Asset management sell-off hopes fade as banks find alternatives to raise capital

People who expected European banks to offload asset management arms to meet mandated 9% tier one capital ratios by mid-2012 may be disappointed, as Credit Suisse analysts barely named such an action as likely among nine banks they highlighted in a report yesterday.

According to the latest results from the European Banking Authority’s bank stress tests, released late yesterday, 71 European banks must raise €115bn. This figure is 8% higher than October’s original estimate.

The capital requirement for German banks has increased most since October, by 153%, from €5.2bn to €13.1bn.

Most of this related to Commerzbank, which faces a €2.4bn increase in its requirement, and to the country’s Landesbanken.

Belgian banks’ requirement rose 52% from €4.1bn to €6.3bn, while Austria’s jumped by €900m from €3bn.

The banking sectors of France, Sweden and Portugal, by contrast, experienced decreases, of €1.5bn, €1.4bn and €900m respectively.

Some practitioners had foreseen widespread selling of non-banking activities such as asset management, as a way for banks to raise the required capital. But in a research note, Credit Suisse analysts did not point explicitly to potential sales of such units.

In Austria, it said, Erste Bank should be able to meet the 9% target by “generating the required capital internally, 80% through retained earnings, and 20% through mitigation”.

Local rival Raiffesein, which holds most of RZB’s risk-weighted assets, should be able to make necessary capital savings by adjusting risk-weighted assets, to meet the target.

Germany’s Commerzbank, which suffered one of the biggest shortfall increases – from €2.9bn to €5.3bn – should satisfy required targets by a combination of a €30bn reduction in risk-weighted assets, up to €600m from exchange offers, and unidentified ‘further measures’.

In Spain, Santander’s €15.3bn shortfall should be reduced by €8.5bn of convertible bonds expected next year, leaving a €6.8bn deficit.

Credit Suisse noted this had already been partially covered by a preference share conversion of about €2bn announced this month, and by selling its stake in South American operations. The Spanish bank’s remaining gap, which will be about €2.3bn on Credit Suisse calculations, should be mitigated by “risk-weighted asset optimization”.

Local rival BBVA’s deficit of €6.3bn “will be covered through retained earnings of €2.4bn, RWA reduction of €2.3bn and the conversion of 50% of convertible bonds which were issued in exchange for preference shares”.

Popular’s deficit of €2.6bn “is expected to be covered by the early conversion of the bank’s €1.2bn convertible bonds, retained earnings of €500m, and RWAs optimization of €650m. Note also the bank has recently acquired Banco Pastor and has issued about €700m of additional convertible bonds,” Credit Suisse said.

Its analysts said the capital deficit at France’s BNP Paribas – one of three French banks today downgraded by ratings agency Moody’s – has fallen from €2.1bn to €1.48bn. The bank had mentioned “several potential mitigating factors” which should allow it to reach the desired capital level.

Societe Generale, which was also downgraded by Moody’s along with Credit Agricole, had already mentioned the €1.2bn reduction in its shortfall from €3.3bn in its third quarter results.

Deutsche Bank, whose requirement is for an extra €3.2bn, could be one exception to the rule of not selling off asset management units, as it reviews its operations except for DWS.

Credit Suisse said Germany’s largest bank “expects to reach the benchmark by year-end 2011 and also show €2.5bn of retained earnings, based on consensus estimates, and €800m of benefit from mitigation”.

But overall, the Swiss bank’s team seemed unimpressed with the latest EBA stress test, which it said “continues to miss the wider structural challenges the sector is facing in terms of funding”.


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