European investment banks got some Christmas cheer on Friday. Deutsche Bank AG and Credit Suisse Group AG agreed to pay a combined $12.5 billion to settle U.S. investigations into crisis-era toxic debt sales.
In any normal industry that would be bad news. In the financial world it brings welcome certainty, effectively soothing investors by putting a one-off price tag on this legal dispute. Deutsche's share price rose; Credit Suisse's slipped only slightly.
Crucially, it looks as if both banks can afford to pay these settlements without turning to shareholders for extra cash. Deutsche Bank could have afforded a fine of up to about $8 billion and Credit Suisse about $4 billion, by some estimates. Today's upfront civil penalties are well below that level, at $3.1 billion for Deutsche and $2.5 billion for Credit Suisse. This will mean some painful billion-dollar losses in the fourth quarter, but it could have been much worse.
The settlements come just as investors are betting on a more solid financial footing for big investment banks. Remember that Deutsche Bank faced a potentially existential crisis back in September. Back then, the U.S. was said to be seeking a fine as big as $14 billion just as investors were losing faith in Deutsche's ability to make money in the post-crisis financial world.
Since November, though, bank stocks have been on a tear, helped by rising confidence in the economic outlook and the election of Donald Trump, who's promised to roll back regulation. Deutsche Bank shares have risen 45 percent since Nov. 1, and Credit Suisse's by 11.4 percent. Analysts predict earnings-per-share growth at both banks next year.
Where things get a little fuzzy is the remainder of the settlement payments, due in the form of "consumer relief" -- usually provided through loan modifications or other types of assistance. That's the big unknown from these fines and makes up the bulk of the headline figure, with Deutsche owing $4.1 billion and Credit Suisse $2.8 billion in relief. That could drag on future profit. Credit Suisse would, for example, be paying about $560 million every year for the next five years, according to Vontobel analysts.
Still, spreading the costs over several years is less of a sting. And consumer relief is difficult to monitor and define. Some advocacy groups complain that they're not as onerous as advertised.
Today's news doesn't mean Deutsche and Credit Suisse are out of the woods. They're both in the middle of painful overhauls, which could permanently damage their brands in a crowded investment banking market that's only just starting to see a return of animal spirits. Deutsche Bank still has other legal cases to resolve and is yet to find a buyer for assets such as retail unit Postbank. But as Christmases go, "not as bad as it could have been," is a gift the European banks will be happy to unwrap.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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