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[ZURICH] Deutsche Bank AG and Credit Suisse Group AG may have to raise more capital because of the need to resolve US claims over the sale of mortgage-backed securities before the financial crisis, Barclays said as it downgraded the two banks.
Deutsche Bank may face settlement payments of as much as US$4.5 billion, while Credit Suisse may have to pay US$2 billion, Jeremy Sigee, Kiri Vijayarajah and Thomas Klocanas wrote in a note to investors on Thursday.
The banks are "well below" their Common Equity Tier 1 targets and "struggling to build," the analysts said. "The fear for equity investors is that litigation settlements could increase the likelihood of capital raising moves." They lowered the banks to equal weight from overweight and cut price targets for the stocks.
Goldman Sachs Group Inc. agreed in April to pay US$5.1 billion to settle claims that it failed to properly vet mortgage-backed securities before selling them to investors as high-quality debt. It was the fifth multibillion-dollar settlement reached with banks resulting from the government's push to hold Wall Street firms to account for creating and selling subprime mortgage bonds that helped spur the 2008 financial crisis.
JPMorgan Chase & Co. paid US$13 billion, Bank of America Corp. paid US$16.7 billion, Citibank Inc US$7 billion and Morgan Stanley US$3.2 billion.
Credit Suisse and Deutsche Bank are seeking to boost capital levels and profitability by selling or exiting businesses, shrinking their securities units and cutting jobs. A capital increase could prove difficult as the investment-banking industry is in "structural decline," Berenberg analyst James Chappell wrote last month.
Deutsche Bank had set aside US$6.1 billion) for potential litigation expenses at the end of March. Credit Suisse had US$1.8 billion.