Plugging a 115 billion euro ($147 billion) capital hole in Europe's banks may require more state bail-outs if the grim reaction to UniCredit's fundraising plan — and banks' deteriorating earnings prospects — are anything to go by.
Regulators have given 31 of Europe's banks two weeks to say how they will raise capital to shore up their balance sheets by the end of June. The aim is to avoid a repeat of the 2008 crisis that led to massive injections of public money.
But a plunge in UniCredit shares — the bank has lost nearly a third of its market value since it unveiled a 7.5 billion euro rights issue on Wednesday — shows investors are not in the mood to step in with the cash.
That could leave needy banks in a bind, including Commerzbank, Banca Monte dei Paschi, Banco Popolare, and others in Portugal, Cyprus and Spain, if they cannot find alternative ways to raise the money — and may force them to seek help from government.
"The history of supporting a bank rights (issue) is now fraught with disasters like HBOS and Commerzbank where dilution to shareholders is truly awful if you don't participate, but also likely to lead to more capital losses," said Neil Dwane, chief investment officer in Europe for RCM, a unit of Allianz Global Investors.
"After the collapse in the UniCredit share price, many banks will now be looking at other ways to raise capital."
Investors who supported rights issues in Commerzbank, HBOS (now part of Lloyds ), Royal Bank of Scotland and other lenders have seen their investments crash as the fundraisings failed to reverse a slump in share price.
The European Banking Authority (EBA), which coordinates financial supervision in the European Union, has told banks they must hold more money to protect them from unexpected financial losses, and reduce the risk of massive bailouts by taxpayers.
UniCredit has to raise 8 billion euros, the highest of all affected banks except Spain's Santander, which must plug a 15 billion euro core capital shortfall.
Banks have options to find the capital required. They can retain earnings, shrink loans to customers, convert hybrid debt into equity, buy back their own bonds, sell assets, and cut dividends or staff pay.
A rights issue is one of the least attractive options, as a slump in share prices means any increase in issuance significantly dilutes the value of investors' shares.
Banks need to tell the EBA their plans by Jan. 20. Declining profits in investment banking and higher losses on loans will make it tougher for banks to fill the shortfall by their own internal methods.
"Getting to the EBA capital requirements may lead to some isolated cases of government support to get there, but the bigger driver of how much capital banks need is how European and the euro zone play out in the next few months," one senior banker said.
Germany's Commerzbank will struggle to find the 5.3 billion it needs on its own, analysts reckon. It plans to cut assets and convert hybrid debt, but has held talks with the government about taking a third bailout, sources have said.
Italy's Banca Monte dei Paschi needs 3.3 billion euros and may need to tap shareholders or the government for at least half of that.
Others should be able to plug gaps by holding on to earnings or by securing investors like sovereign wealth funds.
Jon Peace, banking analyst at Nomura, estimated retained earnings — money that is not paid out in shareholder dividends — should provide almost 20 billion euros of the 115 billion euros capital that is required in total.
However, an economic downturn would harm those plans as it would slash bank income.
"If the weather conditions over the coming months are not good, then those who hoped to earn that capital may be shocked by how difficult that is. Because of that they could end up without the required capital on July 1," said Paul Vrouwes, senior investment manager in financials at ING Investment Management.
Portugal's Millennium bcp has said it is mulling all options to find the 2.1 billion euros it needs. That could include funds from China, after a pledge of Chinese support last month for the Portuguese economy. Portugal's banks can also tap an international aid plan for the 7 billion euros they need.
International aid will provide the 30 billion euros needed by Greece's six banks too, and restructurings at Dexia and Volksbank account for 7 billion more.
This means that banks could be left needing to raise less than 30 billion euros via rights issues or through bail-outs.
The bigger problem is more could be needed in future.
"They (the EBA) gave that (115 billion euro) number a month ago. If we struggle further in the coming months, which is likely, even in the second half of this year banks could still require more capital," ING's Vrouwes said.
Analysts at Credit Suisse estimate the capital need for Europe's banks is about 400 billion euros — nearly four times the amount the EBA has asked banks to find. Others say it could be at least double the EBA's requirement.
That could potentially see more banks, including the bigger national champions, needing to bolster their balance sheets, and leave investors — or taxpayers — on the hook again.
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