Bloomberg News

EU Banks Won’t Cut Lending to Meet 9% Buffer, Clausen Says

December 12, 2011

(Updates with Clausen comments from seventh paragraph, bank share valuations and prices from 10th paragraph.)

Dec. 9 (Bloomberg) -- Europe’s banks won’t cut lending to businesses or households as they adjust their balance sheets to fulfill a 9 percent capital adequacy target, said Christian Clausen, the president of the European Banking Federation.

“All banks I talk to keep lending to small- and medium- sized enterprises and households,” Clausen, who is also the chief executive officer of Nordea Bank AB in Stockholm, said in an interview today. “That part of the bank will keep rolling. There will be credit supply to those customers, but they are getting rid of some assets.”

The European Banking Authority yesterday warned banks not to cut lending or inflate capital levels artificially to raise 114.7 billion euros ($153 billion) in extra capital needed to meet stricter regulatory requirements. Clausen, whose federation represents the EU’s national banking associations, in November told Europe’s lenders to keep dumping Italian bonds and other assets tainted by the debt crisis to protect their balance sheets.

“The banks will have to do all things” to meet the stricter capital requirements, Clausen said. “They are all, as I hear, very diligent about how to get there and creating the business model going forward that will give them the 9 percent.”

‘Political Views’

The EBA told banks to raise the money from investors, retained earnings and lower bonuses. Failing that, companies may sell assets, provided the disposals don’t limit overall lending to the “real” economy, the authority said in a statement.

“I know there are some political views on what banks should do, but we have to understand that if you need to raise capital, you need to have a plan that shows you have a sufficient return on capital.”

The EBA’s latest estimate of how much capital banks must raise follows an October assessment, in which lenders were told to find an additional 106 billion euros to achieve a core Tier 1 capital ratio of 9 percent of their risk-weighted assets by mid- 2012, after marking their sovereign bonds to market prices.

Banks needing to raise capital to achieve the higher ratio will only be successful if they can persuade investors they offer adequate returns, Clausen said. A number of banks won’t be able to tap markets unless they offload assets that are weighing down their balance sheets, he said.

Delivering Returns

“You don’t ask investors for capital if you have a plan that delivers 7 percent return on equity,” Clausen said, adding banks need to outline plans to reach a return on equity of at least 10 percent within two years if they’re to win investor favor.

“The money is available,” Clausen said. “For an investor buying at half book value and getting a price to book of one in two to three years, that’s a very good investment opportunity. But it has to be a credible plan. It has to be convincing.”

The 46-member Bloomberg Europe Banks and Financial Services Index has an average price-to-book ratio of 0.71, according to Bloomberg data. Sweden’s Nordea has a ratio of 0.94, UBS AG, the biggest Swiss bank, has a 0.82 ratio, while France’s BNP Paribas SA has 0.56.

German banks were ordered to raise 13.1 billion euros of capital, more than the regulator estimated in October, after some European sovereign bonds tumbled in the three months through September. Deutsche Bank AG, the country’s largest lender, must raise 3.2 billion euros, while Commerzbank AG has to increase capital by 5.3 billion euros, according to the EBA. Spanish banks were told to raise 26 billion euros and their Italian counterparts 15.4 billion euros.

No Easy Task

The Bloomberg Europe Banks and Financial Services Index rose 1.3 percent at 1:45 p.m. in London, rebounding from yesterday’s 3.1 percent slump. Banks received financial support yesterday from the European Central Bank, which coupled an interest-rate cut with a pledge to offer unlimited cash for three years in an effort to avert a liquidity crisis.

“It’s important that banks raise their capital, but they should do it in a way that wouldn’t imply a reduction in lending,” European Central Bank President Mario Draghi said. “That’s not an easy task at this point of time.”

--With assistance from Liam Vaughan in London. Editors: Tasneem Brogger, Kim McLaughlin.

To contact the reporters on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net;

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Tasneem Brogger at tbrogger@bloomberg.net


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