Will Germany's largest lender be crushed by a mega fine?

Is Deutsche Bank on the ropes? Germany's biggest lender is no stranger to spats with US regulators but news this month that it is facing a potential penalty of $14 bn (€12.5 bn) from the US Department of Justice (DoJ) for mis-selling mortgage bonds (RMBS) a decade ago could be the last straw for the bank that has been plagued by scandals and problems in recent years.

If levied, it will be one of the largest fines ever set in the US and there are concerns as to whether Deutsche Bank could even afford to pay the mega fine given that last year it reported its first annual loss since 2008 and may well report another loss this year, irrespective of the size of the potential DoJ fine.

Deutsche Bank intends to fight the penalty, it said in a statement earlier in September: '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 German lender was likely referring to Citigroup. Two years ago, the DoJ asked Citigroup to pay a $12 bn fine to resolve an investigation into the sale of sub-prime mortgages. The fine was eventually reduced to $7 bn. Moreover, Deutsche Bank is not alone: UK lender RBS announced on 27 September that it had reached a final settlement with the National Credit Union Administration Board in the US to resolve two outstanding civil lawsuits for US$ 1.1 bn (£846 mln).

The settlements, involving its subsidiary RBS Securities Inc., relate to two residential mortgage-backed securities (RMBS) cases. RBS said in a statement that the settlement amount ‘is substantially covered by existing provisions as of 30 June 2016 and will have no material impact on the RBS Group’s CET1 ratio’. Switzerland’s UBS is also being investigated by regulators for possible mis-selling of RMBS.

Analysts have been quick to point out that the $14 bn fine is not dissimilar to the €13 bn the EU wants Apple to pay in back taxes. One thing is certain: Deutsche Bank's fine, however it is negotiated, will be a big number, and it seems unlikely that the German government will offer any aid, one analyst who asked not to be identified, told PropertyEU: 'The German government is certainly between a rock and hard place and Merkel's credibility has been tested after such an aggressive stance over assistance to the banks in southern Europe,’ he said. As a result, sell-offs may be the best way of raising capital to pay the fine. ‘Deutsche Bank’s real estate asset management business is potentially attractive to a good number of investors but it’s unlikely to make much of a dent in the $14 bn they will need to raise. The other option is to raise $14 bn of fresh capital, sell businesses or a mix of all of these things.'

Recent scandals
So where did it go wrong for Germany's biggest bank? A wave of recent scandals has rocked the lender's reputation and, with it, its performance on the stock market. Following news of the potential penalty, its shares were trading at just over €10 at the end of September – barely a third of the €27.42 they were trading at in October 2015 and close to a 30-year low. So far, the German government has not shown any inclination to step in and bail out the trouble lender, leaving investors to ponder whether they will be asked to stump up through a cash call. Deutsche Bank declined to comment.

Ultimately, Deutsche Bank is paying the price that comes with a sullied reputation. In April last year, it was fined a record £1.7 bn for rigging Libor – something that investors have not forgotten. At the time, the lender was ordered to fire seven employees – six of whom were based in London - and was accused of being obstructive towards regulators in their investigations into the global manipulation of the benchmark rate. The total fine included $600 mln to the New York State’s Department of Financial Services (NYDFS), $800 mln to the US Commodity Futures Trading Commission (CFTC) and an additional $775 mln to the Department of Justice in the US for misdemeanours between 2005 and 2010.

Analysts have also questioned the bank's efficiency, given how high its costs are. Its CEO of a little over one year, John Cryan, has already said that he plans to axe 9% of the 100,000 strong workforce and to sell its retail arm Postbank as part of a widespread cost cutting drive. In addition, analysts have accused the lender of failing to reduce its balance sheet and cut costs in more prosperous times, thereby leaving it vulnerable in the existing low interest rate environment, particularly given the size of its operations – it had €478 bn of AUM at the end of June 2016.

However, the troubled lender's saving grace may be that it has more than €200 bn of liquidity reserves as of the end of June 2016, someone familiar with the company told PropertyEU. As a result, Deutsche Bank is unlikely to go under, according to those who track the market, although its coffers – and share price – will be badly hit by the gargantuan fine. And, for now, its glory days will remain a thing of the past.