SMTP auth server settings
Probably a bit late to the party, but I'm recording this here for posterity.  My wife's Xperia Z5 Compact (Android 5.?), as well as my own Samsung S3 (4.3) suffer from this same problem.  I've pulled down the source code to the most recent email client, and it appears that the only authentication mechanisms that the native email client supports is PLAIN, LOGIN and XOAUTH2, otherwise the client comes up with the above error message.  As noted in the OP, the mail server is only offering CRAM-MD5 and DIGEST-MD5, which the client doesn't support.  I had to add PLAIN and LOGIN to my mail server (after enforcing TLS), at which point the stock mail client was happy.