Shareholders of European banks resist calls coming from politicians to inject more capital into the banking sector and tensions could lead to a new wave of infusions of public money to credit institutions, according to a Bloomberg analysis.
EU leaders have been working on a plan that could force banks to raise additional capital of 100-300 billion euros, analysts estimated. The money should come either from private investors or public funds. A second option could include hard to accept conditions for banks and their shareholders.
Companies like Schroders Plc and Swisscanto Asset Management, which hold shares of European banks showed that they would like to avoid an investment, because the failure of politicians to solve the state debt crisis could further reduce stock prices of credit institutions, which have fallen sharply in recent years. “Banks need to regain investor confidence and demonstrate that can perform well before raising capital. The market expects a good solution to the state debt crisis” said an analyst at Swisscanto, which manages assets of 52 billion Swiss francs, including a substantial amount of Deutsche Bank shares.
Banks that receive public funds from national or European authorities may face restrictions on payment of bonuses or dividends, according to European Commission President Jose Manuel Barroso.
Barroso recently joined German Chancellor Angela Merkel, asking banks to seek first to strengthen their capital by selling shares to private investors. If not successful, the next step would be to request help from the national government which in turn would have to appeal to European Financial Stability Fund if it will not have money to support credit institutions, according to the two leaders.
The Index Bloomberg Europe 500 of banks and financial service companies fell by 29% this year, led by Dexia, the Franco-Belgian lender that will be divided and sold due to the inability to finance on the market, amid fears of its exposure to state debt of Greece. Declines on the stock markets have devalued some banks, such as the Italian group UniCredit, up to a level that is less than half the value of tangible assets it held, according to Bloomberg data.
Banks reject Barroso’s proposed version, saying that restricting dividends would prevent access to finance. Some investors and analysts also criticize the plan, noting that banks ordered to raise capital will not help solve the basic problems of Europe, namely the low confidence of investors that some governments will be able to pay state debts. European leaders may announce a plan to resolve the crisis at the G20 meeting on November 3-4 in Cannes.
Meanwhile, according to a source close to the situation, the European Banking Authority considers asking the banks to temporarily increase the rate of the first rank capital to risk weighted assets, an important indicator of solvency, to 9%.
Credit Suisse analysts estimated that at least 66 of the largest European banks could fail UE stress tests, in need of recapitalization amounting to 220 billion euros.
Roger Francis, an analyst at Mizuho Securities London, showed that the amount could rise to 338 billion if “strict reductions” will be applied to the principal of Greek bonds, which could reflect the actual loss absorbed by banks, as the market value. A set of 7.8 billion euros of bonds issued by Greece in 2007, is now traded on the secondary market at 45.3% of its value.
“It would be very difficult for me to recommend investors to participate in issues of capital by banks in these conditions”, said Francis.