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One in four European banks may need more capital

One in four European banks may need more capital

Geoffrey Smith

JUNE 23, 2014, 10:11 AM EDT

They’ve been saved by reluctant taxpayers from a eurozone breakup, they’ve been rescued by the ECB from death by bond markets, their economy has been growing for over a year, but over a quarter of European banks think they may still need more capital, according to a survey out Monday.

The survey, by consultants Ernst & Young, lays bare what officials and bankers have been privately acknowledging all year: six years after the financial crisis exploded, many of Europe’s banks are still relying on optimistic internal accounting and indulgent supervision from their national regulators.

All that is due to end in the fourth quarter of this year, when the European Central Bank is due to take responsibility for supervising the euro zone’s largest banks.

Aware that this is its last chance to uncover unexploded bombs still hidden on eurozone banks’ balance sheets, the ECB is now halfway through  an “Asset Quality Review” to find out where  banks are still using local loopholes to pretend that loans aren’t in arrears or default.

Once it’s finished correcting asset valuations, the ECB will join non-eurozone supervisors in carrying out a new-look stress-test that they hope will put to rest doubts about the solvency of Europe’s major banks.

There have been plenty of signs that banks are trying to put their houses in order before being named and shamed by the ECB. Banks such as Italy’s Unicredit  SpA  UNCFY  and Intesa SanPaolo  SpA  ISNPY -1.22%  have written down over $27 billion in goodwill this year, largely to acknowledge that the value of their investments in eastern Europe had slumped since the crisis.

Meanwhile, issuance of new equity has been on a tear, notably from banks in those countries worst hit by the crisis. According to data from Dealogic, European banks raised $18.8 billion from the capital markets between January and June, over two thirds of its from banks in Greece and Portugal.  The figure rises to nearly $30 billion when Deutsche Bank AG’s  DB -0.09%  $11.6 billion capital increase at the start of June is included.

“The markets are in a reasonably benign situation and there is liquidity ready to be invested in banks, in equity or funding, if the markets are convinced by the transparency exercise that we are undertaking,” Reuters cited Daniele Nouy, chair of the Supervisory Board of the ECB, as saying Monday.

EY said that across the 294 banks it surveyed, 8% “fully expect” to have to raise further capital after the AQR, while another 20% think they might have to.

As so often with the eurozone, there are huge discrepancies from country to country. Only 4% of German banks think they might need more funds, whereas 35% of Spain’s banks do.

Spain’s banks are also more inclined to think they’ll have to raise provisions against future losses. By contrast, the solid economic growth being seen outside the eurozone means that UK and Scandinavian banks think they’ll be able to release reserves that they made in the past, boosting their bottom lines.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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