Capitalization estimates for European banks

With the results of stress tests on 91 European banks looming, financial institutions have been coming up with their own scenarios of what to expect.

How financial markets react to Friday's results may well depend on the expectations of analysts.

The following comments and Capitalization estimates come from recent bank notes and/or interviews.

Goldman Sachs -

Overall Capitalization need of 38 billion euros ($49 billion) for European banks.

Goldman conducted a survey of 376 investors and others to gauge what the consensus for the results might be. Participants expected an 89 percent pass rate among the 91 banks and an overall need of 38 billion euros in Capitalization.

Nine percent of respondents expected a need to raise less than 10 billion euros, 33 percent between 10 billion and 25 billion euros, 35 percent between 25 billion and 50 billion euros, 18 percent between 50 billion and 100 billion euros, and 5 percent above 100 billion euros.

A majority of 63 percent said that the amount of capital raised will leave banks adequately (or overly) capitalized, while 37 percent saw a capital deficit even after the stress test.

Societe Generale -

Overall Capitalization need of 30 billion euros.

Michala Marcussen, head of economics at the investment bank, told Reuters journalists at a briefing that her bank calculated the stress tests would show banks having to take potential writedowns in a crisis of between 175 billion and 250 billion euros.

That would lead to a recapitalization need of 30 billion euros, something the bank believes to me "manageable."

Deutsche Bank -

Overall Capitalization need of 24 billion euros to 83 billion euros by 60 European banks.

The bank conducted a partial stress test on the loan books of 60 European banks (excluding quasi-public banks such as Spanish cajas and German landesbanks).

It concluded that the banks would need 24 billion euros under a moderate scenario and 83 billion under a severe scenario similar to the post-Lehman collapse. That equates to 3 percent to 10 percent of aggregate tangible equity.

Looking at market reaction, Deutsche said:

"If the official releases confirm DB's results, and are seen as sufficiently credible, we see further room for financial credit spreads to outperform and would expect some additional relief rally in equities and risky assets in general.

"This would be an important development in supporting consumer sentiment and global growth prospects."


Overall need of 75 billion euros.

The Japanese bank conducted its own tests on European banks, reckoning it had been tougher than the official tests will be.

It estimated the banks would have a capital shortfall of 75 billion euros but suggested that it was the ranking of banks that would matter to the markets more than the overall number.

Nomura said Swiss, UK and Nordic banks would be in the best position mainly due to lower expected losses and a higher capital buffer. Greek banks, due to high domestic debt holdings, and Italian banks would be among the worst.

"In Germany, Deutsche Bank positions well compared with Postbank and Commerzbank while French banks, like the Italian banks, are arguably penalized by the lengthy period to write off (non-performing loans)," it concluded.

Credit Suisse -

Overall need of 90 billion euros.

The bank noted that financial markets seemed to be relatively optimistic about the results.

Its equity research department estimated that 90 billion euros would be needed in recapitalization, but that this compared with 130 billion euros of readily available capacity.

Barclays Capital -

Spain's cajas to need 36 billion euros, German landesbanks 34 billion euros, Greek banks 8.6 billion euros.

The bank said the cajas, landesbanks and Greek banks were the institutions most likely to fail and therefore to need to raise new capital.

But it noted its estimates were based on a number of assumptions and were designed more to compare the potential capital needs with the programmes in place to address them than to predict the exact results of the tests.

UBS - Spain at risk

The Swiss bank took a specific look at Spain, one of the peripheral euro zone economies seen as most vulnerable to debt problems.

It suggested Spanish bonds were facing a double risk from the stress tests.

The results could be seen as not credible if they were too low -- a recapitalization need of less than 15-20 billion euros, for example.

Alternatively, UBS said, if a large number of more than 50-60 billion euros were needed, markets could be concerned about Spain's ability to finance a good portion of it.

[Source: Reuters, Londond, 23Jul10]

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