SocGen, UniCredit Join European Banks Slipping on Capital

by Fabio Benedetti-Valentini

Frederic Oudea, chief executive officer of Societe Generale SA, told analysts in an earnings call on Feb. 12 that regulators are satisfied with his bank’s fully-loaded core capital buffer at about 10 percent. Photographer: Balint Porneczi/Bloomberg

(Bloomberg) -- Three of the euro area’s largest lenders reported a drop in capital levels in the fourth quarter, failing to keep up with regulators’ demands for bigger cushions against potential losses as they face challenges in markets ranging from Russia to Brazil.
UniCredit SpA, Societe Generale SA and Commerzbank AG all posted a drop in common equity ratio, a key indicator of financial strength. Their shares plunged when earnings were released last week, signaling that investors have doubts about the strength of their balance sheets.
European banks are trying to build up buffers against almost 900 billion euros ($1.03 trillion) in soured credit at a time of risks on a range of fronts. In addition to the enduring fragility of the continent’s economy, lenders are now having to contend with a slowdown in
emerging markets, a recession in Russia and the possibility that Greece may abandon the euro currency.

“The capital situation, especially in continental Europe, is going to remain particularly tight,” said Julian Chillingworth, chief investment officer at Rathbone Brothers Plc, which manages 27 billion pounds ($41.5 billion). “Weaker players are going to suffer.”
UniCredit, Italy’s biggest bank, blamed its capital erosion on the ruble’s decline, while Societe Generale said it had to offload assets in Brazil, which suffered a recession in the first half of last year, and reevaluate retirement benefits. It also cited a change in accounting.

Russian Exposure

Although France’s second-biggest bank logged a loss on its Russia business, it said the impact of ruble swings on its capital buffer was “limited.” UniCredit and Societe Generale, along with Raiffeisen Bank International AG, are the three European banks with the largest lending operations in Russia.
UniCredit’s common equity ratio fell to 10.4 percent at the end of December from 10.8 percent three months earlier. At Commerzbank, the core capital measure slipped to 9.5 percent from 9.6 percent. Societe Generale’s ratio fell 26 basis points over the same period, trimming most of last year’s gain.
“If you want to operate toward the minimum of what regulators require, of course you can, but then you shouldn’t be surprised to see a discount on your stock,” said Omar Fall, an analyst at Jefferies in London, referring to Societe Generale. The French bank has fallen 18 percent over the past 12 months, compared with a drop of about 2 percent for the 49-member STOXX 600 Banks Index in the same period.

Individual Buffers

The European Central Bank, in its new role of supreme bank supervisor, is drawing up buffers based on each bank’s particular risk profile that apply on top of industrywide standards. Lenders that fared poorly in Europe’s recent bank health check face tighter capital requirements. The ECB is also scrutinizing deviations in national laws defining capital across the region, which may result in other lenders having to hold more capital.
Societe Generale, UniCredit and Commerzbank all passed the ECB’s asset-combing review last year. But even the best-capitalized lenders will need caution in returning profits to shareholders this year, Daniele Nouy, who chairs the ECB’s supervisory board, said Jan. 29.

Capital Toolkit

Banks seeking to improve capital levels have various options. They can retain a bigger portion of profits, cut costs or reduce assets. They can also sell shares, following the example of Banco Santander SA. The Spanish bank raised 7.5 billion euros last month by selling shares.
Under stressed loan-loss assumptions, European banks would face a combined capital gap of 224 billion euros, down from about 300 billion euros a year ago, Berenberg analysts including James Chappell in London, estimated in a report earlier this month. They said the deficit would be much deeper if the euro region slipped into Japan-style deflation.
“As a shareholder one should prefer lower capital and better return on equity,” said Lutz Roehmeyer, who helps manage 11 billion euros at LBB Invest in Berlin, including Societe Generale and UniCredit shares. “Regulation was too harsh over the last few years.”
Societe Generale Chief Executive Officer Frederic Oudea told analysts last week that regulators are satisfied with his bank’s fully-loaded core capital buffer at about 10 percent. Oudea, who is also the head of the European Banking Federation lobby group, further said he sees no sign that regulators want to increase ratios as the priority is “reduce discrepancies” among nations.
As tighter capital requirements can restrict lending, “it’s understandable that some banks are trying to relax that pressure,” Rathbone’s Chillingworth said. “The sector is not out of the woods.”