Bankers miss out on fee bonanza after Europe bank tests

By Alex Chambers

LONDON (BestGrowthStock) – Bankers hoping to earn fat fees from a flurry of fundraisings after the health checks on the European banking system will be disappointed.

Just seven banks across the continent need a paltry 3.5 billion euros ($4.51 billion) of new capital according to the results of a Europe-wide probe, far lower than analysts estimates of between 24 and 90 billion euros.

The actual deals that will follow in the wake of the exercise might still exceed the bare minimum laid down by regulators given that some lenders have only just jumped the mandatory 6 percent capital hurdle.

Any work to help raise money for banks in capital markets will be a welcome distraction for investment bankers who have seen a dearth of deals in the second quarter, with investors jittery about Europe’s sovereign debt crisis.

But governments will be the first port of call for banks who need to fix a hole in their books now that their resilience has been tested.

Governments have played a lead role in helping weak banks throughout the credit crisis, be it through forcing mergers or injecting cash, and this will remain the case.

But politicians, speaking about the results of the so-called stress tests on 91 European banks, said the banks that failed the test should seek to reinforce their capital via the private sector first.

“We would expect this (government aid) to be accompanied by meaningful equity offerings to provide a market-based solution, as we saw recently with Bank of Ireland,” said Martin Thornycroft, head of equity syndicate, Morgan Stanley.

Ireland’s largest bank last month was part recapitalized by the state, made a cash call on its shareholders, carried out a debt of equity swap and converted some state preference shares into ordinary equity.

“The state capital solution will be a sort of bridge. Whatever gets put in — there will be a need for some sort of takeout via the private market in the short-to-medium term,” said Prasad Gollakota, head of capital solutions at UBS.

While raising equity is a clean answer, banks will often need additional measures if the amount of money they require is too much for investors to swallow, or if the ownership structure stands in the way as with some of the regional banks.

Banks might aim to raise capital via retained earnings or by unlocking the value in cross-holdings and subsidiaries, for instance through an Initial Public Offering, with bankers saying these could come over the next six to 12 months.

“Capital raising in the bank sector is a potential source of supply (of equity raisings). The obvious question is how much they need and how the outcome of the stress tests dovetails with Basel III,” said Thornycroft.

Basel III is the new set of rules laying out how much capital banks need to set aside against their lending. But they are still waiting for the final results and the impasse has hamstrung efforts to recapitalize.

The uncertainty is about hybrid Tier 1 bonds — instruments that sit between equity and debt in the capital structure — so that banks are more reliant on alternative ways of boosting the balance sheets like debt for equity swaps.

“If you’re a bank that needs equity and you have securities trading below par it makes a lot of sense,” said Gollakota.

And weaker banks may also start to issue more bonds if the tests help improve market sentiment, allowing investors to replace central banks in funding them.

“The lack of liquidity is a bigger issue (than capital) right now and that’s the biggest potential beneficiary from this exercise,” said Sandeep Agarwal, head of financial institutions, debt capital markets at Credit Suisse.

Stock Investing

($1=.7766 Euro)

(Reporting by Alex Chambers, Editing by Douwe Miedema, Sharon Lindores)

Bankers miss out on fee bonanza after Europe bank tests