European banks: still undercapitalised

European banks are still in need of time or money to recapitalise their weak balance sheets. This has to be especially worrying for UK banks as they have raised a significant amount of capital and their housing market has yet to see the level of write-offs that the U.S. housing market has engendered. The FT argues that this under-capitalisation goes right across the board.

European banks have a $400bn hole on their balance sheets in spite of a record-breaking week in fundraising from rights issues.

This is a 20 per cent increase from the end of last year, raising a big question mark over the health of the banks and suggesting the credit crisis is deepening, according to Citigroup.

Royal Bank of Scotland and UBS raised $40bn from rights issues this week as capital-raisings since the end of the third quarter last year rose to $110bn.

However, the gains from capital-raisings are being outweighed by structured credit writedowns and lower underlying earnings, which are hitting the equity base of the big banks.

The so-called capital deficit, which measures the amount of equity banks should have in relation to risky assets on their books, now stands at more than $400bn, according to Citigroup.

The U.S. financial services group said in a research note: “It doesn’t matter how you think of capital: every measure of capital adequacy looks to have got worse since last year. We believe European banks remain further away than ever from a gold standard level of capital adequacy.”

RBS, UBS, Barclays, Deutsche Bank, Hypo Real Estate, Crédit Agricole, Commerzbank, Natixis, Alliance & Leicester and Société Générale all remain highly leveraged, according to Citigroup.
-Financial Times, 14 Jun 2008

Funny that the FT would have caught this analysis from Citigroup because just last week they had argued that the European banking sector was ripe for a little M&A activity. The truth is that most European banks are in no position to go into risky mergers unless forced upon them in order to bolster capital and diversify risk. For now, Europe’s main concern in its banking sector should be avoiding risk, not seeking it.