German finance giant Deutsche Bank had less than 24 hours to bask in the glory of bumper earnings Thursday before a 14-year-old skeleton emerged from the lender’s closet.
That skeleton was the potential actual cost of its acquisition of Postbank, a subsidiary that has caused several headaches in recent months.
Deutsche Bank said it had put aside €1.3 billion ($1.4 billion) in provisions as part of a tense legal battle with former shareholders of Postbank, which Deutsche Bank took full control of in 2010.
Former shareholders at Postbank argued that Deutsche Bank actually took control of Postbank in 2008, and at the time was obliged to make a mandatory takeover offer of €57.25 per share. That’s more than double the €25 per share figure Deutsche Bank formally agreed to buy Postbank for two years later in October 2010.
A preliminary ruling by a higher regional court indicated it was inclined to agree with the former Postbank shareholders, setting up Deutsche Bank for a hefty payout when a formal judgment is made.
Ruling shocks Deutsche Bank
To say the news was a shock to Deutsche Bank would be an understatement.
In an explanatory letter published Sunday, the bank responded to a question of why it didn’t mention the lawsuit during its earnings call, made just a day before the ruling. Deutsche Bank said there was no indication that any ruling would affect the bank’s outflows, nor that it might need to make any provisions.
“While Deutsche Bank continues to disagree strongly with this assessment, the court’s statements will impact Deutsche Bank’s estimation of the probability of a future outflow, resulting in a legal provision in the second quarter of 2024,” the group wrote in a statement Friday.
However, the increasing likelihood is that Deutsche Bank may have to pay out $1.4 billion.
Shares in the bank plunged more than 6% Monday morning as investors digested the news that the litigation would probably affect Deutsche Bank’s ability to engage in share buybacks.
The bank had commenced a €675 million ($722 million) share buyback program in March.
But Morgan Stanley said its next buyback was likely to be delayed as Deutsche Bank weighed up potential damage from current litigation.
Mediobanca, meanwhile, has suggested that Deutsche Bank may choose to settle to avoid paying the maximum $1.4 billion it has set aside for the case, as noted in a letter to clients seen by Bloomberg.
Postbank’s mounting problems
If Deutsche Bank CEO Christian Sewing wasn’t already cursing the acquisition he inherited when he took the reins in 2018, he almost certainly will now.
The bank is fighting multiple fires in relation to the beleaguered Postbank, including a pay dispute with employees.
Workers at Postbank are demanding a 15.5% pay hike from Deutsche Bank, and recently staged a 20-day strike as part of its battle. The demanded figure is well above the 6.4% raise offered by Deutsche Bank in March.
Meanwhile, Deutsche Bank is also dealing with the fallout of a data glitch in 2023 that wreaked havoc on the bank’s customers. There was heavy speculation that Deutsche Bank was the main culprit behind an 87% increase in complaints to Germany’s financial regulator last year.
