Europe's banks face decisive day

London/Milan: Today is a decisive day for Europe's banks. Though plenty of other influences are swirling about them — the scale of Greek sovereign bond haircuts, volatile funding markets, ominous financial results of US peers — today's deadline for submitting plans of action to raise capital ordered by European regulators is vital.

Of the 31 banks that together were found to have a ¤115 billion (Dh 540 billion) capital shortfall in December stress tests by the European Banking Authority (EBA), the worst offenders were Spanish, Italian and German. The EBA will have to judge whether plans drawn up to close those deficits are credible.

The trickiest issue will centre on the degree to which fresh money is being raised (which the regulator would like) versus a shrinkage of loan portfolios (a politically sensitive course but one that is far easier to pursue). So far, only UniCredit has launched a rights issue while many banks have begun to shrink, potentially triggering a credit crunch.

Spain

This was the country whose banks had the biggest capital shortfall identified by the EBA. Santander had the largest needs —¤15.3 billion — for a single institution. Spanish banks have opted for asset sales, conversion into ordinary equity of convertible instruments, reductions in lending and manipulation of risk weightings.

Santander says it has reached the targeted core capital ratio of 9 per cent of assets. It has raised ¤1.5 billion from the sale of a stake in its Brazil arm, though a chunk of new capital comes from the obligatory conversion into equity in October this year of ¤6.83 billion of instruments sold to clients. BBVA and Bankia are planning to raise more capital by converting preference shares into ordinary equity. BBVA gained another ¤400 million in capital due to the tax treatment of goodwill when it was forced to write down a further ¤1.5 billion on the value of its US banking business.

Italy

Four banks are on the hook to raise more than ¤15 billion in order to comply with EBA demands. Their task was already tough with investors shunning them amid sovereign debt fears. But it has been harder since UniCredit received a rocky reception to its ¤7.5 billion rights issue As a result, Banca Monte dei Paschi di Siena, Banca Popolare and UBI Banca have sworn off rights issues and are hoping to be able to boost capital by a combined ¤7.5 billion through cost-cutting, securitisation or asset sales.

Germany

Commerzbank's deficit, at ¤5.3 billion, is by far the biggest. It has frozen lending to most of its east European operations and is set to shrink existing assets, in part offloading parts of property lender Eurohypo. Of the other German banks requiring capital, Deutsche Bank intends to close its ¤3.2 billion gap through retained earnings and some "management action", though it has not given details.

Austria

The biggest banks are under pressure because of activities in central and eastern Europe. Raiffeisen, has proposed 20 measures to fill a ¤2.1 billion capital gap, though it says cutting lending to the region would be a last resort.

"We are well on the way to getting by without this 20th point," Herbert Stepic, RBI chief executive, said. Erste Bank is confident it can fill its ¤743 million gap without government help or radically changing its business model. Its recipe is retaining profits and selling some non-core assets.

Portugal

Banks are seeking to strengthen capital ratios through asset sales and liability management in an effort not to draw on a ¤12 billion state recapitalisation fund they fear would wea-ken management control.

— Financial Times