Capital crunch for Europe's banks as writedowns peak
Europe's banks may be through the worst in terms of writedowns on risky assets but their capital positions remain under intense scrutiny as they face falling profits, slowing economies and tough financial markets.
Banks must simplify products to avoid regulationBanks are taking action on their balance sheets and there are likely to be more rights issues, increased asset sales, deeper cost cuts and dividends in danger, according to fund managers and analysts.
"We're probably through the worst now that the systemic risk has effectively been removed, but we're not out of the woods. A lot of business models have been broken and time is needed for them to be repaired," said Guy de Blonay, fund manager at New Star Asset Management.
Europe's major banks including UBS, Credit Suisse and HSBC have lost or written down over $110 billion (56 billion pounds) from their exposure to the U.S. subprime housing crisis and subsequent drop in the value of tarnished assets.
A jump in writedowns in the first quarter shook banks such as UBS, Royal Bank of Scotland and Credit Agricole into action to rebuild strained balance sheets. They came out with massive rights issues and lifted confidence that the sector has got to grips with toxic assets.
But the drip of regular bad news has left investor confidence fragile and also raised the bar on capital ratios - the buffer a bank keeps to protect depositors against future shocks. Regulators and shareholders have encouraged the shift in mood.
Analysts said a tier 1 capital ratio of 8 percent, or 6 percent on a core tier 1 basis, is increasingly seen as the comfort level European banks should hold.
"The market likes to get hold of big themes for the banks and the next theme will be capital adequacy," said Jon Peace, analyst at Lehman Brothers. "Anybody below (a core tier 1 capital ratio of) 6 percent will face a headwind ... anybody who falls below that level is going to be suspected of a rights issue no matter what management says."
France's Agricole last week said one reason it opted to tap investors was because regulators are expected to take a tougher line on capital. Its comment that "capital will be king" was echoed by U.S. Federal Reserve Chairman Ben Bernanke, who urged banks to hold "generous" capital cushions.
Not all banks are falling into line.
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