Banks Seeking Capital Ideas

Date: 17-01-2012
Source: The Wall Street Journal

European Lenders Are Taking Unusual Steps to Meet Their Cash Requirements

LONDON—With a deadline looming to submit plans showing how they will satisfy new capital requirements, European banks are taking unorthodox steps to boost their cash buffers—but the steps do little to fundamentally strengthen their shaky finances.

The European Banking Authority last month instructed 31 banks to come up with a total of about €115 billion (about $146 billion) in new capital by June 30, the latest attempt by regulators to quash continuing concerns that the Continent’s banks have dangerously thin cushions to absorb sudden losses. By the end of this week, the banks need to submit to their national regulators plans detailing how they will fulfill the authority’s requirement.

The simplest way for a bank to drum up billions in capital usually is by selling new shares to investors. But most lenders don’t want to do that now because it sharply erodes the value of the bank’s outstanding shares. Indeed, the one big European bank to embark on such a deal recently, Italy’s UniCredit SpA, has seen its share price hammered.

Among the unorthodox steps banks instead are adopting is taking accounting losses tied to previous acquisitions in ways that, at least on paper, boost the amount of capital banks hold. Others are considering the use of stock rather than cash to pay dividends and employee salaries.

„Levers are being pulled all over the place so banks can get their capital ratios up without actually having to go to institutional investors,“ which would be expensive and difficult right now, said Alastair Ryan, a banking analyst at UBS in London.

These unconventional measures to address one of the euro zone’s biggest vulnerabilities come on top of widespread efforts by banks to shed assets, curb lending, sell business lines or change how they account for certain assets. Such moves either generate fresh cash or shrink the bank, thereby reducing the amount of capital it needs to hold.

At least two big banks are poised for capital bounces stemming, paradoxically, from accounting-related losses on years-old acquisitions. Spanish giant Banco Bilbao Vizcaya Argentaria SA announced last week it was taking a roughly €1 billion hit because of the deteriorating profit outlook for its banking business in the southern U.S. The loss is only on paper—a write-down of the so-called goodwill associated with its 2007 acquisition of Alabama-based lender Compass Bancshares—and therefore doesn’t hurt BBVA’s capital cushions.

In fact, it has the opposite effect. Under Spanish law, the goodwill impairment generates a tax benefit, which BBVA estimates will add about €400 million to its capital buffers. That will help the Madrid-based bank, Spain’s second-largest, fill a €6.3 billion capital hole by the summer. BBVA is pursuing other measures to boost capital and doesn’t expect to need to issue new shares.

A BBVA spokesman said the impairment wasn’t designed to improve BBVA’s capital ratio. „Accounting standards require us to evaluate goodwill for impairment every year, and the process is reviewed by internal and external auditors,“ he said.

In Italy, Banca Monte dei Paschi di Siena SpA executives are considering a significant write-down of the goodwill associated with their 2007 purchase of lender Antonveneta, according to a person familiar with the matter. Such a move would likely push Monte dei Paschi, the No. 3 Italian lender, into the red for the fourth quarter.

A loss would be good news for the 540-year-old Tuscan bank. Under the terms of bonds Monte dei Paschi issued to the Italian government in the first phase of the crisis, part of a bailout of Italy’s banking sector, the bank can skip interest payments on the bonds if it posts a loss, according to industry officials and analysts. As a result, Monte dei Paschi is likely to save €160 million by skipping the scheduled interest payment, thereby making it easier for the bank to close the €3.3 billion capital hole the European Banking Authority identified in December.

„It’s much less painful than having to raise equity in this market,“ said Andrea Filtri, a London-based banking analyst with Mediobanca.

It is unclear whether the lender will be able to raise enough capital to avoid a stock sale, analysts say.

Bankers and some other experts say that, while the banks are taking unusual steps to boost their capital buffers, it is a natural response to banking-authority requirements that many industry officials—as well as some European government officials and central bankers—view as arbitrary and overly strict. Plans for another round of authority „stress tests“ this year are on hold.

Germany’s Commerzbank AG is scrambling to come up with a plan to address its €5.3 billion shortfall without resorting to government aid. In addition to curtailing lending, the Frankfurt-based lender, Germany’s second-largest, is considering asking senior employees to accept part of their salary in stock.

Commerzbank also is trying to wring more capital out of a big shareholder, German insurer Allianz SE. Allianz’s 5% stake is currently in the form of a special class of subordinated debt known as a „silent participation.“ The banking authority doesn’t recognize this as high-quality capital. Commerzbank is negotiating with Allianz to restructure that stake so that it counts toward the authority’s requirement. Allianz declined to comment.

Spain’s largest bank, Banco Santander SA, recently executed a complex securities transfer designed to boost its capital buffers. The move essentially fast-forwards a prior deal in which Santander’s Brazilian unit issued debt instruments to Qatari investors that will convert into normal stock in 2013. The instruments will only count toward Santander’s core capital levels once they become equity.

So Santander last week transferred a slug of the Brazilian stock that will be due the Qataris to an unidentified third-party bank. By handing over the shares for those convertible bonds now, instead of waiting until next year, Santander was able to count them now as core capital. The move, along with asset sales and other steps, bumped up Santander’s core capital ratio to the necessary 9%.

In another bid to preserve capital, a number of Spanish banks are increasingly leaning on so-called scrip dividends, in which the banks dole out stock instead of cash.

Banco Popular SA said it will now offer a scrip option as often as four times a year. Another Spanish bank, Banesto, which is majority-owned by Santander, is considering whether to pay its next dividend completely in shares following a fourth-quarter loss, according to people familiar with the matter.

Analysts say retail investors may not be fully aware of the risks of getting shares in lieu of cash. When banks issue new shares to pay dividends, existing shares become less valuable.

Bank officials say such dilution is minor and the products are adequately explained.