock.
Is Deutsche Bank Prepared for the Fine?
Given the bank's market value of about $18 billion, a fine of $14 billion is not a good sign. The bank, which is already battling multiple legal cases, has only around $6 billion in its litigation reserves. Therefore, paying a $14 billion fine would seriously impact the capital structure of the bank. It is important to note that Deutsche Bank has already been struggling in terms of profitability and even reported negative revenue in Q4 2015. According to Bloomberg, “[The German lender] has racked up more expenses for litigation and fines since the start of 2008 than any other financial firm.”
Andrew Lim, an analyst at Societe Generale SA, also highlighted in his note to investors that the bank will be “significantly under capitalized” even after it utilizes its litigation reserves.
Deutsche Bank has already failed the stress test conducted by the Federal Reserve and, with the majority of business being conducted in London, it also faces uncertainty in relation to Brexit fallout. In addition, the IMF said earlier this year that the German lender “appears to be the most important net contributor to systemic risks.” In other words, the bank is too big and has the potential to drag other financial institutions down as well.
Another major problem is that Deutsche Bank is the largest originator of CRE loans, as per CrediFi analysis. With this fine, which pertains to the real estate bubble in 2008, the impact could affect the entire CRE loans market.