Legal Business Blogs

Deutsche Bank pinpoints litigation costs for wiping out its fourth quarter profits

Frankfurt-headquartered Deutsche Bank yesterday (19 January) partially blamed its full-year litigation expenses of €2.5bn for a fourth quarter pre-tax loss of €1.2bn, shortly after Morgan Stanley blamed legal costs of $1.2bn for its drop in net income during the same period.

Deutsche Bank’s litigation fees amounted to €528m for the fourth quarter.

The bank – Germany’s largest lender – in December agreed to settle its mortgage-backed securities litigation with the Federal Housing Finance Agency (FHFA) as conservator for Fannie Mae and Freddie Mac, with a pay-out of €1.4bn. Deutsche Bank was one of 17 financial institutions the FHFA made claims against in relation to residential mortgage-backed securities.

The announcement comes after last Friday (17 January) saw Morgan Stanley announce a fourth quarter 78% drop in net income to $192m due to legal costs and weak fixed income trading.

Revenue for the period rose from $7bn to $7.8bn but legal costs of $1.2bn meant that earnings for the quarter were almost wiped out, the FT reported on Friday (17 January).

In its report the US investment bank declared that ‘the current quarter includes $1.2 billion of additions to legal reserves for mortgage-related matters, specifically litigation and investigations related to residential mortgage-backed securities and the credit crisis.’

Investment banks have been boosting their internal litigation functions in response to growing regulatory oversight and Taylor Wessing’s head of financial disputes, Shane Gleghorn, told Legal Business: ‘The internal teams will continue to be beefed up and it’s also good news for regulatory consultants – those who make their living on advising banks on how to structure their system controls; banks will allocate more resources to that.

‘The biggest decision making process is going to be, certainly for significant banks, how they allocate and divide it between internal and external legal spend.’