Deutsche Bank AG (DB) has hit the headlines again and this time for a wrong reason. The company, which reported solid earnings last week on gains from recent acquisitions, has been sued by the U.S. attorney’s office for allegedly lying over mortgages.
Deutsche Bank and its subsidiary, MortgageIT, have been suspected of repetitively lying in an effort to participate in and take advantage of the Federal Housing Administration (F.H.A.) program that insures mortgages.
According to the lawsuit, Deutsche Bank and its MortgageIT unit heedlessly chose mortgages that dishonored the Federal Housing Administration's mortgage insurance program rules. Quality checks and the ability of borrowers to make mortgage repayments were ignored before making the selection. Deutsche later resold those government insured mortgages and made significant gains.
MortgageIT, acquired by Deutsche in 2006, had endorsed over 39,000 mortgages between 1999 and 2009 with a total underlying principal balance of more than $5 billion for the Federal Housing Administration insurance. Over $386 million have been paid in F.H.A. insurance claims and several more millions of dollars are expected to be paid for MortgageIT home loan defaults in the days ahead.
Treble of what the government has suffered as damages for such claims and other penalties have been sought by the lawsuit. However, Deutsche Bank believes the allegations are unsubstantiated and plans to defend the charges.
First Quarter Results
Last week, Deutsche Bank AG reported first quarter 2011 net income of €2.1 billion ($3.1 billion) or €2.13 per share, compared with €1.8 billion or €2.43 per share in the prior-year quarter.
While Deutsche Bank recorded stellar net earnings in the quarter, an increase in shares outstanding pulled down the earnings per share figure from the prior-year period. The company witnessed a rise in net income on the back of increased revenues, which in turn benefited from recent acquisitions of Postbank, Sal Oppenheim and the commercial banking activities from ABN AMRO in the Netherlands. Deutsche Bank’s management reaffirmed the 2011 profit target of €10 billion for its business divisions and continues to invest in its franchise.
Last week, two major competitors of Deutsche Bank also reported their first quarter 2011 performances. Among these, UBS AG (UBS) posted a sequential increase in profit though the number came in below the prior-year comparable period’s results. The bright spot was the surge in positive inflows that the company experienced in the quarter. On the other hand, Credit Suisse Group AG (CS) reported a significant drop in profit from the prior-year quarter, due to lower revenues.
Our Take
While we believe that Deutsche Bank AG’srecent earnings news has been encouraging for investors’ and consider strategic acquisitions and initiatives as imperative for repositioning its business, a negative news like this kind where the company’s business practices have been questioned hurts its reputation. If the company is finally proved at fault, its financials would also bear the burnt.
Shares of Deutsche Bank AG fell nearly 2% in yesterday's trading on the New York Stock Exchange.
CREDIT SUISSE (CS): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
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