Bloomberg News

U.K. Banks Would Face $102 Billion Capital Deficit on Euro Exits

June 08, 2012

U.K. banks Royal Bank of Scotland Group Plc, Barclays Plc (BARC) and Lloyds Banking Group Plc (LLOY) would have a capital deficit of 66 billion pounds ($102 billion) should Europe’s peripheral nations leave the euro, according to Liberum Capital Ltd.

Foreign exchange losses, loan losses and lower investment banking revenue would erode capital if Greece, Spain, Italy, Ireland and Portugal adopt a new currency, assuming the British banks target a 10 percent core Tier 1 capital ratio, Cormac Leech, a London-based analyst at the firm, wrote in a note to clients today.

The European Commission last month backed proposals to provide a direct capital infusion to Spain’s banks, a model Germany opposes in favor of aid with fiscal austerity strings attached. Fitch Ratings downgraded Spain three levels late yesterday to within two steps of junk as it increased its estimate for the cost to the government of shoring up banks to as much as 100 billion euros ($125 billion). The rating company estimates the economy will remain in recession through 2013.

“Barclays, Lloyds and RBS are ‘high risk’ given the potential capital deficit,” Leech wrote in the note. “It’s now uncontroversial to expect Greece to exit the euro zone.”

Liberum estimates a 55 percent possibility of the five peripheral members leaving the currency.

Leech, who initiated coverage on the U.K. banks, has buy ratings for HSBC Holdings Plc (HSBA), Europe’s biggest lender, Standard Chartered Plc (STAN) and Lloyds. He has hold recommendations for RBS, Britain’s biggest government-owned lender, and Barclays.

-- Editors: Jon Menon, Steve Bailey

To contact the reporter on this story: Howard Mustoe in London at

To contact the editor responsible for this story: Edward Evans at

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