Cyprus

  • Deutsche Bank to fight $14bn demand from US authorities

    Deutsche Bank said it would fight a $14bn demand from the US Department of Justice to settle claims it missold mortgage-backed securities, a shock bill that raises questions about the future of Germany’s largest lender.

    The claim against Deutsche, which is likely to trigger several months of talks, far exceeds the bank’s expectations that the DoJ would be looking for a figure of only up to €3bn.

    The demand adds to the problems facing Deutsche Bank’s Chief Executive John Cryan, a Briton who has been in the job for a year.

    The bank only scraped through European stress tests in July and has warned it may need deeper cost cuts to turn itself around after revenue fell sharply in the second quarter due to challenging markets and low interest rates.

    Deutsche Bank shares, which have lost around half their value this year, tumbled 7.6 per cent to €12.10 in Frankfurt on Friday, with analysts saying the bank may need to raise fresh funds from investors or sell assets to shore up its capital ratios.

    The cost of insuring Deutsche Bank debt against default rose by around eight per cent.

    The bank, which employs around 100,000 people, said it regarded the DoJ demand as an opening shot.

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

    “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.”

    Analysts said that even a hefty reduction in the bill was likely to weigh heavily on Deutsche Bank’s finances.

    “If the final bill is at €5bn or more Deutsche Bank will not be able to avoid a capital hike anymore,” said Ingo Frommen, banking analyst at LBBW.

    Deutsche Bank’s problems are likely to alarm political leaders in Europe’s largest economy and the home to the European Central Bank.

    The German finance ministry said on Friday that the government expected a “fair result” from the negotiations but that the talks were a matter for the bank and the American authorities.

    Finance minister Wolfgang Schaeuble took the unusual step of voicing public support for the bank earlier this year and a senior opposition figure said he expected the government to step in as a last resort if needed.

    “The question would be how much damage would it do to the economy if the bank were to topple,” said Green Party financial spokesman Gerhard Schick.

    The DoJ has taken a tough stance in settlement negotiations with other banks, requesting sums higher than the eventual fine.

    A recent European Union ruling that Apple must pay up to €13bn in taxes to the Irish government and the forthcoming US election could complicate Deutsche Bank’s efforts to whittle down the demand.

    One of Deutsche’s top 10 investors said he expected the bank to have to pay €4-5.5bn for the mortgages case. “But because of the election campaign it may end up higher – at maybe 6 or 7bn.”

    In 2014, the DoJ asked Citigroup to pay $12bn to resolve an investigation into the sale of shoddy mortgage-backed securities, sources said. The fine eventually came in at $7bn.

    In a similar case, rival Goldman Sachs agreed in April to pay $5.06bn to settle claims that it misled mortgage bond investors during the financial crisis.

  • S&P upgrades Cyprus on ‘gradual recovery’

    in a statement, it said that it “has raised its foreign and local currency long-term sovereign credit ratings on the Republic of Cyprus to ‘BB’ from ‘-BB-’.”

    At the same time the ratings agency affirmed its ‘B’ foreign and local currency short-term sovereign credit ratings on Cyprus.

    “We expect the Cypriot economy will expand by about 2.7% this year, surpassing our March 2016 forecast, with annual growth at about 2.5% in real terms in 2017-2019,” the agency said. It said that Cyprus’ recovery is supported by resilient business services, tourism, gradually reviving private consumption, and construction. The restructuring in the financial sector is advancing, but the agency expects it will be a few years before the sector contributes to economic growth.

    “We think that the sovereign’s budgetary position will continue improving over the next few years, standing at close to balance or in surplus, with gradually declining government debt,” it noted.

    S&P said that the positive outlook reflects its view that “we could upgrade Cyprus within the next 12 months if its reduction of currently high levels of non-performing loans accelerates, indicating a convergence of Cyprus’ credit and monetary conditions, including the monetary transmission mechanism, with those of the eurozone”.

    The rating agency also expects the unemployment rate, 15 per cent at year-end 2015, will drop further to below 12 per cent by 2018, which will support households’ disposable incomes and private consumption.

    “We expect the Cypriot economy will continue to grow at about 2.5 per cent in real terms in 2017-2019, even though high levels of non-performing loans (mainly loans past due for more than 90 days and forborne loans for a minimum observance period even if they meet the new repayment programme) remain a key concern for financial stability and economic performance,” it said.

    In the long run, S&P said it also factored in the possibility of a reunification of the island, which would represent an important positive contribution to the country’s growth rate, despite initial micro- and macroeconomic challenges.