Deutsche Bank Ramps up Litigation Provision by €600m

Deutsche Bank has increased its litigation reserves to deal with mortgage-related lawsuits and regulatory investigations in the United States and lowered its formal earnings statement for 2012.

Germany's biggest bank increased the money it will set aside to cover potential legal decisions to €2.4bn ($3.1bn/£2.1bn), according to a statement published Wednesday on its website, a €600m addition from its previous estimate. The bank said the increase reflects "new developments" in the ongoing legal battle between investors and banks as a result of the near collapse of the US mortgage-backed securities markets after the global financial crisis. The move will hit last year's earnings by €600m, the bank said, lowering the 2012 bottom line to €80m.

"Deutsche Bank is obliged, under IFRS (international accounting rules), to assess the impact this new information has on its financial position and results for 2012," the statement said. "IFRS requires that any developments that materially affect the Bank's legal provisions must be considered and if necessary reflected if they become known before the financial statements are finalized."

The bank had previously warned investors that its fourth quarter earnings would suffer a "significant negative impact" from costs linked to its on-going restructuring and with the completion of the so-called 'bad bank', which it has deemed a "Non-Core Operations Unit".

Deutsche Bank shares traded 1.66 percent higher at €32.745 each by mid-morning Wednesday in Frankfurt, paring the year-to-date decline to around 0.3 percent.

No additional details of the litigation were provided in the statement, however, the bank was fined $17.5m last week by Massachusetts Secretary of the Commonwealth William Galvin for failing to disclose conflicts of interest when marketing collateralized debt obligations (CDOs) to investors. A CDO is an investment backed by pools of bonds, loans or other assets and frequently include mortgage-backed securities.

According to a statement on the Massachusetts securities regulator's website, Galvin said Deutsche Bank Securities, a unit of the bank, failed to supervise its employees who "knew but failed to disclose" such conflicts concerning its various roles related to a $1.56bn hybrid-CDO mortgage product known as 'Carina'.

The fine is the latest in a line of mortgage-related litigation and investigations in which the bank in named.

In May 2012, Deutsche Bank agreed to pay $202m to the US Department of Justice to settle civil charges, filed in the previous year, that it defrauded the US government over the resale of risky mortgages.

The regulator said Deutsche Bank and its subsidiary, MortgageIT, lied to get Federal Housing Administration insurance for its loans after years of reckless lending practices.

As part of the settlement, Deutsche Bank admitted responsibility, which cost the Federal government $386m when the mortgages defaulted.

Last November, US District Court Judge Denise Cote in Manhattan rejected an application by Deutsche Bank and Goldman Sachs to dismiss a Federal Housing Finance Agency lawsuit accusing them of misleading both Fannie Mae and Freddie Mac into buying billions of dollars of risky mortgage debt.

Deutsche Bank also faces a number of regulatory probes on alleged key interbanking lending rate manipulation across various jurisdictions and is being investigated by its domestic regulator, the Federal Financial Supervisory Authority, for a tax evasion scheme involving the trading of carbon permits and, in a separate probe, its pay policies.

It was recently named in a lawsuit filed by the world's oldest bank, Monte Dei Paschi di Siena, which is seeking €1.2bn in damages from two former employees, as well as Deutsche Bank and the Japanese investment bank Nomura, after it suffered huge losses from derivatives trades.

The ailing Italian lender is aiming to recoup over a billion euros in damages after a number of structured finance deals led to the group being hit by €730m worth of losses.

On 1 March, the group revealed in a statement that the bank's board of directors had started liability actions and claims for damages against former Chairman Giuseppe Mussari and former General Manager Antonio Vigni, as well as Nomura and Deutsche Bank over the two most costliest trades, although the damage amount was not specified.

In December last year, an Italian court ruled that Deutsche Bank, JP Morgan, UBS and Depfa Bank were guilty of mis-selling the Milan City Council an interest rate swap that lost it millions of euros in payments, in what is believed to be a landmark criminal case in Europe.