Deutsche Bank and Credit Suisse Group agreed to pay a combined $12.5bn to resolve US investigations into sales of the toxic debt that fuelled 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 $7.2bn and Credit Suisse agreed to a $5.3bn deal, the banks said in separate statements early on Friday. Their announcements came hours after Barclays, which is being probed in a related case, was sued for fraud on 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 fuelled the 2008 financial crisis. Before the two deals yesterday, authorities had already extracted more than $46bn from six US financial institutions over their dealings in mortgage-backed securities. Bank of America Corp, which had the largest such settlement, agreed to pay $16.7bn 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’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% 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 $9bn would cause the bank’s capital to fall to dangerous levels requiring action.
Deutsche Bank will pay a $3.1bn civil penalty and provide $4.1bn in relief to consumers under a settlement in principle with US authorities. The fine will cut pretax profit by $1.2bn 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 $14bn, which had spooked stock and bond holders earlier this year.
Germany’s biggest bank still faces US 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 €5.9bn ($6.2bn) for all of its outstanding legal costs as of September 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 will pay a $2.48bn civil penalty and $2.8bn in relief, to be paid over five years following the settlement. The bank will take a pretax charge of about $2bn in addition to its existing reserves during the fourth quarter. Credit Suisse had set aside about 2.1bn francs ($2.1bn) 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 6bn 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.
The Swiss bank remains under Justice Department scrutiny over its handling of US clients in Israel. The department fined Credit Suisse $2.6bn in 2014 for helping Americans dodge taxes in Switzerland. The bank is also a target of several antitrust cases in the US, including class actions related to foreign-exchange rates and interest-rate swaps.
