Published October 6, 2009

Europe banks to raise US$78b more to meet Basel rules

US$38b is to repay govt funds, US$40b will be fresh capital

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(BANGALORE) European banks may raise an additional US$78 billion in capital over the next six months as they attempt to boost capital ratios towards levels proposed under the globally agreed Basel II bank capital rules, JP Morgan Securities said.

Banks appear focused on a revised minimum Core Tier 1 ratio - a standard of capital held against risky assets - of 8 per cent that could lead to potential capital raising of US$78 billion, of which US$38 billion will be to repay government funds and US$40 billion will be fresh capital, JP Morgan said.

With an expected capital need of US$17 billion at Germany's Commerzbank, US$10 billion at Allied Irish Banks, US$7 billion at Bank of Ireland and US$6 billion at France's Societe Generale, the four account for 52 per cent of the total capital requirement seen for European banks, JP Morgan analysts said.

The Group of 20 leading industrial and emerging market countries agreed in September to finalise new capital rules by the end of 2010 and set an end-2012 date for implementing the tougher capital rules for banks.

The Basel Committee on Banking Supervision, which drew up Basel II, is set to finalise major changes to the framework by the end of this year, with actual higher levels of capital requirements set or calibrated by the end of 2010.

Banks will have to hold more and higher quality capital, cap leverage and comply with minimum liquidity standards.

Last month, UniCredit proposed a four billion euro (S$8.25 billion) capital increase, a move that would boost Italy's biggest bank's Core Tier 1 ratio by around 80 basis points. The ratio was 6.85 per cent in the first half of the year.

Norway's biggest bank DnB NOR in September also unveiled a US$2.4 billion rights issue, that would increase the bank's Tier 1 ratio to 11.3 per cent.

JP Morgan analysts named HSBC Holdings and Swiss banks UBS AG and Credit Suisse as banks with the most excess capital.

Despite the consensus view of excellent second half of 2009 investment banking revenue, the analysts see long-term headwinds in the European investment banking sector.

They reiterated their preference for credit exposed banks, which offer earnings upgrade potential over the next 18 months.

Meanwhile, European Central Bank vice-president Lucas Papademos said banks need more and better capital to prevent a repeat of the financial crisis.

'The objective is not to do this tomorrow, but do it over time,' Mr Papademos said at a panel discussion on the sidelines of the International Monetary Fund and World Bank annual meetings. 'It has to be done at the appropriate pace so as not to have unwanted adverse effects.' Mr Papademos also said supervisors don't intend to impose 'excessive regulation' on banks, adding 'we shouldn't throw out the baby with the water'. -- Reuters, Bloomberg