DOJ Settlement Should Relieve Pressure on Deutsche Bank
The bank's financial statements will be burdened with the noncash part of the fine spread across a few years, though the bank does not expect to see any impact on its 2016 results.
Deutsche Bank (DB) announced that it has reached a $7.2 billion settlement agreement with the U.S. Department of Justice regarding its residential mortgage-backed securities investigation. We will maintain our fair value estimates for Deutsche Bank at EUR 16.60 per share and $18.30 per ADR as well as our no-moat rating.
As was widely expected, the fine is not as high as the originally pronounced figure of $14 billion. However, the total fine is higher than our expectation of $4.7 billion and at the higher end of what the Street was estimating. The total fine will be split into a civil litigation charge of $3.1 billion in cash and $4.1 billion in consumer relief in the United States. The bank indicated that it will take a $1.17 billion charge in the fourth quarter to reflect the DOJ settlement. The consumer relief will be in the form of loan modifications and additional assistance to homeowners and borrowers over a period of at least five years. As the cash settlement is lower than we expected, we believe it should help to remove the short-term pressure on the shares. However, we expect the financial statements to be burdened with the noncash part of the fine spread across a few years, though the bank does not expect to see any impact on its 2016 results. We maintain our view that Deutsche Bank may still need to raise capital to support its capital adequacy in the medium term.
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Derya Guzel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.