Deutsche Bank AG, Royal Bank of Scotland Group Plc, Societe Generale SA and UniCredit SpA may face pressure from investors to boost capital after scraping through Europe’s banking stress tests.
Deutsche Bank, Germany’s largest bank, had a core Tier 1 capital ratio of 6.5 percent under the test’s adverse scenario. While that surpassed the 5 percent fail rate, it ranked eighth among the 12 German banks that participated and 57th overall among the 90 banks tested. Edinburgh-based RBS had a ratio of 6.3 percent, Societe Generale of Paris 6.6 percent and Milan-based UniCredit 6.7 percent.
The European Banking Authority’s tests, which gave a passing grade to all but eight participants, have been criticized for not including the impact of a potential Greek sovereign default, even though credit default swaps indicate investors see an almost 90 percent chance one will occur. Bond yields jumped to a euro-era record in Spain and Italy yesterday, a sign the debt crisis is widening beyond Greece, Ireland and Portugal, the three nations that received bailouts.
“Since the stress tests did not include any sovereign debt failure, some view them as not being stringent enough,” said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which oversees $74 billion. “If we see sovereign defaults, many of the large banks like Deutsche, SocGen and RBS will need new capital. These banks should strengthen their capital base to curb investor worries.”
Deutsche Bank, Societe Generale and UniCredit said their capital ratios would have been higher had regulators recognized all the steps they were taking to increase reserves.
European bank shares rose, rebounding from the biggest drop in 11 months that sent the Bloomberg Europe Banks and Financial Services Index to a two-year low yesterday. Societe Generale rose 4 percent by 10:38 a.m. in Paris trading, after plunging 5.5 percent yesterday. RBS gained 2.6 percent, Deutsche Bank advanced 3.1 percent, and UniCredit climbed 4 percent.
The eight banks that failed the tests had a combined capital shortfall of 2.5 billion euros ($3.5 billion), the London-based EBA said on July 15. Investors expected as many as 15 banks would fail and be required to raise 29 billion euros, according to a survey by New York-based Goldman Sachs Group Inc. last month.
JPMorgan Cazenove analysts led by Kian Abouhossein said in a note after the test that as many as 20 banks may need to raise as much as 80 billion euros of additional capital to help allay investor concern over a Greek default.
“The EBA tests give a lot of transparency and it looks like some of the banks, even if they did pass the 5 percent capital ratio minimum level, will likely need to boost their capital to regain market confidence and investors’ trust,” said Jonathan Fayman, a fund manager at BlueBay Asset Management Plc in London, which oversees about $43 billion.
The failures were Greece’s EFG Eurobank Ergasias SA and Agricultural Bank of Greece SA, Austria’s Oesterreichische Volksbanken AG and Spain’s Banco Pastor SA, Caja de Ahorros del Mediterraneo, Banco Grupo Caja3, CatalunyaCaixa and Unnim. As many as 16 more will need to bolster capital after their core Tier 1 ratio dropped below 6 percent, the EBA said.
An additional 17 banks had ratios below 7 percent, which will be the minimum level under new rules from the Basel Committee on Banking Supervision that take full effect in 2019.
By comparison, 18 lenders had Tier 1 capital ratios above 10 percent under the harshest scenario, including Danske Bank A/S, Denmark’s largest lender, and Germany’s Landesbank Berlin.
Deutsche Bank said on July 15 that the stress tests failed to reflect the bank’s plans to reduce risk-weighted assets and retain earnings, as well as the “sound economic environment” in Germany. The company plans to reach a target for a core Tier 1 ratio above 8 percent by 2013 under Basel III rules. A spokesman declined further comment.
By reducing risk-weighted assets, a bank can bolster its capital ratio.
“I don’t expect Deutsche Bank to make a capital increase,” said Konrad Becker, a Munich-based analyst at Merck Finck & Co. “You have to look at the reason for the 6.5 percent ratio and it is not because of sovereign risk. It is mainly because of risk-weighted assets linked to derivatives and other assets.”
Chief Executive Officer Josef Ackermann, 63, told reporters in Cernobbio, Italy, in April that the company is “well capitalized.” The Frankfurt-based bank raised 10.2 billion euros last October in its biggest-ever share sale to finance a bid for a controlling stake in Deutsche Postbank AG and meet stricter capital rules for banks.
Societe Generale, led by CEO Frederic Oudea, 48, would have had a core Tier 1 ratio of 7.5 percent under the adverse scenario had the tests taken into account its first-quarter results, an option to pay dividends in shares, the annual capital increase reserved to employees and the reduction of capital allocated to risky assets, according to a statement on July 15. The bank reiterated that the ratio will climb to at least 9 percent in 2013 under Basel III. Spokeswoman Laetitia Maurel declined to comment.
Berenberg Bank analysts including Nick Anderson said in a note yesterday that the EBA’s methodology was “relatively harsh” on RBS as it assumed a static balance sheet after 2010, ignoring the bank’s plans to sell holdings including its insurance unit to reduce assets by a further 10 percent by the end of 2012.
RBS spokesman Michael Strachan declined to comment. The bank, run by Stephen Hester, 50, since November 2008, required a government rescue after piling up the most losses of any European bank during the financial crisis, according to data compiled by Bloomberg.
‘Not Properly Understood’
“The bottom line is that the role of capital in a bank is not properly understood, putting pressure on banks to hold more capital rather than less in the future,” the Berenberg analysts said in the note. “The debate is now in the hands of politicians, the media and the markets, all now armed with stress test data.”
UniCredit, Italy’s largest bank, said on July 15 that the stress test didn’t take into account the effect of convertible bonds that would boost the core Tier 1 ratio to 7.2 percent under the adverse scenario. A spokesman for UniCredit declined further comment.
The bank, led by CEO Federico Ghizzoni, is the only one of the country’s biggest lenders that hasn’t raised capital this year. Intesa Sanpaolo SpA, Monte dei Paschi di Siena SpA, Unione di Banche Italiane ScpA and Banco Popolare SC asked investors for a total of 10.5 billion euros before the stress tests. All the banks tumbled in Milan trading yesterday on concern the sovereign debt crisis is infecting Italy.
Ghizzoni, 55, told reporters in Vienna in June that the bank would decide on a share sale to boost reserves once it knows how potential rules imposing a capital buffer on the world’s biggest banks will affect UniCredit. It did raise 7 billion euros in the last three years through two offerings of securities.
Bank of Italy Governor Mario Draghi said on July 13 that Italian banks have raised about half of the 40 billion euros required by the Basel rules. In June, analysts surveyed by Bloomberg said Milan-based UniCredit needs to raise 6 billion euros to meet regulators’ stricter capital requirements.
“The stress tests conducted showed that although only eight banks failed, several of the larger European banks are thinly capitalized,” said Furnes at Storebrand Asset Management.