EU Banks Face Boycott in Search for Capital

By Liam Vaughan, Kevin Crowley and Elisa Martinuzzi - Oct 14, 2011 2:41 PM GMT+0700

Shareholders in European banks are resisting calls to pump more capital into the industry, pressure that may leave taxpayers as the investors of last resort.

European Union leaders are working on a plan that may force banks to raise 100 billion euros ($137 billion) to more than 300 billion euros in additional capital, according to analysts’ estimates. That money would come either from existing investors or state funding that may come with strings attached. Schroders Plc (SDR) and Swisscanto Asset Management say they’re reluctant to invest, given a failure to resolve the region’s fiscal crisis may send financial stocks even lower.

“Banks need to regain investor confidence and show how they can perform before they can raise capital,” said Peter Braendle, who helps manage 52 billion Swiss francs ($58 billion) at Zurich-based Swisscanto, including Deutsche Bank AG (DBK) shares. “The market is waiting for a good solution to the sovereign- debt problems.”

Banks receiving national or EU aid may face restrictions on bonuses and dividends, according to Jose Barroso, president of the European Commission. Barroso this week joined German Chancellor Angela Merkel in urging lenders to boost capital by selling shares to private investors. Failing that, he called for banks to be bailed out by governments or, if the state can’t afford it, by the European Financial Stability Facility.

Plunging Stocks

The 46-member Bloomberg Europe 500 Banks and Financial Services Index has dropped 29 percent this year, paced by Dexia SA (DEXB), the Franco-Belgian lender that’s being broken up after concern over its holdings of Greek sovereign debt blocked its access to short-term funding.

The declines have left banks including UniCredit SpA (UCG), Italy’s biggest, with a market value that’s less than half of the lender’s tangible book value, according to data compiled by Bloomberg.

The Association of German Banks panned Barroso’s demands, saying dividend restrictions would cripple future fundraising. Some investors and analysts criticize the plan, too, saying that forcing banks to raise more capital doesn’t address the underlying issue of investor confidence in sovereign debt.

‘Not the Solution’

“Recapitalizing the banks is not the solution,” said Justin Bisseker, who helps manage 205 billion pounds ($323 billion) as a European bank analyst in London for Schroders, Britain’s largest independent money manager. “Sovereign risk is the principal concern. Once investors’ confidence in sovereigns returns, then confidence in the banks will follow.”

European leaders are expected to announce a plan to tackle the crisis at a meeting of Group of 20 nations on Nov. 3.

According to a person familiar with the situation, the European Banking Authority, the EU’s chief bank regulator, is considering forcing institutions to “temporarily” bolster their core Tier 1 capital ratios, a measure of financial strength, to 9 percent.

At least 66 of Europe’s biggest banks would fail a revised European Union stress test and need to raise an additional 220 billion euros, Credit Suisse analysts said yesterday.

Roger Francis, a bank analyst at Mizuho Securities in London, said that figure could rise to 338 billion euros if “strict haircuts” are applied on Greek bonds, meaning the debt writedowns reflect their full loss of market value.

A 7.8 billion-euro five-year bond issued by Greece in 2007 trades at 45.3 cents on the euro, according to Bloomberg prices.

Yields Rise

“I would find it very difficult to recommend investors participate in bank rights issues in these circumstances,” Francis said in a telephone interview.

Yields on 10-year Greek bonds have almost doubled to 24 percent this year. Yields on Italian 10-year bonds are approaching 6 percent, the level that prompted the European Central Bank to begin buying the securities in July.

Costs to insure European bank debt against default has risen 39 basis points in 2011, credit-default swap prices show.

“Even if you are deemed to be a good bank and not a basket case, it’s going to be very hard to raise money,” said Francis Dallaire, an analyst at Pareto Ohman in Stockholm. “It’s much better to start by making sure the sovereigns are in OK shape. Otherwise, it would take a huge amount of capital to ensure the bank against a large euro country going into difficulty.”

Unlimited Cash

Slovakian lawmakers yesterday approved an expansion of the EFSF to 440 billion euros. The EFSF, which was created last year, is authorized to buy stressed euro nations’ bonds and offer credit lines to governments, which can then aid banks. Politicians are considering whether to increase the fund’s firepower to 1 trillion euros using leverage.

The ECB last week reintroduced yearlong loans, giving banks unlimited access to cash through January 2013. Banks are increasingly tapping the ECB as short-term funding evaporates.

The case of Commerzbank AG may show how pumping in cash has not raised confidence, according to Nicolas Walewski, who manages 1.8 billion euros in European equities at Alken Asset Management LLP in London. Commerzbank shares have slid 41 percent since Germany’s second-biggest lender raised 5.3 billion euros in a May share sale, hurt by tumbling profit and writedowns of its Greek bond holdings.

“As long as they’re deleveraging, you want to stay out of banks,” said Walewski, whose only bank holding is Switzerland’s UBS AG. “There will be relief rallies along the way, but while economies aren’t growing and banks aren’t lending, earnings will suffer. Recapitalizing is irrelevant in this environment.”

To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net; Kevin Crowley in London at kcrowley1@bloomberg.net; Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net.

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net.