Deutsche Bank's $14bn fine shocks RBS

Deutsche Bank's chart is enough to make you wince. Since the financial crisis, its share price has crashed by 92% as it staggers from one disaster to another. Since 2008, it's paid billions of dollars in fines for misdemeanours including price manipulation of gold and silver, and of London Interbank Offered Rate, or libor.

Now, the US Department of Justice (DoJ) is demanding $14 billion (£10.6 billion) from the German lender for issuing and underwriting residential mortgage-backed securities (RMBS) between 2005 and 2007.

These complex products often packaged so-called "subprime" mortgages, which were then sold onto other investors who took on the risk. Irresponsible lending eventually led to massive defaults and is widely blamed for triggering the market crash in 2008 and global recession that followed.

It's admitted the Americans have asked that it submit a counter proposal, but Deutsche already has the gloves on.

"Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited," it said last night. "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."

That's pretty much guaranteed. Two years ago the DoJ made a similar claim against Citigroup who eventually paid $7 billion rather than $12 billion. Goldman Sachs also took a $5 billion hit, although only half of that was cash, the rest being so-called consumer relief.

However, Deutsche Bank cannot afford a hit like this right now. In 2007, the bank increased profits by 70% to €6 billion (£4.6 billion). Eight years later it lost €6.8 billion after absorbing massive litigation charges and restructuring costs.

Deutsche shares slumped a further 7% Friday to just €12, back near multi-year lows last seen in August. And the likelihood of any long-lasting recovery remains remote, given the state of its struggling core investment banking business and enormous strain put on margins by low interest rates.

And this swoop on Deutsche could easily spell bad news for UK banks, specifically Royal Bank of Scotland, which is already under investigation by the DoJ on similar charges. Traders were concerned enough Friday to sell RBS shares down over 5% to a six-week low.

Only last month, alongside first-half results, RBS admitted that "potential penalties and compensatory damages imposed by US DoJ which may be substantial".

Ironically, UK-based Deutsche Bank analysts this month raised litigation and conduct forecasts for RBS from £4 billion this year and almost nothing in 2017 to £4.3 billion and £1.7 billion respectively.

Even if RBS does haggle down any fine from the Americans, it will still run into billions of pounds. We may get confirmation in 2017.

But this will now likely remain a "significant near term overhang," according to Barclays analyst Rohith Chandra-Rajan. There are currently more than 15 material items currently against RBS, but he cites US RMBS as the big worry.

"While the shares don’t look expensive at 0.6x tangible book value, uncertainty on a range of issues including UK economic prospects, progress on required divestments and worries on the size of near term conduct costs, drives our 'underweight' rating and 200p price target."

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