Banks may need to raise capital on haircuts

 

European banks will need to raise capital if governments choose to impose "haircuts" on the value of the banks' sovereign debt holdings, said Goldman Sachs analysts, who expect banks that trade at reasonable valuations to be able to raise cash.

However, banks in Greece, Italy, Ireland, Portugal, and Spain would struggle to raise capital, Goldman analysts wrote in a note to clients.

"Here, capital would need to be provided by the sovereign (leading to partial or full nationalizations) or by multinational institutions," they added.

The analysts lowered their price targets on several European banks, including Italy's UniCredit, Spain's Banco Santander and Greece's Agricultural Bank of Greece SA. Goldman analysts said they do not see a meaningful capital shortfall for European banks if no "haircuts" are imposed.

"On the other hand, the midpoint of our 'sovereign shock' scenario would result in 38 banks requiring 30-92 billion euros of capital, at the 5 to 7% Core Tier 1 cut-off level," they wrote in a note to clients.

Earlier this week, Deutsche Bank Chief Executive Josef Ackermann said many European banks could go under if they had to accept a "haircut" at current market valuations on their entire sovereign debt holdings instead of the 21 percent write-down that has been proposed on Greek sovereign debt.

European banks in July agreed to contribute to a rescue plan for Greece by taking a 21% loss on bonds maturing before 2020. The deal prompted banks to take a loss on their bonds in Q2 results.

The European sovereign debt crisis has kept banks hostage to market worries about their capital strength and access to funding, concerns that were stoked again last week when a European source told Reuters that the IMF saw a capital shortfall of 200 billion euros among European lenders.

As the prospects recede for a return of confidence, some major lenders, including Barclays, HSBC, Goldman Sachs, Credit Suisse and UBS, have begun to slash tens of thousands of high-paying jobs.

European bank shares, including France's BNP Paribas, Germany's Commerzbank, were down on Friday with the STOXX Europe 600 banking index down 2.13% at 130.81 points.