A wave of investor demand that has allowed Deutsche Bank and two other lenders to raise six billion euros in new share capital in the past month is unlikely to prompt other European banks to go to their shareholders for more cash.
More than four years after the financial crisis began, many are hesitating to take the plunge with further equity issues that are often unpopular with existing shareholders, while in Britain high politics have thrown up additional complications.
Many banks across the continent must still raise funds to get into shape for Basel III capital requirements that come into force in 2019, aiming to prevent a repeat of the 2008-09 disaster when taxpayers had to bail out a string of lenders.
With global stock markets hitting record highs, powered by huge injections of liquidity from central banks, now would seem a good time to do this by selling new shares.
Deutsche (DBKGn.DE), Alpha Bank of Greece (ACBr.AT) and Russia’s VTB (VTBR.MM) have raised the combined six billion euros ($7.8 billion), while Commerzbank (CBKGk.DE) detailed terms on Tuesday for its 2.5 billion euro share offering. Greece’s Piraeus (BOPr.AT) is also raising cash.
Investment bankers have hailed the sales as a testament to demand for bank stocks including even higher risk investments such as Alpha, a bailed-out bank in a bailed-out country which is ranked as «junk» by the three biggest credit rating agencies.
But the banks are often less enthusiastic. «You raise capital either because someone is forcing you to, or because it makes business sense,» said Jaime Ramos Martin, European equities portfolio manager at Standard Life Investments.
Many banks see no business sense in issuing equity, believing regulators will give them time to build up capital gradually from their profits or by issuing «cocos», bonds that are converted into shares if a bank’s position worsens.
Executives from a number of banks who spoke to Reuters on condition of anonymity said they did not plan or need to raise capital. As one banker put it, the successful recent issues means others «may consider, but most don’t necessarily need to raise or don’t want to raise».
The financial crisis, which went global when Lehman Brothers investment bank collapsed in the autumn of 2008, wiped out the capital buffers of even the world’s strongest banks. Weaker banks had to turn to their governments for tens of billions in bailout funding while stronger ones went to the markets.
In Europe, the 46 banks in the benchmark EuroStoxx 600 banks index .SX7P tapped private investors for more than 100 billion euros in ordinary equity since the autumn of 2008, according to figures compiled by Reuters. The outcome has been mixed, with massive gains by some and heavy losses by others.
Investors who put close to 1.5 billion euros into Belgian bank KBC last year have done spectacularly well. Those who bought shares last October have seen their investment rise 55 percent, based on the May 13 closing price, while those who subscribed in December are up 41 percent.
Backers of Spanish bank Santander’s 7.2 billion euro capital increase in December 2008 are now up 19 percent. However, those who took part in National Bank of Greece’s 1.25 billion euro issue in July 2009 are nursing losses of 44 percent, and investors who bought into a 499 million euros placement by Bank of Ireland in June 2010 are down 88 percent.
Investment bankers involved in the current wave of equity issues say there is money to be made for investors who are flush with cash and seeking yield. The stock of almost all European banks is still trading well below book value – their net assets divided by the number of shares.
Many of the early capital increases were triggered by the demands of European Union stress tests, where banks’ finances were subjected to crisis scenarios to see if they had enough capital or needed to raise more. This has made many banks view raising equity as a last resort and a sign of defeat.
But forecasts from analysts at Deutsche Bank – one of those lenders to have recently bitten the bullet – appear to belie the assumption that taking on more equity prevents banks from delivering a good return to shareholders.
“Markets don’t punish banks for raising capital if they genuinely need it,» said Deutsche analyst Matt Spick. «Rather, markets punish banks that consistently run with less capital than the market would like them to have, rightly or wrongly.”
Under the Basel III rules, banks will be judged on their common equity tier 1 capital ratios – a measure of high-quality capital compared with risk-weighted assets.
