Italy, Spain May Feel Bank Plan Most

Italian, Portuguese and Spanish lenders will bear the brunt of a 100 billion-euro ($139 billion) plan to recapitalize European banks, while their counterparts in the U.K., Germany and France may avoid raising additional funds.

European policy makers, trying to reach agreement before a meeting in Brussels tomorrow on how to tackle the euro zone crisis, may force banks to boost core Tier 1 capital to 9 percent of risk-weighted assets by the end of June, two people with knowledge of the talks said. UniCredit SpA, Italy's largest bank, Banco Comercial Portugues SA, Portugal's second-biggest, and Banco Bilbao Vizcaya Argentaria SA, Spain's No. 2, are among the companies analysts say may have to raise the most capital.

Lenders may be able to mark up the value of bonds that are trading above face value, allowing them to mitigate the cost of writing down their southern European sovereign debt, the people said. That may benefit U.K. and German lenders such as Royal Bank of Scotland Group Plc and Deutsche Bank AG, whose biggest holdings of bonds are those issued by their own governments. It may also allow French banks to avoid further fundraisings.

“The mark-ups will definitely help German, northern European and British banks while hurting the peripheral countries,” said Christopher Wheeler, a London-based analyst with Mediobanca SpA. “If we really allow banks to offset sovereign haircuts with gains on other bonds, then I'm not sure that's going to calm the markets.”

Government Bonds

The euro weakened against the dollar and yen in Asian trading today. The European currency fell to $1.3903 as of 12:01 p.m. in Tokyo from $1.3929 in New York yesterday and slipped to 105.79 yen from 106.

Policy makers still haven't provided details about their methodology or how much individual banks will have to raise, according to Carla Antunes-Silva, an analyst at Credit Suisse Group AG in London. Analysts estimate lenders will need to raise 90 billion euros to 110 billion euros, depending on the size of their sovereign-debt writedowns.

Banks with large holdings of U.K., German and French bonds may avoid raising additional capital, while those with Greek, Irish, Italian, Portuguese and Spanish debt will have to raise the most, according to London-based analysts at JPMorgan Chase & Co. and MF Global Ltd.

Greek government bonds maturing in 2020 were trading at about 38 cents on the euro yesterday and Portuguese 10-year bonds at 55 cents. Spanish debt of a similar maturity was at 99.8 cents, while the French equivalent was at 99.5 cents. U.K. 10-year gilts were at 110 pence on the pound and German 10-year bunds at about 101 cents on the euro.

Banks that can't raise money privately will have to accept capital from their government or the European Financial Stability Facility, which may come with limits on dividends and bonuses, European Commission President Jose Barroso said Oct. 14.

Lenders' Opposition

Lenders including Deutsche Bank have opposed further capital injections because they risk diluting shareholders without addressing the underlying problem of a potential Greek default. BNP Paribas SA, France's largest bank, is among financial firms that have said they can meet demands for increased capital without cash injections.

European bank stocks have dropped 29 percent this year, as measured by the 46-member Bloomberg Europe Banks and Financial Services Index. UniCredit has tumbled 42 percent in Milan trading, valuing it at about 17 billion euros, 56 percent less than book value. Banco Comercial Portugues has tumbled 69 percent in Lisbon, and BBVA is down 15 percent.

UniCredit, BBVA

Executives at UniCredit and BBVA declined to comment, while Banco Comercial didn't immediately respond to an e-mail seeking comment. UniCredit has said its plan to raise capital will be outlined when the firm presents its industrial program by year- end. A spokeswoman for the European Banking Authority, which is overseeing the capital review, declined to comment.

UniCredit may need 9.4 billion euros and Intesa Sanpaolo SpA, Italy's second-largest lender, 950 million euros, JPMorgan analyst Kian Abouhossein wrote in a report to clients yesterday. Banca Monte dei Paschi di Siena SpA, which Abouhossein doesn't track, may need 4 billion euros, according to MF Global's Simon Maughan.

In Portugal, Banco Espirito Santo SA, the country's largest lender by market value, may require about 3.4 billion euros, and Banco Comercial Portugues about 3.9 billion euros, according to MF Global.

Spain's two largest banks, Banco Santander SA and BBVA may require about 3.1 billion euros each, Banco Popular SA 2.8 billion euros, Banco de Sabadell SA 2 billion euros and Bankinter SA 914 million euros, according to JPMorgan.

'Big Question'

“The amount of money we are talking about is affordable in places like Germany and France,” Maughan said in an interview with Bloomberg Radio's “Bloomberg — The First Word” today. “It's not affordable in places like Portugal and Greece. So ultimately the issues over those two nations remain. The big question is over Italy. Can they raise the money?”

Abouhossein and Maughan's estimates are based on Basel 2.5 risk-weightings and assume that lenders will mark the value of all their southern European sovereign debt to market prices.

The mark-to-market proposal “has the neat side-effect of leaving the French banks with a minimal capital requirement, important to protect the French triple-A rating, and the troublesome Brits with nil,” Anke Richter, credit strategist at Mizuho International Plc in London, said in an e-mail. “Given that the banks almost certainly won't be able to raise the extra capital required, governments will have to step in, but their indebtedness is the underlying problem, so that doesn't seem to reduce stress on the system.”

Lloyds, RBS

RBS and Lloyds Banking Group Plc, two of Britain's four biggest lenders, may avoid having to raise any additional capital, JPMorgan said. The British government owns about 82 percent of RBS after providing a 45.5 billion-pound ($73 billion) bailout to the lender in 2008 and 41 percent of Lloyds.

“It's increasingly clear that U.K. banks won't have to face any recapitalization, but they will benefit from anything at the margin that takes away the logjam in the interbank market, frees up the cost of funding or removes uncertainty,” said Maughan, who advises clients to buy U.K. and Swiss bank shares.

Societe Generale SA may be the only French bank required to bolster capital, requiring about 3.7 billion euros, according to JPMorgan. Of the German banks, Deutsche Bank faces a shortfall of 2.2 billion euros and Commerzbank AG 845 million euros, Abouhossein said.

Lenders that don't have large capital shortfalls may look to boost their capital ratios before the June 2012 deadline by shrinking their assets rather than raising capital privately.

“This may involve retaining earnings, cutting expenses and dividends, selling and running off assets to maturity,” Alberto Gallo, senior credit strategist at RBS said in an Oct. 21 report to clients.

Bloomberg News

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