Carpe capital

A flurry of equity-raising by European banks

Published on The Economist, October 1, 2009.

APOCALYPTIC predictions about continental European banks’ capital levels have been made for some time, usually by people across the Atlantic or English Channel. They are more leveraged than their American peers, the charge goes, and far slower to recognise bad debts. This week saw rights issues launched by two of Europe’s giants, BNP Paribas of France and UniCredit of Italy, for a combined €8 billion ($12 billion). Spain’s Santander, the euro zone’s largest bank, is floating part of its Brazilian arm, which could raise its parent a billion dollars of capital. Norway’s largest bank, DnB NOR, said it would sell up to €1.6 billion of shares on September 25th. 

An admission of weakness? Not really. BNP is taking advantage of bouncier markets (see chart) to make early repayment of the hybrid capital it got from the French government. Both UniCredit and DNB NOR are raising funds to avoid tapping their governments’ relief programmes (Italy’s Intesa Sanpaolo also said it would no longer seek to tap the state). European core Tier-1 capital ratios typically stand at 7-8%, the same as at America’s big banks (although DNB NOR is aiming for 10%). Leverage ratios, which compare equity with reported assets, look worse for Europeans partly because of accounting quirks …

… Managers cannot be complacent, however. New capital rules, due at the end of next year, could make life much harder. Most retail banks are hoping that they can get away with rebuilding capital further through retained earnings. Investment banks are in for rougher treatment as regulators seek to penalise their trading books. Credit Suisse and Goldman Sachs, which mark most of their balance-sheets to market and hence recognise losses early, are already running with core capital ratios of 10-12%. Laggards with less core capital or worse assets may have to play catch-up. On September 24th Japan’s Nomura, which picked up bits of Lehman Brothers last year, said it would raise up to $5.6 billion—equivalent to almost one-third of its existing share count. Its stock price has since fallen by almost a fifth. (full text).

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