Basel III to hit European banking landscape, warns ING head
Core capital requirements for banks across Europe are set to dramatically alter the landscape of the industry, warns ING’s head of investment in the sector.
Small European banks, in particular those in Switzerland, are expected to be hardest hit by core capital requirements made compulsory by Basel III.
Under Basel III, European banks’ core capital must be 3.5% on 1 January 2013, rising to 7% on 1 January 2019.
But harsher implementation of the rules in Switzerland will hit its two major players, UBS and Credit Suisse, said ING’s head of its Invest Banking and Insurance Fund Paul Vrouwes.
The Swiss regulator wants UBS and Credit Suisse to have a buffer capital of 19% by 1 January 2019. The banks will be expected to hold core capital of 10%, plus subordinated capital of 9%.
“This will clearly increase pressure on the profitability of these banks in the future,” Vrouwes said.
“To achieve the 19% buffer, UBS still has to raise capital of 6%,” he added.
UBS can raise its capital in a number of ways, including one or more share issues, selling assets for more than book value, paying out lower dividends or none at all to shareholders, or issuing contingent capital (CoCo’s) as Credit Suisse did.
He expects services offered by both banks to become more expensive for investors.
Banks elsewhere in Europe are also likely to be affected by the new rules.
Core capital ratios in Germany are expected to be retained at 7%.
Several of its regional banks were injured by the subprime mortgage crisis, and will find it difficult to attain even the 7% threshold, said Vrouwes.
“In Germany, Deutsche Bank has survived the credit crisis relatively unscathed, but Commerzbank, on the other hand, is known as a weak bank owing to the write-downs following the credit crunch.
“Commerzbank’s higher risk profile in the market already translates into higher funding costs; clearly putting it at a disadvantage compared with Deutsche Bank.
“In the longer term, this may lead to consolidation in the German banking sector,” he said.
Separately, Spanish banks are being hit by their real estate liabilities.
“Spanish banks are disadvantaged by the fact that Spain – like the US – is dealing with a real estate crisis.
“Spanish banks are therefore heavily involved in mortgages, which have to be written down on account of the fall in value of the underlying Spanish property. Because of this, Spanish banks are relatively high risk,” said Vrouwes.
Banks in other peripheral European countries are experiencing the same problem, he added.
ING IM’s Invest Banking and Insurance Fund is currently neutral on Europe as a whole, but overweight on France and Norway due to their low valuations.