U.S. DoJ Seeking Twice The Amount Deutsche Bank Provisioned For Settlement

In a research note released Wednesday, Goldman Sachs noted thatDeutsche Bank AG (USA) DB has reportedly provisioned a much smaller amount for settling the U.S. RMBS investigations. The company reportedly was considering $2 billion to $3 billion as a reasonable amount as opposed to the $14 billion payment sought by the DoJ.

Too Little For DoJ's Liking

Analyst Louise Pitt noted that the company's second-quarter filings revealed that a $5.5 billion reserve for litigation, although the company had not given the break-up for the DoJ investigation. The analyst also noted that Deutsche Bank made a small net profit in the first half and has $4.3 billion of pro forma coupon payment capacity.

Investors Be Aware!

Highlighting the areas investors need to focus on, Goldman listed the size of the DoJ settlement, the split between cash and consumer relief, the ability of the bank to carry out its restructuring plans amid the market volatility, the difficult operating environment, the possible cancellation of AT1 coupons and possible loss absorption.

Related Link: Comments From Credit Suisse CEO Send Eurobank Stocks Volatile

Settlement Amount Poses Risk

Goldman said it is difficult to invest in the capital securities without better visibility on the timing and extent of any DoJ settlement, the bank's existing reserves and any capital improvement plans. The firm believes if the settlement amount is close to the reserves held, spreads could rally. However, if the bank is required to provision much more in this operating environment, it faces significant downside risk.

Concluding, Goldman said it is very selective in its view among European banks and prefers those with already high capital and identified restructuring plans at current levels, with UBS, Royal Bank of Scotland Group PLC RBS, Credit Suisse Group AG (ADR) CS and ISPIM meeting the criteria.

At time of publication, Deutsche Bank was up 1.09 percent at $12.04.

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