Daily Kickstart (“Sh*t Loans” Edition)

Deutsche Bank and Credit Suisse are on the move overnight after the banks both settled mortgage securities fraud suits with the US for $7.2 billion and $5.3 billion, respectively.

Deutsche rose as much as 4% in Frankfurt trading:

The settlement comes as something of a relief for weary Deutsche Bank shareholders who previously feared the penalty could be much larger. The bank has already paid handsomely to resolve a number of  legacy fraud cases including some $2.5 billion in April of 2015 to close the book on LIBOR rigging allegations.

“The dramatic back-to-back announcements show the urgency among senior Obama appointees in the Justice Department to resolve the outstanding probes of precrisis conduct at major banks before those officials leave office in mid-January,” WSJ wrote on Friday morning, adding that  “part of the rush stems from a great deal of uncertainty about how a Trump administration might pursue, settle or drop the remaining probes, according to people familiar with the discussions.”

Deutsche will pay $3.1 billion in “penalties” and the remaining $4.1 billion will be doled out over time as “consumer relief.” Q4 earnings will take a roughly $1.2 billion hit as a result of the penalty. Here’s what three of Deutsche’s compatriots think (via Bloomberg):

Goldman (neutral)

• Says $1.2b negative impact on 4Q earnings is at lower end of market expectations
• Settlement removes a key area of concern for investors
• Says $7.2b outcome is within its estimated range of $2.8b-$8.1b and much less than $14b initially sought
• Sees CET1 ratio impact of ~30bps if settlement not tax deductible
• That would put 3Q CET1 at ~11.3% not counting any positive impact from sale of Hua Xia

RBC Capital (neutral)

• Says settlement over RMBS issuance and underwriting activity between 2005 and 2007 is still subject to the negotiation of definitive documentation
• RBC says the $3.1b civil penalty portion of the agreement is less than RBC estimate of $4b
• Pretax charge of $1.17b is less than RBC est. EU1.2b
• Says 62% of settlement already provisioned
• Charge will impact CET1 ratio by 29bps assuming no tax relief
• Boost from sale of Hua Xia stake should counter impact on CET1
• Hard to judge impact $4.1b in customer relief will have on earnings

Morgan Stanley (equalweight)

• Says settlement is less than market was expecting, ends uncertainty that was weighing on the stock
• Anticipated impact on 4Q pretax profit of $1.2b compares with Morgan Stanley est. $2.3b and consensus est. $1.7b
• That’s good news for Deutsche Bank’s capital
• Before DOJ settlement, MS had estimated a 2019 capital shortfall of $7.3b
• Settlement implies 4Q CET1 ratio may be close to 12%, including gains from sale of Hua Xia
• Says that compares to “go to” level of 13% by 2018
• Settlement is positive read-across for banks such as RBS that haven’t reached an agreement yet

Meanwhile, Barclays says it will fight the US Justice Department which, according to reports, was seeking somewhere in the neighborhood of $5 billion to settle similar charges. The DoJ complaint against the bank contains a number of colorful exchanges between Barclays execs who were in some cases wary of what they were selling to investors. “We have to eat their sh*t loans,” one executive is quoted as saying, in reference to a pool of Wells Fargo mortgages. Some of the mortgages were described by third parties hired by the bank to conduct due diligence as “craptacular.”

Meanwhile, Italian Prime Minister Paolo Gentiloni’s government approved the creation of a €20 billion fund to help beleaguered lenders.  Monte dei Paschi (which failed in its attempt to raise capital) says it will tap the fund. Junior bonds of banks that hit up the fund for cash will see their holdings converted to equity setting the stage for haircuts of as much as ~25% for institutional investors (but not, apparently, retail).

Elsewhere, Chinese shares fell while Japan was closed for the Emperor’s birthday.

US futs are largely flat while oil fell on Libyan production and a strong dollar. “Thinning trade ahead of the Christmas break saw the oil market struggle for traction in the early part of yesterday until a flurry of mostly positive US economic data delivered some festive cheer,” Stephen Brennock, an analyst at PVM Oil Associates, said in report seen by Bloomberg. “Some of the upside fizz is however evaporating this morning with oil prices reversing part of Thursday’s advance as a bout of pre- Christmas profit-taking takes hold”

Gold is up as of this writing but still looks to be headed for a seventh straight week of declines.

Watch out next week for an estimated $35 billion in selling by defined benefit funds looking to rebalance into quarter-end. That could swell to nearly $60 billion depending on stocks’ relative performance to bonds headed into the new year.

Happy trading.

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