Let me take a quick victory lap on Deutsche Bank (DB) : it turns out the settlement with the Department of Justice over the subprime mortgages issue is much smaller than the initial $14 billion leaked to the markets, which spooked investors back in September.
The German bank agreed on Friday to pay a total of $7.2 billion, made up of $3.1 billion in penalties and $4.1 billion in customer relief.
This was to be expected. When the bank announced a surprise profit back in October, I wrote about a positive omen for the negotiations with the DOJ buried in that statement. It said it had "entered into a tolling agreement with the DOJ in connection with various RMBS offerings to toll the relevant statutes of limitations," which indicated a thawing of the relations between the two.
Does this mean Deutsche Bank's troubles are behind it? It's possible, although people are worried about its massive derivatives exposure. They probably shouldn't be, seeing as the positions mostly cancel each other out as they are mainly used for hedging.
More importantly, does it mean this is a good time for investors to snap up the shares? This is where it gets complicated. It depends on what you believe the eurozone economy and the European Central Bank will do in the year ahead. But more importantly, it depends on where you believe German politics is going.
Chancellor Angela Merkel faces perhaps the most important challenge of her political career. She has remained one of the few political leaders in Europe to stand for normality in a world increasingly dominated by populism and "post-truth."
But the recent attack on a busy Christmas market in Berlin, where 12 people were killed and dozens injured, may give impetus to those attacking her welcoming policy for refugees, which saw one million people reach Germany over the course of one year.
Already, attacks on refugee shelters are on the rise in Germany, while moderate politicians have condemned the increasing use of Nazi language by parties and groups opposed to the government's decision to receive the migrants.
Coupled with increasing opposition to Germany's role as the eurozone's biggest paymaster -- which ignores the fact that the country is, after all, the biggest economy in the single currency area and has benefited handsomely from the weaker euro -- this response indicates that the parliamentary elections could yield unpleasant surprises for investors next year.
On the other hand, Deutsche Bank shares -- which surged this morning in European trading following the announcement of the settlement -- are still cheap. The Frankfurt-listed shares lost more than 18% year to date -- although investors who bought them three months ago saw a handsome 60% increase. They trade on a forward price/earnings multiple of 12.6, compared with 16.6 for rival Commerzbank (CRZBY) .
Deutsche Bank's New York-listed ADRs were indicated to open more than 2% higher shortly after the announcement. Investors who are not afraid of risk and volatility may consider getting some exposure.
