Bank investors are forever doing esoteric tasks such as modeling net interest income. On occasion, however, the resolution of long-standing legal disputes has the greatest impact on a lender's stock value. The tumultuous legal journey of Deutsche Bank this year serves as an example.
Christian Sewing, CEO of the 29 billion euro bank, made a clear pitch at the beginning of 2024. He was using excess cash to buy back shares and was clearly moving closer to his 2025 target of clearing a ten percent return on tangible equity. Investors were taken aback in April by an unexpected legal dispute pertaining to Deutsche Bank's 2010 acquisition of Postbank. Following indications from a Cologne court that it agreed with part of the plaintiff's arguments, Deutsche Bank had to set aside 1.3 billion euros to cover the entire cost of the lawsuits, using up cash that could have been used for buybacks. Deutsche's stock fell 9%.
The 14-year-old story took a new turn late on Wednesday. 60% of the cohort's litigants received a settlement from Sewing's Bank for just 45% of their total claim value. Shares of the bank increased by 3%.
Theoretically, the shareholders of Deutsche Bank might have tracked the case's intricacies as it shifted from higher and lower Cologne courts to the federal level and back again. The main points are that, in 2009, the takeover regulations should have required Deutsche to make a more pricey mandatory takeover offer at 57.25 euros per share in 2009 rather than the buyer's voluntary offer of 25 euros per share the following year, according to statements made by former Postbank shareholders in 2010. The payment on Wednesday was 31 euros per share.
However, such results could not have been predicted. The court's April letter stunned even Deutsche's legal staff. And the fact that they put away so much money shows that they also believed a favorable settlement was unlikely.
To make matters more complicated, banks often avoid discussing the calculations underlying their litigation provisions out of concern that doing so would make them targets. The 1,100-word summary of the situation was included in the German lender's annual report in March, but it said nothing about whether any money had been set aside at that point because any disclosures might prejudice the outcome severely. The pertinent section of the report, which is approximately 8,000 pages long and covers a wide range of topics from accusations of Libor manipulation to notorious financier Jeffrey Epstein, included the Postbank issue as just one of several cases and investigations.
It's understandable why banks like Deutsche, which have a history of litigation risk, trade below the industry average. Not surprisingly, lenders' aggregate valuation is lower than that of the broader market. Given that legal wildcards have posed a risk for at least ten years, it makes sense that many investors avoid them.