Deutsche Bank AG (DBK) will pay 1.4 billion euros ($1.9 billion) to settle claims that it didn’t provide adequate disclosure about mortgage-backed securities sold to Fannie Mae and Freddie Mac.
The agreement with the Federal Housing Finance Agency covering the period 2005 to 2007 resolves Deutsche Bank’s largest mortgage-related litigation case, the Frankfurt-based company said in a statement on its website today.
Europe’s biggest investment bank by revenue is grappling with legal issues stretching from the U.S. housing market to the alleged manipulation of benchmark interest rates. The settlement follows similar agreements UBS AG and JPMorgan Chase & Co. (JPM:US) struck with U.S. regulators for mortgage-backed debt sold during the housing bubble that preceded the 2008 financial crisis.
“The sum is slightly higher than we expected, but it is better to get these kind of things out of the way rather than spend months haggling over a few hundred million,” Stefan Bongardt, an analyst with Independent Research GmbH in Frankfurt, said by telephone.
While Deutsche Bank has increased its reserves for litigation by 1.2 billion euros to 4.1 billion euros at the end of the third quarter compared with June, legal costs are piling up, hurting share performance.
Deutsche Bank rose 1.6 percent to 34.04 euros at 4:32 p.m. in Frankfurt. Today’s increase almost doubled gains this year to 3.3 percent. The Bloomberg Europe Banks & Financial Services Index climbed 16 percent in the period.
Moody’s Investors Service lowered Deutsche Bank’s outlook to negative from stable yesterday citing the impact of rising litigation expenses. The European Commission fined the lender 725 million euros this month for its part in rigging interest rates linked to the London interbank offered rate. The company reached a settlement yesterday to forfeit 221 million euros to end a derivatives contract with Italian bank Banca Monte dei Paschi di Siena SpA.
The litigation costs may bring a fourth-quarter loss as management replenishes the reserves, Dirk Becker, an analyst with Kepler Cheuvreux, said by telephone from Frankfurt.
Today’s agreement is “substantially reflected” in funds set aside for legal costs and “no material additional” reserves are needed in this case, Deutsche Bank said.
Deutsche Bank has still to reach a settlement with regulators outside the euro area for its role in rigging benchmark interest rates. It also faces suits by the family of deceased German entrepreneur Leo Kirch, which blames the bank for the collapse of his media empire. Further U.S. mortgage-related cases are still pending.
“Legal problems are far from over,” said Becker, who recommends investors buy the shares on valuation grounds. “The first quarter will probably look pretty clean, but 2014 is still going to be an expensive year.”
Freddie Mac (FMCC:US) will receive about $1.6 billion of the settlement, which will be reflected in its fourth-quarter results, the McLean, Virginia-based company said in a statement on its website today.
The FHFA, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits in 2011 in New York state and federal courts and in federal court in Connecticut. The agency said Deutsche Bank and 16 other lenders, including Bank of America Corp. and JPMorgan, misled the two financing companies about the soundness of the mortgages underlying $196 billion of securities they purchased.
Banks may pay a total $27 billion to settle lawsuits with the FHFA, according to data and company filings compiled by Bloomberg last month.
UBS, Switzerland’s largest bank, agreed to pay $885 million to the two mortgage financing companies in July. JPMorgan agreed to pay $4 billion in October to resolve similar claims by the FHFA, part of a wider $13 billion accord with the U.S. government.
Fannie Mae (FNMA:US) and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.
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