Litigation Limbo

Costly Skeletons in the Closet

Jain and Fitschen, co-CEOs of Deutsche Bank AG, pose for the media prior to a shareholders meeting in Frankfurt
Can Anshu and Jürgen put the past behind them?
  • Why it matters

    Why it matters

    Deutsche Bank is desperately trying to solve a slew of legal cases to free up management capacity and focus on future strategy.

  • Facts

    Facts

    • An agreement is difficult, because several U.S. authorities are taking proceedings against Deutsche Bank, which hopes to dismiss all these by paying a single fine.
    • Thomson Reuters StarMine experts expect an average third quarter pre-tax profit of €642 million, or $809 million, about half as much as one year ago.
    • The third quarter net profit is likely to fall to €455 million, compared with €1.2 billion a year earlier.
  • Audio

    Audio

  • Pdf

Deutsche Bank’s managers want to get the bank out of the headlines. People close to the bank say that the two co-chiefs Anshu Jain and Jürgen Fitschen together with other board members are trying to resolve most of the big litigation, this year if possible. But if settlements are involved, this is in the hands of the regulators.

Top of the list is the Libor scandal over the manipulation of reference interest rates. The bank is keen to reach a financial solution and discussions with the authorities in the United States and the United Kingdom about the penalty for terminating the investigation have already begun, according to Handelsblatt sources.

Major banks such as Barclays and UBS, which were also involved in the scandal, ended investigations against them this way in 2013. Deutsche Bank seeks a similar agreement with the U.S. and U.K. authorities but this is difficult, especially in the United States, because there are several authorities involved in the proceedings, and Deutsche Bank is trying to dismiss all the claims with a single fine, according to industry insiders.

 

008 Deutsche Bank-01

 

In addition to troubles abroad, the German supervisory authority BaFin is also investigating the bank and it is unclear how long this will take. Deutsche Bank refused to comment on the information but a spokesman said: “The bank supports the various investigations of supervisors and has also initiated internal inquiries into the transactions in connection with the interbank interest rate.”

The size of the penalty Deutsche Bank is facing in the United States and the United Kingdom is currently unclear. According to the latest annual report, Deutsche Bank put aside €2.5 billion ($3.1 billion) in provisions for legal risks. Some of the money is reserved for the violation of U.S. sanctions. A fine is expected to be set soo for all these cases. According to information from finance industry insiders, the bank believes the penalty may amount to €600 million. The bank is hoping to soon settle the dispute over U.S.-mortgage securities.

A further case that is likely to take longer is the investigation regarding the manipulation of the foreign exchange market which is only at an early stage.

A quick end to many or most legal problems would also help the board members. The supervisory board, which approves the board of management’s decisions and has the power to hire and fire executives, has currently frozen their bonuses because of these risks.

The bank supports the various investigations of supervisors and also has initiated internal inquiries of the transactions in connection with the interbank interest rate, a Deutsche Bank spokesman said.

Deutsche Bank will need new provisions for the various litigations in the third quarter, which will leave marks on the balance sheet, observers say. Overall, the Bank is involved in around 1000 major legal cases.

However, at the end of October Germany’s largest bank is expected to report strong operating profits in the third quarter. “In investment banking, there are positive surprises, and even retail banking and asset management are running smoothly,” sources told Handelsblatt. According to unnamed sources quoted by Reuters, the bank “is earning money properly” again. Thomson Reuters StarMine experts expect an average pre-tax profit of €642 million – about half as much as a year ago. The net profit is likely to fall to €455 million, after €1.2 billion a year earlier.

The third quarter earnings, which will be announced on October 29, could also be overshadowed by the results of the European Central Bank stress tests, which are likely to be published the weekend before. The German bank will have no problem in passing the first part of the test, the balance check. However, for second part, the actual stress test, no predictions are possible, according to finance industry circles. The results of the latter are likely to be revealed shortly before October 26. But with its capital cushion, the bank feels well prepared.

 

Laura de la Motte and Peter Köhler write about finance for Handelsblatt. To contact the authors:  delamotte@handelsblatt.com and koehler@handelsblatt.com.

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!