"The past is a foreign country: they do things differently there," wrote LP Hartley. For Deutsche Bank (Ger:DBK) and Royal Bank of Scotland (RBS), that country is America, where regulators are dragging the universal banking groups through the mud over the sale of mortgage-backed securities in the run-up to the financial crisis.
The US Department of Justice's demand for $14bn (£11bn) from Deutsche in settlement for its part was more than expected and sent its shares crashing, triggering expectations of capital-raising, government support, or both. The price of its stock has fallen by a half since the start of the year and currently represents just 0.2 times its book value per share, according to Capital IQ data.
As we went to press, company bosses denied seeking state support or any plans for a capital raising in the market, which would be painful at current prices. The bank is hoping the total proposed is just a starting position. Another alternative is selling assets such as its Abbey Life insurance business, which it has agreed to offload to closed-book consolidator Phoenix (PHNX) for £935m, or its asset management division, although such sales will affect future returns.
Standing in line for its punishment is RBS, which it should be remembered is largely owned by the taxpayer. The bank's share price also suffered following the Deutsche news, and its own discount to book value stands at 0.4 times book value per share, against an average of 0.5 times among the battered European bank peer group. On Wednesday, RBS announced it had reached a separate $1.1bn settlement - "substantially covered" by current provisions - with the National Credit Union Administration Board which also related to mortgage-backed securities sold in the US.
| Nasty numbers | |||
|---|---|---|---|
| Price-to-book value | Tier one capital ratio | Return on equity (%) | |
| Deutsche Bank | 0.22x | 14.7% | -11.1% |
| Royal Bank of Scotland | 0.39x | 19.1% | -5.7% |
| European peers | 0.53x | 15.5% | 2.8% |
| Source: S&P Capital IQ | |||
