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By Steve Slater
LONDON, Sept 16 (IFR) - Deutsche Bank faces the prospect ofhaving to tap shareholders for more cash after the US Departmentof Justice asked Germany's flagship lender to pay US$14bn tosettle an investigation into alleged mis-selling ofmortgage-backed securities.
The DoJ move was only the first salvo in what could be alengthy negotiation over the size of the fine, but it raisedfears the final penalty will be far higher than expected.
Deutsche Bank said on Friday it has "no intent" to settlethe issue at "anywhere near the number cited".
"The negotiations are only just beginning. The bank expectsthat they will lead to an outcome similar to those of peer bankswhich have settled at materially lower amounts," it said.
Several banks, including Citigroup and Goldman Sachs, havefaced similar initial requests from the DoJ and ended paying farsmaller amounts, people familiar with the matter have said. ButFrance's BNP Paribas still paid almost US$9bn in July 2014 forviolating US trade sanctions, and bankers said Deutsche needs totread carefully.
The Department of Justice declined to comment.
A fine of more than US$4bn could force Deutsche Bank to onceagain raise capital from shareholders, analysts said. That wouldbe its fourth rights issue since 2010, which have raised almost22bn, including 8.5bn in the most recent one in June 2014.
Deutsche Bank shares slumped 7% to 12.18 on Friday.
With its shares trading at less than one-third of bookvalue, and little sign of a turnaround, some analysts andbankers reckon the German government may need to step in toparticipate in any fundraising, given the strain on its capital.
Its Additional Tier 1 bonds plummeted as the threat of ahefty fine renewed concerns about the bank's ability to paycoupons on the securities.
A 1.75bn 6% perpetual non-call April 2022 lost over sixpoints in early trading, dropping to a cash price bid of 76.85from 82.96, though it steadied back to 78.98, according toTradeweb prices.
Deutsche had litigation reserves of 5.5bn at the end ofJune.
BNP Paribas analysts estimated about 2bn was likely to havebeen set aside for the RMBS fine. They estimated any fine ofmore than 6bn would likely lead to AT1 coupon deferrals.
Every 1bn loss is also equivalent to around 25bp in CET1capital, the analysts estimated. On a fully loaded basis, thebank had 60.7bn of regulatory capital at the end of June,including 43.5bn of common equity Tier 1 capital and 12.6bn ofTier 2 capital. The bank's fully loaded CET1 ratio was 10.8% atthe end of June, below most rivals and short of its target of12.5% by 2018.
RBS SWEATS
Several other European banks are also being targeted foralleged mis-selling of US RMBS, including Royal Bank ofScotland, which analysts had expected to pay a bigger fine thanDeutsche. RBS shares fell 4% on Friday.
Fines for the US mis-selling are complex because severalauthorities are involved, including the DoJ and the FederalHousing Finance Agency (FHFA).
The fines relate to allegations that banks mis-sold USmortgage-backed bonds during the housing bubble and misledclients about the quality of the assets, which rapidly lostvalue when the mortgage market collapsed.
Banks are keen to settle the issue, and some settlements areexpected to come in October before the US presidential electionin November. The FHFA has pursued 18 banks for wrongdoing, andsettled with many of them already.
A US mortgage fine of more than US$4bn would be a worry forDeutsche, as it could also face a penalty of US$1bn-$4bn relatedto alleged misconduct in its Russian operations, said JP Morgananalyst Kian Abouhossein.
"We see capital as key with any material charge creatingcapital at risk potentially leading to similar concerns as wesaw in early 2016," Abouhossein said in a note on Thursday.
The bank's litigation bill since 2012 has already hit morethan 12bn, including paying US$1.9bn in 2013 to settle claimsover RMBS with US agencies Fannie Mae and Freddie Mac.
Deutsche chief executive John Cryan has said he wants toclose the major litigation cases this year so the bank can moveon with its turnaround plan.
RBS is also keen to put its looming US mortgages fine behindit.
Abouhossein estimated RBS could face a fine of US$9.6bnrelated to the issue. That includes a payment of US$5bn for theFHFA, and US$3bn for other authorities including the DoJ andUS$1.6bn for related lawsuits. The range of analysts' estimatesfor RBS's potential fine have ranged from US$5bn to as much asUS$13bn.
Based on recent settlements with other banks, Abouhosseinestimated Deutsche Bank could be fined US$3bn-$3.5bn and CreditSuisse faced a fine of US$2bn.
UBS faces a settlement of US$2bn, while Barclays is expectedto pay out less than US$1bn, he estimated. UBS and Barclays havealready paid some fines related to US mortgages.
All the banks have significant litigation reserves,including US$10bn at RBS for litigation and redress payments. (Additional reporting by Helene Durrand, Arno Schuetze andGareth Gore)
