Deutsche’s legal seesaw flags investor blind spot
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam Proud
LONDON, Aug 22 (Reuters Breakingviews) -Bank investors spend ages engaged in pointy-headed tasks like modelling net interest income. Yet sometimes the most consequential thing for a lender’s share price is the outcome of decades-old court claims. Deutsche Bank’s DBKGn.DE legal rollercoaster this year is a case in point.
The 29 billion euro bank’s CEO Christian Sewing started 2024 with a clear pitch. He was making clear progress towards a 2025 goal of clearing a 10% return on tangible equity, while using spare capital to repurchase shares. Out of the blue in April, a legal case related to Deutsche’s 2010 purchase of Postbank gave investors a shock. A Cologne court indicated that it was sympathetic to some of the plaintiff’s arguments, prompting Deutsche to set aside 1.3 billion euros for the full cost of the claims and depleting capital that could otherwise have gone towards buybacks. Deutsche’s shares plunged 9%.
Late on Wednesday, the 14-year-old saga took yet another turn. Sewing’s bank settled with plaintiffs representing 60% of the cohort for just 45% of their full claim amount. The bank’s shares rose 3%.
In theory, Deutsche’s shareholders could have followed the minutiae of the case as it bounced around between higher and lower Cologne courts, up to the Federal level, and then back again. The basic gist is that former Postbank shareholders said in 2010 that takeover rules should have forced Deutsche to make a more expensive mandatory takeover offer in 2009 at 57.25 euros per share, rather than the voluntary 25-euro offer the buyer launched the following year. Wednesday’s settlement was 31 euros per share.
Yet predicting that outcome would have been impossible. Deutsche’s own legal team was surprised by the court’s message in April. And the fact that they set aside such a large amount of money suggests they thought a favourable settlement unlikely too.
A further complication is that banks are often cagey about the calculations behind their litigation provisions, for fear of putting a target on their back. The German lender’s March annual report included a 1,100-word rundown of the situation but didn’t say whether it had set any money aside at that stage, stating that any disclosures could “prejudice seriously” the outcome. The Postbank situation was also just one of dozens of cases and investigations listed in the relevant section of the report, which runs to about 8,000 words and mentions everything from disgraced financier Jeffrey Epstein to allegations of Libor rigging.
Little wonder that banks with a history of legal risk, like Deutsche, trade at a discount to the sector. And little wonder that lenders as a whole are valued below the wider market. With the ongoing risk of legal wildcards dating back a decade or more, many investors understandably steer clear.
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CONTEXT NEWS
Deutsche Bank on Aug. 21 said that it had reached a deal with plaintiffs representing 60% of the claims in a legal fight over whether the lender underpaid in its 2010 acquisition of Deutsche Postbank.
The settlement, which was struck at a lower price than Deutsche had feared, will allow the bank to book a one-off gain of 430 million euros in its next set of results.
The bank in April set aside 1.3 billion euros to cover possible payouts on the case, after a Cologne court indicated that it may find elements of the plaintiff's arguments valid.
Deutsche shares were up 3.1% to 14.44 euros as of 1053 GMT on Aug. 22.
Banks' price-earnings multiples lag the wider market https://reut.rs/3AKfsLB
Editing by George Hay and Streisand Neto
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