UniCredit, Societe Generale and Deutsche Bank could be the first European banks to be forced to raise additional capital in case of the crisis worsening in the euro zone, although they passed stress tests recently, according to an analysis.
Stress tests, with results published recently by the European Banking Authority (EBA), have been criticized by analysts as too lenient, but still revealed some weaknesses in the system.
UniCredit might need an additional capital of 5.6 billion euros and Societe Generale and Deutsche Bank – three billion euros each, to achieve the global standards of capital in a scenario with two years of recession and “realistic” losses on state bonds in the euro zone, according to Reuters estimates.
UniCredit could try to raise capital this year after new rules for banks will become clear, analysts estimating that the Italian group will seek to raise between 5 billion and 7 billion euros. Depending on the speed and severity with which the state debt crisis will evolve in the euro area, other banks might join them.
“Many banks will need capital increases in case of a contagion caused by problems in Greece, Portugal and Ireland”, commented an investment fund manager.
The agreement reached by EU leaders last week and major financial institutions to save Greece calmed fears of a crisis spreading to other euro area countries, but the threat of expanding is still real, and some believe that the imminent entry of Greece in default increase significantly the chances that Ireland and Portugal follow the same path.
Therefore, banks will be pressed, more than ever to strengthen their capital reserves to absorb losses from savings with problems and the politicians seem determined to force the private sector to take responsibility.
However, banks will most likely try to delay any operations of capital accumulation because of difficult market conditions.
Shares of European banks last week reached maximum of the last two years, and most of them are highly undervalued in relation to the operational situation, so any capital would dilute old shareholder holdings and moreover, will not attract too many investors.
According to the stress test results, rates of the Tier 1 capital of UniCredit and Societe Generale would fall to 6.6% in a scenario of a two year recession in the euro area, while Deutsche Bank indicator would drop to 6.5%.
These figures exceed the minimum threshold of 5% set by the EBA, but are below the average of 7.7% of the 90 credit institutions examined.
In addition, tests have been criticized by some analysts for criteria considered too lenient, because it didn’t include scenarios covering the state debt losses of euro zone countries.
JPMorgan analysts estimate that 20 European banks may need an additional capital of 80 billion euros, a figure reached after conducting its own stress tests, with tougher criteria, based on data provided by EBA.
Morgan Stanley estimates that European banks would need 40 billion euros, while Credit Suisse wrote in an analysis that 49 credit institutions would need 83 billion euros.