Big EU Lenders See More Pain

Wall Street Journal

Commerzbank, Monte dei Paschi and Bankia Must Scramble to Raise Capital

LONDON—Just six months after issuing billions of euros of new stock to investors and raising hopes the European banking sector was on the mend, three big lenders in key euro-zone economies have been hit by a fresh wave of problems.

EUBANKS

Germany’s Commerzbank AG and Italy’s Banca Monte dei Paschi di Siena SpA are scrambling to come up with billions of euros in new capital to comply with European regulations. That is raising the prospect they might need to go back to their beleaguered investors—or taxpayers—for fresh rounds of aid.

Spain’s Bankia SA, meanwhile, is facing a possible merger with a stronger rival as part of the government’s plan to deep-clean its banking sector, just six months after the bank raised some €3 billion ($3.9 billion) in an initial public offering that was widely hailed as a success for the Spanish sector.

The travails of the three banks, coming so soon after they tapped the markets for capital, are likely to make investors even more reluctant to put money into cash-strapped European lenders, analysts and investors say.

« It’s extremely difficult to make a rational call as to whether some of these banks are investible, » said Ian King, the head of International Equities at Legal & General Asset Management in London.

The timing is bad. Thirty-one European banks need to submit plans to their regulators on Friday about how they intend to come up with a total of €115 billion in capital by June. So far, only one, Italy’s UniCredit SpA, has announced plans to raise capital by selling new shares.

The banks enjoyed a respite from the bad news Thursday. A broad market rally sent many European lenders’ shares surging, in Commerzbank’s case by 15%. The rally stemmed partly from successful government-bond auctions and from hopes negotiators in Athens were poised to avert a messy default by the Greek government.

Last summer, a parade of European banks successfully sold stock to investors in a bid to put their problems in the rearview mirror.

In June, Commerzbank, Germany’s second-largest bank behind Deutsche Bank AG, took advantage of improving market conditions to raise about €11 billion, including more than €5 billion via a so-called rights offering in which it sold stock to existing shareholders. Commerzbank largely used the proceeds to repay much of the taxpayer aid it received in the first phase of the financial crisis.

By using the funds to pay back the government instead of to bolster its capital cushion, Commerzbank left itself vulnerable to the intensifying euro-zone crisis. Since June, its shares have been sliced roughly in half. Regulators identified a €5.3 billion capital hole last month that the bank must fill by June.

At a news conference Thursday in Frankfurt, CEO Martin Blessing said the bank can satisfy the capital requirements without issuing more shares. He said Commerzbank has already come up with €3 billion and intends to drum up the rest by slashing assets, cutting lending and selling a stake in a Russian bank. But Mr. Blessing admitted the plans hinge on the euro crisis not worsening. While the bank « can’t rule out » additional measures such as another rights offering, it doesn’t plan to do so now, he said.

Monte dei Paschi, Italy’s third-largest bank, also has run into problems since raising about €2.2 billion of capital last July through a rights offering.

At the time, bank executives hailed the offering as a resounding success, insulating it from further financial instability. Since then, amid rising fears about Italy’s financial health, Monte dei Paschi’s stock has plunged about 60%.

Now the bank is scrounging for €3.3 billion in new capital to satisfy regulators. Among the obstacles: The bank’s largest shareholder, a Tuscan charitable foundation, is deeply in debt, thanks largely to its participation in the July offering, and isn’t able to buy more shares.

« Investors are just reluctant to invest in any rights offerings because the share prices have fallen so much, » said Andrew Lim, an analyst with Portuguese investment bank Espirito Santo. The lesson for bank executives, he said, is that « if you need to raise equity, raise it early and raise enough. »

Bankia was formed last year through the merger of seven smaller savings banks. The bank sold shares to the public—largely Spanish investors—at a discounted price last July.

But Bankia is facing big problems. It has €38.9 billion of Spanish real-estate exposure, more than any other bank, according to Barclays Capital.

Spain’s newly elected government fears Bankia won’t be able to withstand real-estate losses that are likely to result from a law requiring deeper write-downs on troubled assets, people familiar with the matter say.

Government ministers are looking at plans that would have Bankia, among others, merge with a stronger rival, these people say.

A Bankia spokesman said Thursday he « strongly denies » that the lender is in talks to merge. He said that Bankia is well-positioned to absorb new losses.

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