Europe Banks’ Trillion-Euro Bad-Loan Burden Spurs Cash Calls

  • Distressed debt remains top priority eight years after crisis
  • Big banks gearing up for second round of ECB stress tests

Eight years after the financial crisis, a flurry of stock sales is reminding investors just how far some European banks still have to go to repair their balance sheets.

Spain’s Banco Popular Espanol SA jolted markets last week with plans for a 2.5 billion-euro ($2.8 billion) rights issue a month after its chief executive officer said capital was adequate. In Italy, Banco Popolare SC and Veneto Banca SpA are tapping investors for 1 billion euros each after Banca Popolare di Vicenza SpA turned to a rescue fund for its cash call. All these consumer banks are raising money to cover a backlog of bad loans, a plight shared in varying degrees by many of their peers.

"Banks have to adjust to new ECB requirements and that is what has driven some of these cash calls," said Stefano Girola, who helps manage about 40 billion euros at Syz Asset Management in Lugano, Switzerland. He said he wouldn’t be surprised if banks in Portugal and other lenders in Italy also sell new stock this year.

Non-performing loans have been a top priority for the European Central Bank since it took over as the region’s banking supervisor in late 2014. The ECB estimates euro-area banks had about 1.2 trillion euros in bad loans on their books at the end of September, less than at the end of March 2015 but still more than in June 2013. Banks in Italy, Spain, Ireland, Portugal and Greece account for over half of the burden, which is restraining lending and eroding the profitability of an industry vital to economic growth.

The ECB’s supervisory arm has been evaluating non-performing loans in terms of both quality and quantity as Europe has no system for determining provisions for write-offs, ECB Vice President Vitor Constancio told reporters in Frankfurt Thursday. Plans will be established for individual banks to “speed up the workout of NPLs in order to, as quickly as possible, address that problem,” he said, adding that the process will take “some time.”

Banks that have been slow to deal with distressed debt may pay a premium for delaying the inevitable. The 30 euro-area banks tracked by the Euro Stoxx Banks Index are down 17 percent this year, while Banco Popular and Banco Popolare have declined 37 percent and 65 percent respectively. At those prices, they will have to put up more shares than they would have earlier for the same amount and may struggle to find demand.

Investors last month balked at Pop. Vicenza’s 1.8 billion-euro cash call, forcing the country’s new rescue fund to take control of the lender. Veneto Banca said earlier this week that it has received assurances the fund will buy its stock if investors also spurn its offering.

“Reality is dawning across EU banks, exemplified by the surprise 2.5 billion-euro rights issue by Spain’s Banco Popular, that organic clean-up of legacy issues is simply not happening, let alone happening fast enough,” said Jonathan Tyce, senior banking analyst at Bloomberg Intelligence.

Stress Tests

The pain isn’t limited to small lenders. Bigger European banks are gearing up for a second round of ECB-supervised stress tests targeting those with at least 30 billion euros in assets. Last month, the chief executive officer of UniCredit SpA, Federico Ghizzoni, agreed to step down under pressure from shareholders worried that the bank’s capital cushion is too thin. The ECB’s first tests in 2014 turned up a 25 billion-euro capital gap across euro-area lenders, mainly at Italian banks. UniCredit was not among them.  

"It was clear that some banks didn’t have enough coverage ratios and that some balance sheets were still loaded with non-performing assets,” said Christian Sole, senior equity analyst at Candriam Investors Group in Brussels, which oversaw about 94 billion euros in assets at the end of last year. “I can imagine they’ve gotten clear guidance from regulators and the supervisor on what they expect for banks in terms of capital and balance sheets."

In Italy, Banco Popolare is raising money to win ECB approval for a do-or-die merger with Banca Popolare di Milano Scarl, while Veneto Banca is among Italian lenders whose reserves are deemed too low. Spain’s Popular is struggling to offload failed real estate assets from the collapse of the country’s property market.

“Popular’s capital raise serves as an important reminder that Spanish and European banks must continue to tackle the issue of forbearance,” Berenberg analyst Andrew Lowe and Iro Papadopoulou wrote in a note Tuesday, referring to delayed foreclosures. “Until banks do so, we see little scope for the sector to halt its under-performance.”

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