Deutsche Bank AG and Credit Suisse Group AG agreed to pay a combined $12.5 billion to resolve U.S. investigations into sales of the toxic debt that fueled the financial crisis, putting behind them a major dispute that undermined confidence in the banks and raised questions about their turnarounds.
Deutsche Bank will pay $7.2 billion and take a $1.2 billion pretax charge this quarter, while Credit Suisse agreed to a $5.3 billion deal and will recognize a $2 billion hit to earnings, the banks said in separate statements early Friday. Their announcements came hours after Barclays Plc, which is being probed in a related case, was sued for fraud Thursday by the Justice Department after it balked at paying the amount the government sought in negotiations.
The settlement costs will probably lead Deutsche Bank and Credit Suisse to second straight annual losses and prompt continued questions over whether the German lender will raise capital through a share sale. The Obama administration is pressing to wrap up investigations of Wall Street firms for creating and selling the subprime mortgage bonds that fueled the 2008 financial crisis. Before the two deals on Friday, authorities had already extracted more than $46 billion from six U.S. financial institutions over their dealings in mortgage-backed securities.
"For Deutsche it was certainly quite positive" because the hit to capital is "modest," said Kyle Kloc, a portfolio manager at Fisch Asset Management in Zurich who holds Deutsche Bank bonds. "With Credit Suisse it is more complicated. Yes, it reduces uncertainty but it is toward the high end of what people expected."
Deutsche Bank rose as much as 5 percent and traded 0.8 percent higher at 2:35 p.m. in Frankfurt. Credit Suisse fell 0.8 percent after taking a bigger-than-expected provision. The stock earlier gained as much as 2.2 percent. Barclays fell 0.9 percent in London.
Deutsche Bank's settlement "might help in the short run because a major source of uncertainty has been cleared," said Michael Huenseler, an investor at Assenagon Asset Management, which holds about 0.8 percent of Deutsche Bank's shares. "But it's still higher than many have expected and it will pose a long-term drag on profitability."
Deutsche Bank will pay a $3.1 billion civil penalty and provide $4.1 billion in relief to consumers. The bank had set aside 5.9 billion euros ($6.2 billion) for all of its outstanding legal costs as of Sept. 30. The consumer relief doesn't have to be provisioned in the same way as the civil penalty because it will be provided through loan modifications or other assistance over five years or more.
The deal is far below the Justice Department's initial request of $14 billion, which had spooked stock and bond holders earlier this year. Bank of America Corp., which had the largest such settlement, agreed to pay $16.7 billion over bonds that were worth four times those of Deutsche Bank.
Deutsche Bank, in a memo to employees, said it doesn't expect the settlement to affect its credit rating or its ability to operate in the U.S., and it anticipates paying interest on all its debt in full and on time. The lender's 1.75 billion euros of 6 percent additional Tier 1 bonds, the first notes to take losses in a crisis, gained about 4 cents on the euro to 86.5 cents, the highest since Jan. 28, according to data compiled by Bloomberg.
Chief Executive Officer John Cryan has set out to resolve the bank's legal disputes as he seeks to restore confidence. His strategy, announced in October 2015, called for cost cuts and the elimination of dividends for two years to preserve capital. The bank has said it may not be profitable in 2016 as it focuses on moving past its legal battles.
Germany's biggest bank still faces probes into whether it manipulated foreign-currency rates and precious metals prices and whether it facilitated transactions that helped investors illegally transfer billions of dollars out of Russia. In the memo, the bank said an internal review by the bank found "deficiencies" in the bank's systems and controls in Russia, but no indications that it breached sanctions in the country.
Credit Suisse will pay a $2.48 billion civil penalty and $2.8 billion in relief, to be paid over five years following the settlement. Credit Suisse had set aside about 2.1 billion francs ($2.1 billion) in general litigation provisions by the end of the third quarter. The fourth-quarter charge it announced on Friday exceeds the 1.67 billion francs that analysts polled by the bank had estimated for litigation charges from the fourth quarter of this year until 2018.
"With this settlement, the largest remaining major uncertainty is now eliminated" for Credit Suisse, said Peter Casanova, an analyst at Kepler Cheuvreux who has a buy rating on the stock.
Chief Executive Officer Tidjane Thiam tapped shareholders for 6 billion Swiss francs in late 2015 while shifting the company's focus away from capital-heavy investment banking toward wealth management. Thiam has updated investors twice on his plan, which includes a partial initial public offering of its Swiss unit in late 2017. In December, the former insurance executive pledged more cost cuts and lowered targets for the international wealth management and its Asian unit.
The Swiss bank remains under Justice Department scrutiny over its handling of U.S. clients in Israel. The department fined Credit Suisse $2.6 billion in 2014 for helping Americans dodge taxes in Switzerland. The bank is also a target of several antitrust cases in the U.S., including class actions related to foreign-exchange rates and interest-rate swaps.
Unlike Credit Suisse and Deutsche Bank, Barclays was unable to reach an agreement, marking the first time the Justice Department has sued one of the banks at the center of an Obama administration initiative to recoup investor losses on mortgage securities. The lawsuit is rare for big banks, which typically settle with the government rather than risk drawn-out litigation and a possible trial.
The breakdown in talks suggests that the bank is willing to take its chances with incoming enforcement officials in the Trump administration. The bank has lined up a law firm whose top lawyer is known for his aggressive defense of clients.
"Barclays bought Lehman in the middle of the crisis, and I'm just wondering if the issues the DoJ is dealing with are Lehman issues," Chris Wheeler, an analyst at Atlantic Equities, told Bloomberg Television. "Maybe Barclays is saying, 'Hang on a minute. We didn't actually manage the bank until we acquired it in 2009.'".
At least three other European banks remain under investigation over the role of their mortgage-backed securities business: UBS Group AG, HSBC Holdings Plc and Royal Bank of Scotland Group Plc. RBS could pay about $2.5 billion to the Department of Justice and $3.5 billion to settle a lawsuit from the U.S. Federal Housing Finance Agency, according to Joseph Dickerson, an analyst at Jefferies International Ltd. with a hold rating on shares.