Europe Bank Shares Show Muted Rise After US Stress Tests
May 08 2009 - 4:26AM
Dow Jones News
European banking shares were mainly higher early Friday, as
results of stress tests on U.S. banks overnight spurred investor
hopes that the worst of the global financial crisis could be
nearing an end.
Some of the initial reaction in European banks appear muted as
much of the stress-test results had already been leaked to the U.S.
media in the past few days.
At 0740 GMT, key banks were higher, with Lloyds Banking Group
PLC (LYG) up 6.5%, Deutsche Bank AG (DB) up 3%, BNP Paribas SA
(BNP.FR) up 2.9%, Standard Chartered PLC (STAN.LN) up 2.5% and
Banco Santander SA (SAN.MC) up 2.3%. UBS AG (UBS) and Credit Suisse
Group (CS) were up 2.4% and 3%, respectively.
The FTSE 350 Bank index was up 2.9%, while the Stoxx Euro 600
Banks index was up 2.6%.
The gains follow a marked rise in the past two months and the
index levels are already higher than at the start of the year.
On Thursday, the U.S. Treasury Department directed 10 of the
nation's 19 biggest banks to boost their capital levels by a
combined $75 billion.
The Treasury released the much-anticipated results late
Thursday, with Bank of America Corp. (BAC), Wells Fargo & Co.
(WFC) and GMAC LLC being instructed to raise the most capital.
JPMorgan Chase & Co. (JPM), American Express Co. (AXP) and
Goldman Sachs Group Inc. (GS) were among the financial institutions
deemed to not need fresh capital.
Meanwhile, banks began announcing plans to raise cash
Thursday.
Treasury Secretary Timothy Geithner said he was "reasonably
confident" the banks could raise the needed capital.
Federal Reserve Chairman Ben Bernanke said the results should
provide "considerable comfort" about the health of the banking
system.
In reaction, analysts are divided on how results of the
stress-testing translate to European rivals, many of whom have
tapped shareholders and strategic investors for capital as well
after major write-downs and losses.
European investors have already largely rooted out European
banks with skimpy capital positions because, unlike in the U.S.,
regulators here have been using equity Tier 1 ratios as a solvency
measure for some time, Keefe, Bruyette & Woods said.
"The market has been using equity Tier 1 ratios as a measure of
solvency for European banks throughout the crisis and the market is
therefore well briefed on those banks with thin ratios," KBW
analyst Andrew Stimpson said.
Applying similar guidelines as U.S. regulators have to European
banks, Stimpson said only six European banks would need to raise
capital to meet the minimum: Commerzbank AG (CBK.XE), Danske Bank
(DANSKE.KO), Swedbank (SWED-A.SK), Bank of Ireland (IRE), Allied
Irish Bank (AIB), and Banco Popolare (BP.MI).
To be sure, many banks will need more capital as a buffer, but
are likely to spend coming years doing so by paying shareholders
less through crimping dividends and share buybacks, KBW said.
Analysts at UBS are far more cautious, arguing that European
banks lag behind their U.S. rivals because responsibility for is
scattered.
"Unlike the U.S., there is no major policy initiative to
recapitalize banks in Europe while the impairment cycle is lagging
the U.S. by 9-12 months with Eastern Europe likely to be major drag
on the banking system," UBS analyst Philip Finch said.
As a result, UBS lifted its rating on U.S. banks to neutral from
underweight; European ones remain at underweight on what Finch
calls limited progress on recapitalizing.
-By Vladimir Guevarra, Dow Jones Newswires, Tel. +44 (0)
2078429486, vladimir.guevarra@dowjones.com