U.S. mortgage investigation

Deutsche Bank AG’s shares and its riskiest bonds dropped the most since the Brexit vote after the lender said the U.S. Justice Department is seeking $14 billion to settle a probe tied to mortgage-backed securities, more money than the bank is willing to pay.

“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the company said in a statement early Friday in Frankfurt. “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.”

Chief Executive Officer John Cryan, 55, has struggled to boost profitability by selling risky assets and eliminating jobs as unresolved legal probes and claims add to concerns that the lender will be forced to raise capital. Reaching a mortgage deal would clear a major hurdle for Deutsche Bank, which has paid more than $9 billion in fines and settlements since the start of 2008, according to data compiled by Bloomberg.

“While this number seems very large, it’s obviously a first negotiation point,” Chris Wheeler, an analyst at Atlantic Equities, told Francine Lacqua on Bloomberg Television. “There’s going to be an awful lot of management time spent on it to get to a sensible number.”

Deutsche Bank fell as much as 8.8 percent, the biggest intraday drop since June 27, and was down 8.7 percent at 11.96 euros at 2:41 p.m. in Frankfurt. Other European lenders under investigation in relation to residential mortgage-backed securities also declined, with UBS Group AG down 2.9 percent and Credit Suisse Group AG slipping 5.2 percent. Royal Bank of Scotland Group Plc slumped 4.5 percent, while Barclays Plc fell 2.8 percent.

The bank’s 1.75 billion euros ($2 billion) of 6 percent additional Tier 1 bonds, the first notes to take losses, fell 5 cents to 78 cents on the euro, the biggest drop since the U.K. voted to leave the European Union in June. Deutsche Bank’s 650 million pounds ($852 million) of 7.125 percent notes fell 5 pence to 81 pence on the pound, also a record fall.

“They are dropping like a stone,” said Tomas Kinmonth, a credit strategist at ABN Amro Bank NV in Amsterdam. “The fine, even if reduced, could surpass all provisions held by the bank.”

DOJ Negotiations

Germany’s government expects a “fair outcome” in the U.S. probe, a spokeswoman for the Finance Ministry in Berlin said on Friday.

Germany’s largest lender confirmed that it had started negotiations with the Justice Department to settle civil claims over the bank’s issuing and underwriting of residential mortgage-backed securities from 2005 to 2007. The Wall Street Journal reported the $14 billion claim on Thursday.

Bank of America Corp. paid $17 billion to reach a settlement in a similar case in 2014, the biggest such accord to date. Goldman Sachs Group Inc. agreed to a $5.1 billion settlement with the U.S. earlier this year, including a $2.4 billion civil penalty and $875 million in cash payments, to resolve U.S. allegations that it failed to properly vet mortgage-backed securities before selling them to investors as high-quality debt. The settlement included an admission of wrongdoing.

Opening bids from U.S. entities are often very high compared to the final outcome, analysts at Bank of America Merrill Lynch wrote in a note to investors. “A similar phenomenon is possible with the DoJ and Deutsche Bank.”

The Justice Department, in concluding previous investigations into the sale of mortgage-backed securities that soured during the financial crisis, typically has presented initial penalties higher than what banks ultimately paid, people familiar with those negotiations have said. The sides may negotiate over the final tab, as well as what conduct the bank will acknowledge and whether individuals will be sanctioned.

‘Shareholder Money’

Justice Department spokesman Peter Carr declined to comment on the negotiations.

JPMorgan Chase & Co. analysts wrote in a note to clients earlier Thursday that a settlement of about $2.4 billion “would be taken very positively,” and that an agreement exceeding $4 billion would pose questions about Deutsche Bank’s capital positions and force it to “build additional litigation reserves.” The lender’s common equity Tier 1 ratio, a key measure of financial strength, was at 10.8 percent at the end of June.

“In defense of protecting its shareholders’ money, Cryan is well within his rights in negotiating a more equitable and just settlement with the U.S. government, and calling this one a punishment that’s several orders of magnitude greater than the crime,” said Tony Plath, a finance professor at the University of North Carolina. Plath expects a final settlement of about $4 billion to $5 billion.

Settlement Goal

Cryan has said that he aims to settle major outstanding legal issues as soon as possible as part of his wider overhaul. Deutsche Bank had 5.5 billion euros set aside for settlements and fines at the end of June, with Chief Financial Officer Marcus Schenck saying in July that the lender will probably face “material” litigation charges in the second half.

In addition to the U.S. mortgage investigation, Deutsche Bank faces litigation and regulatory probes relating to issues such as foreign-currency rate manipulation and precious metals trading. The German bank is a party to 47 civil actions concerning the setting of interbank lending benchmarks, according to its 2015 annual report published in March.

“Obviously I don’t like this amount, it’s too high and it seems that with every settlement, the DOJ wants to get more from European companies,” said Andreas Domke, a portfolio manager at Allianz Global Investors, which owns shares in the lender. “It’s good that Deutsche Bank is pushing back.”

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