Out of 41 European lenders, Deutsche analysts expect 14 to have capital ratios above 11 percent next year and forecast their average return on total equity will be 11.7 percent then. At the remaining 27 banks which are expected to have ratios below 11 percent next year, they predict return on total equity will be only 8.1 percent
“There is no evidence that earning a decent return for shareholders is hampered by having a strong capital base,» said Spick. The probable reason was that banks already achieving high profitability were able to build up a strong capital base, he added.
THE 2013 SHOW
Banks came into 2013 riding a wave that pushed the EuroStoxx 600 banks index .SX7P up 23 percent in 2012 and a further 8 percent so far this year. Despite this, most large share issues have been made at a discount to the market price.
Deutsche Bank was an exception. It priced its 3 billion euro placement at the previous day’s closing price of 32.90 euros and made the whole issue in less than 24 hours. The bank’s shares rose 6 percent on the day the order book was filled.
“The Deutsche Bank share price reaction should make people feel less scared about whether more capital raisings come along, because demand looks strong relative to supply at the moment, said,» Paras Anand, head of European equities at Fidelity Worldwide Investment.
Before the Deutsche issue, investors had been questioning the bank’s capital adequacy, something it was aware of, sources familiar with the process said. The sales pitch was based on the idea that Deutsche would «re-rate» after its perceived capital problems had been solved and the bank’s shares would higher.
There are also commercial advantages for institutions active in investment banking to have new capital, particularly one with a large U.S. operation facing demands for higher capital there.
“There is clearly new business to be gained from having this additional capital,» said Martin. «It means they can now take more risk and so on. There are more profits for the taking here.”
Investors anticipating the issue had already set aside money for Deutsche before it happened. «Deutsche Bank was seen as the right amount at the right time,» said one investment banker. «There are very few that would work as well as Deutsche Bank.”
German rival Commerzbank announced on Tuesday that it was pricing its issue at a discount of 55 percent to Monday’s closing price. The offer, which runs until May 28, is open to current shareholders who can buy 20 new shares for every 21 shares they hold now.
At the other end of the euro zone from Germany – geographically and economically – Greek banks have been canvassing private investors for fresh funds as they try to avoid falling under state control.
They have been hammered by loan losses during Greece’s depression and last year’s radical writedown in the value of their holdings of Greek government bonds. This has left the top four lenders with a 27.5 billion euro capital shortfall.
Under a rescue funded by Greece’s EU/IMF bailout, the four will fall under state control unless they can raise at least 10 percent of their capital needs privately. Alpha announced on May 1 it had raised 457 million euros, meeting the 10 percent target.
Piraeus had already ensured it could keep management control when France’s Societe Generale (SOGN.PA) and Millennium BCP (BCP.LS) of Portugal effectively paid it to take over their Greek operations. However, Piraeus is continuing to canvas investors for new equity.
In Italy, a number of small banks have capital holes that need filling before they come under European Central Bank supervision next year, most notably Carige (CRGI.MI), which needs 800 million euros. But large Italian banks have raised more than 26 billion euros of new equity since summer 2008 and show no signs of an imminent return to the equity markets.
In Britain, the Bank of England has identified a 25 billion pound ($38 billion) capital hole across the country’s banks, but the problem here is as much political as financial.
The two big banks most in need of capital, Royal Bank of Scotland (RBS.L) and Lloyds (LLOY.L), were bailed out during the crisis at huge cost to the British taxpayer.
RBS Chief Executive Stephen Hester said on Tuesday it would take another 18 months to improve the bank’s capital position enough to keep regulators happy.
But the two banks’ largest shareholder, the government, wants to sell the stakes – not pump in yet more public cash in an exercise that would be a political non-starter in the run up to parliamentary elections in 2015.
One investment banker said the appetite for bank equity didn’t mean a rush of activity would follow, as the market waits for the state to start selling its stakes.
“People are talking in the market a lot about the UK banks, there’s a lot of political dialogue … the discount, the timing, the elections,» he said. «It’s a fascinating debate.”