March 22, 2013 / 2:15 PM / in 5 years

European banks braced for big bill for U.S. mortgage litigation

* Total cost could reach $11 bln - analysts

* Deutsche Bank has set aside extra 600 mln euros

* Five banks at risk of heavy losses

By Steve Slater

LONDON, March 22 (Reuters) - European banks squeezed by regulatory demands for higher capital buffers could take an additional $11 billion hit from mortgage-related litigation costs in the United States.

Deutsche Bank has already bumped up its provisions, this week setting aside an additional 600 million euros ($777 million) for litigation costs, mainly related to lawsuits over its role in selling bonds backed by U.S. sub-prime mortgages.

Clients who bought the mortgage-backed securities from Deutsche and other banks feel they were misled about the quality of the assets, which rapidly lost value after the U.S. mortgage market collapsed between 2006 and 2009.

Deutsche has not broken out its U.S. mortgage litigation provision, but analysts at Credit Suisse estimate that it could reach $2.1 billion.

The Credit Suisse research suggests that Swiss bank UBS could be hit even harder, with a potential cost of $3.5 billion, and estimates the bill for five European lenders will come in at $11 billion.

The potential litigation over U.S. residential mortgages covers several areas, including legal proceedings with the Federal Housing Finance Agency (FHFA), losses from the repurchase of securities and from class action lawsuits.

The FHFA action, filed in September 2011, is one of several - against 17 financial organisations - alleging violations of laws in connection with the sale of residential mortgage-backed securities (RMBS) purchased by Fannie Mae and Freddie Mac.


The U.S. lawsuits are among many litigation risks facing banks. Credit Suisse analysts assessed 38 areas of potential litigation at 10 European banks and said that the total cost could be $70 billion of capital.

UBS said its balance sheet at the end of 2012 reflected a provision of $658 million with respect to RMBS claims, but its annual report acknowledged that the cost could be substantially more or less than this.

A trio of British banks also face U.S. mortgage-related litigation bills.

State-backed Royal Bank of Scotland (RBS) could suffer a loss of $2.4 billion, Barclays faces a potential $1.7 billion hit and HSBC could end up with a bill for $1.1 billion, the Credit Suisse analysts estimated.

Barclays said in its annual report that it will defend itself against the claims. Defeat, however, could result in a loss up to the outstanding amount of the relevant RMBS at the time of judgment, less the market value.

The bank said that the outstanding amount of RMBS related to the claims was $2.7 billion at the end of December and the market value was $1.6 billion. Cumulative losses reported on these RMBS was about $400 million at the end of December, it said.

RBS, meanwhile, has said that it has substantial legal and factual defences to mortgage-related claims and will continue to defend them.

HSBC’s annual report said the bank was unable to make a reliable estimate of the financial effect of any potential litigation but said that claims could be significant.

Credit Suisse itself is involved in some U.S. mortgage-related litigation, relating to its roles as issuer, sponsor, depositor, underwriter or servicer of RMBS transactions, according to its annual report released on Friday.

The bank’s analysts do not cover Credit Suisse.

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