Lawsuit notwithstanding, Commerzbank bullish on Deutsche Bank performance
Fellow German financial institution Commerzbank is coming to the aid of its beleaguered big brother Deutsche Bank. The Hamburg-founded Commerzbank released a research note Wednesday from one of its sell-side equity analysts urging investors to buy Deutsche Bank stock. The reasoning is that, even if Deutsche has to pay out on the impending $1 billion lawsuit brought by the United States government, that only corresponds to 8% of expected pre-tax profit for this year or around 10% of the earnings per share that Commerzbank estimates for 2011. In a letter to clients, analyst Michael Dunst speculates that a full $1 billion will be due to the government by Deutsche Bank, since the loans in question originated primarily from the Mortgage IT unit before being taken over the German banking giant. "We assume that 90% of Mortgage IT's business related to this program was generated before Deutsche Bank bought this company," Dunst states. "This could limit the potential 'realistic' penalty payment that the U.S. government authority could expect." The majority of the estimated 39,000 mortgages generated by Mortgage IT from 1999 to 2009 (Deutsche bought the firm in January 2007) are insured against default by the Federal Housing Administration. So far, the FHA has paid up $386 million to cover defaults. However, with a finance volume of $5 billion, the FHA could be forced to pay a further hundreds of millions in default insurance payouts, according to Dunst. After Deutsche bought Mortgage IT, the bank began winding down its operations. Currently, "no provisions have been built so far related to this risk by Deutsche Bank," he added. According to the lawsuit, Mortgage IT did not implement enough quality control in the underwriting process. Dunst said the purpose of the FHA is to encourage banks to extend credit to borrowers who may fall short of normal underwriting standards. "However, according to the U.S. attorney, once being in this program Mortgage IT selected mortgages that violated the program rules with regard to whether borrowers could make their mortgage payments," Dunst said. Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney.