LONDON/FRANKFURT: A $9bn rights issue and a fresh purge of assets are among the measures Britain’s Barclays and Germany’s Deutsche Bank announced yesterday to meet tougher rules on risk, raising concern among investors that regulators will push other European banks into similar action.
Unlike their US rivals, which were quickly restructured and recapitalised in the heat of the financial crisis, Europe’s banks are still trying to extricate themselves from the legacy of 2007-09, with regulators in Britain and on the continent worried that some of them are still too big to fail.
“If Barclays needs to raise that much capital, and it was relatively well capitalised by European standards, it suggests we’ve got a long way to go in Europe,” said the head of equities at one UK fund manager.
“We’ll see this creep in Europe, moving the bar higher and higher to get to where the regulators want to go, and we’ve still got a long way to go in terms of capital raising.”
Barclays bore the brunt of a surprise new British curb on banks’ risk exposure, requiring it to raise an extra £12.8bn of capital in the next year. To meet the new target, Britain’s third-largest bank by market value said it would tap shareholders for £5.8bn, shrink its loan book by £65bn-£80bn and sell £2bn’ worth of bonds, sending its shares sliding over 7 percent.
Tougher rules on risk can discourage lending, and Britain’s business minister accused the Bank of England last week of holding back economic recovery by imposing higher capital requirements.
Standard Life, one of the biggest investors in Barclays and the UK stock market, criticised regulators for a “lack of stability or consistency”.
The regulatory regime “appears both capricious and hostile to banks and is in consequence raising the cost of capital for the banking sector,” said David Cumming, head of equities at Standard Life Investments.
In the eurozone, national regulators are pushing banks to get their houses in order before the European Central Bank takes over direct supervision of the bloc’s largest banks next year.
Fitch rating agency said on Tuesday that Italian mid-sized banks are likely to have to raise more equity to offset capital pressure because of a deep recession and rising bad debts. The Bank of Italy has already extended inspections of bad loans at 20 of the country’s banks.
Deutsche Bank, which has already raised around ¤5bn in new debt and equity, said it had earmarked an additional ¤250bn in assets, roughly equivalent to the annual economic output of Denmark, that could be cut to meet new bank safety rules.
In addition to pressure on capital, European investment banks are involved in a number of regulatory inquiries including a global investigation into manipulation of benchmark interest rates and the mis-selling of mortgage-backed bonds in the United States.
In Frankfurt, Deutsche Bank set aside an extra ¤630m to cover claims and settlements, causing it to miss quarterly profit expectations. Even when banks settle with regulators, they still face further lawsuits from other parties.
Barclays and Swiss bank UBS, which have already paid out nearly $2bn over their role in the manipulation of benchmark interest rates, were named in a lawsuit by the city of Philadelphia in connection with the scandal, along with Deutsche and a host of other banks. Barclays also set aside another £2bn to cover compensation claims arising from mis-sold products in Britain.
In one of the few bright spots for European banking yesterday, UBS said it would buy back a fund set up to purge it of toxic assets during the financial crisis. This drew a line under its humiliating state bailout in 2008, boosting its capital and raising the prospect of an early increase in dividends.
UBS beat second quarter profit forecasts despite paying a $885m fine to settle a lawsuit with the US housing regulator over its role in the sale of mortgage-based securities.
UBS’s second-quarter performance was driven by buoyant equity markets. Its decision to pull out of most areas of fixed income meant that, unlike Deutsche Bank, it was not hit by a drop in income from debt trading in the latter part of the second quarter after the US Federal Reserve signalled an end to cheap money.
Leaving aside the litigation charge, Deutsche’s investment bank underperformed US rivals such as Goldman Sachs and Morgan Stanley. Revenues from its investment bank rose 9 percent, compared with double-digit gains on Wall Street.
In Spain, Santander’s core capital ratio, a measure of its capital strength, rose partly due to a reduction in lending, underlining the risk for regulators that the push for greater capital levels could further choke the supply of credit and hurt the wider economy.
Reuters
