Europe’s latest bank re-cap wave is one to surf

April 6, 2011

By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — Europe’s latest bank recapitalisation wave is the one to surf. Shareholders have seen so many false dawns that they could be forgiven for thinking daylight would never come. But there are reasons to believe that this round of rights issues will be final. For equity investors, it’s a sign that the risk-reward balance has finally shifted in their favour.

Commerzbank’s plans to raise 8.25 billion euros in equity — more than its market value — were rewarded with a 3.5 percent share price bounce. Intesa Sanpaolo, one of the few lenders to avoid raising fresh capital since the beginning of the crisis, launched a 5 billion euro rights issue and its shares jumped almost 5 percent. Further equity offerings look likely: investors polled by Morgan Stanley expect European banks to seek 30 billion to 40 billion euros this year.

Shareholders who have pumped nearly 400 billion euros into European banks in the past three years can be confident this is the last time. Bad debts are receding, so future capital demands can be met from retained earnings. Meanwhile, regulation is becoming less murky. National regulators still differ on minimum capital requirements — Intesa is aiming for a 10 percent core Tier 1 capital ratio, while Commerzbank has been allowed to get away with 8 percent. But with the exception of banks in Switzerland, Ireland, and possibly the UK, 10 percent looks like the top of the range.

True, it’s too early to sound the all-clear. If one of Europe’s peripheral economies defaulted, or if Spain needed a bailout, all bets would be off. And if the European Union’s bank stress tests end up being tougher than expected, yet more capital would be sought.

But the bigger picture is that in a recovering world Europe’s big banks will start generating plenty of spare capital. The freedom to squander this on value-destructive M&A will be limited by regulators, implying that the cash should be channelled into higher dividends. Valuations are reasonable — most European lenders trade around book value. And many investors are underweight the sector. For them, the recap wave is a buying opportunity that may not be repeated.

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