Deutsche Bank can handle Department of Justice settlement, S&P says

Deutsche Bank will have enough capital to cover its looming settlement with the U.S. Department of Justice, according to S&P Global Ratings.

The agency on Friday reaffirmed its low-end investment-grade rating on Deutsche Bank credit, but more importantly addressed the most critical question for the German lender's future — whether it will be able to handle a payment it will have to make regarding its past practices related to mortgage-backed securities.

Various reports have said the starting figure for the settlement is $14 billion, a number likely to cripple Germany's biggest bank. There was speculation last week — shot down quickly — that that number would be close to the $5.4 billion the bank has set aside.

S&P figures the final number will be somewhere above that $5.4-billion figure, but "materially smaller" than the $14-billion figure.

"This assumption takes account of penalties and consumer relief paid by peers to settle similar litigation cases with the DOJ," S&P analysts said in a statement.

The analysis found Deutsche's capital and earnings "are adequate" and said "the bank is strengthening its risk management and culture to address the historic governance failures highlighted by the litigation cases."

As a result, S&P reaffirmed its BBB+/A-2 rating, which is considered lower-medium on the investment-grade scale. However, it said the bank's outlook is "negative," which means the bank faces a downgrade unless it implements needed changes across the board.

"We remain of the view that Deutsche Bank's main challenge is the restructuring of its business model to achieve stronger earnings and capital," the agency wrote. "We believe that it was historically less decisive than peers in adjusting its strategy and balance sheet to the changed regulatory and market environment, and it is now looking to catch up."

Deutsche Bank officials did not respond to a request for comment. Shares rose about 1 percent in afternoon trade, spiking briefly on an unconfirmed report that Qatar was considering increasing its stake if the bank seeks to raise capital.