Deutsche Bank in Germany, Credit Suisse in Switzerland and Barclays in UK sued by US to pay billions of dollars as penalty, “ForexSQ” experts say the top European banks include the Germany’s biggest bank “Deutsche Bank” and the Switzerland bank “Credit Suisse” agreed to pay the penalty but the UK bank “Barclays” was unable to reach an agreement to pay the U.S. fine.
Deutsche Bank, Credit Suisse and Barclays Sued
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Deutsche Bank AG and Credit Suisse Group AG agreed to pay a combined $12.5 billion to resolve U.S. investigations into sales of the toxic debt that fueled the financial crisis, putting behind them a major dispute that had weighed on their shares and raised questions about their turnaround plans.
Deutsche Bank will pay $7.2 billion and Credit Suisse agreed to a $5.3 billion deal, the banks said in separate statements early Friday. Their announcements came hours after Barclays Plc, which is being probed in a related case, was sued for fraud Thursday by the Justice Department after it balked at paying the amount the government sought in negotiations.
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. Before the two deals on Friday, authorities had already extracted more than $46 billion from six U.S. financial institutions over their dealings in mortgage-backed securities. Bank of America Corp., which had the largest such settlement, agreed to pay $16.7 billion over bonds that were worth four times those of Deutsche Bank. “The settlements are reducing a major uncertainty for the banks,” said Raimund Saxinger, a fund manager at BHF Bank.
Deutsche Bank rose 3.1 percent at 10:28 a.m. in Frankfurt, paring losses this year to 19 percent. Credit Suisse fell 0.3 percent, after earlier gaining as much as 2.2 percent. Barclays fell 0.9 percent in London.
Deutsche Bank Long-Term Drag
Deutsche Bank’s settlement “might help in the short run because a major source of uncertainty has been cleared,” said Michael Huenseler, an investor at Assenagon Asset Management, which holds about 0.8 percent of Deutsche Bank’s shares. “But it’s still higher than many have expected and it will pose a long-term drag on profitability.”
The settlement will probably spare the bank from having to raise capital, said George Boubouras, the chief investment officer of Melbourne-based Contango Asset Management Ltd. Analysts at Keefe, Bruyette & Woods had estimated a fine exceeding $9 billion would cause the bank’s capital to fall to dangerous levels requiring action.
Deutsche Bank Penalty To U.S.
Deutsche Bank will pay a $3.1 billion civil penalty and provide $4.1 billion in relief to consumers under a settlement in principle with U.S. authorities. The fine will cut pretax profit by $1.2 billion this quarter as the firm taps existing legal reserves to blunt much of that cost. The deal is far below the Justice Department’s initial request of $14 billion, which had spooked stock and bond holders earlier this year.
Germany’s biggest bank still faces U.S. probes into other matters and potentially expensive civil suits — liabilities that Chief Executive Officer John Cryan has set out to resolve as he seeks to restore confidence. His strategy, announced in October 2015, called for cost cuts and the elimination of dividends for two years to preserve capital. Deutsche Bank has said it may not be profitable in 2016 as it focuses on moving past its legal battles.
The bank had set aside 5.9 billion euros ($6.2 billion) for all of its outstanding legal costs as of Sept. 30. The consumer relief doesn’t have to be provisioned in the same way as the civil penalty because it will be provided through loan modifications or other assistance over five years or more. In other settlements, banks haven’t typically booked immediate charges for relief, instead incurring costs as a longer-term drag on profits.
Credit Suisse Penalty
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Credit Suisse will pay a $2.48 billion civil penalty and $2.8 billion in relief, to be paid over five years following the settlement. The bank will take a pretax charge of about $2 billion in addition to its existing reserves during the fourth quarter. Credit Suisse had set aside about 2.1 billion francs ($2.1 billion) in general litigation provisions by the end of the third quarter.
“With this settlement, the largest remaining major uncertainty is now eliminated” for Credit Suisse, said Peter Casanova, an analyst at Kepler Cheuvreux who has a buy rating on the stock. “This is good news.”
Chief Executive Officer Tidjane Thiam tapped shareholders for 6 billion Swiss francs in late 2015 while shifting the company’s focus away from capital-heavy investment banking toward wealth management. Thiam has updated investors twice on his plan, which includes a partial initial public offering of its Swiss unit in late 2017. In December, the former insurance executive pledged more cost cuts and lowered targets for the international wealth management and its Asian unit.
Still Remaining
The Swiss bank remains under Justice Department scrutiny over its handling of U.S. clients in Israel. The department fined Credit Suisse $2.6 billion in 2014 for helping Americans dodge taxes in Switzerland. The bank is also a target of several antitrust cases in the U.S., including class actions related to foreign exchange rates and interest-rate swaps.
Barclays Penalty
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Unlike Credit Suisse and Deutsche Bank, Barclays was unable to reach an agreement, marking the first time the Justice Department has sued one of the banks at the center of an Obama administration initiative to recoup investor losses on mortgage securities. The lawsuit is rare for big banks, which typically settle 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. The bank has lined up a law firm whose top lawyer is known for his aggressive defense of clients.
“Barclays bought Lehman in the middle of the crisis, and I’m just wondering if the issues the DoJ is dealing with are Lehman issues,” Chris Wheeler, an analyst at Atlantic Equities, told. “Maybe Barclays is saying, ’Hang on a minute. We didn’t actually manage the bank until we acquired it in 2009’.”
At least three other European banks remain under investigation over the role of their mortgage-backed securities business: UBS Group AG, HSBC Holdings Plc and Royal Bank of Scotland Group Plc. “ForexSQ” forex blog use Bloomberg as source.
