Banks poised to raise $50 billion in capital

Since the start of the financial crisis last summer, some $191 billion of capital has been raised to rebuild the balance sheets of U.S. and European banks, according to UBS research.

While the first round of fund raising had been driven by sovereign wealth funds, a second round, triggered by UBS' $15 billion rights issue on April 1, has mainly been supported by public share sales.

Analysts and bankers are expecting another $50 billion to $80 billion to be raised over the next one to two months following RBS's 12 billion pound ($23.66 billion) rights issue, as banks improve their capital positions.

It may be better to be safe than sorry.

"I know of several banks who are thinking about doing a rights issue or hybrid convertibles even though they don't absolutely need the money," a London-based equity capital markets banker said.

 

REGULATORY FOCUS

More cash calls are coming as regulators demand higher core capital ratios.

Regulators and central bankers now are requiring an extra layer of permanent capital as they pump hundreds of billions of dollars into the financial system to restore confidence.

U.S. and UK regulators now prefer a minimum core tier 1 capital ratio of 6 percent, bankers said.

To achieve that, Merrill Lynch analysts estimate Barclays, HBOS and Lloyds TSB would need $17 billion, $12 billion and $4 billion, respectively.

The board of HBOS, Britain's largest mortgage lender, is meeting on Monday to discuss a rights issue plan, according to people close to the bank.

"They better raise it now rather than wait. When the credit crisis hits the real economy, their loan books are going to be impaired," said a banker focusing on financial institutions.

The International Monetary Fund, for example, predicts banks will register a $340 billion to $380 billion mark-to-market loss on lending.

UBS projects U.S. banks, this year, will on average write off 187 basis points of loans -- triple the 63 basis points of credit cost in 2006. UK banks' average credit charge is also expected to increase to 116 basis points from 90 basis points two years ago.

There is a silver lining. The raising of capital will reassure jittery credit markets, pulling down the cost of funding for banks and helping restore normality to strained bond and money markets.Â

 

EUROPE TOO

But the trend isn't just a UK affair. In Portugal, three out of five listed banks have announced rights issues amounting to 1.8 billion euros ($2.81 billion) -- 1.3 billion euros from BCP, 350 million euros from BPI and 150 million euros from Banif SGPS, -- to boost their capital ratios.

On Thursday, Italian bank Monte dei Paschi di Siena announced a 4.97 billion euro rights issue in a deal arranged by Merrill Lynch to fund the buyout of Antonveneta. It is also issuing 1 billion euros worth of convertible bonds to shore up its tier 1 capital ratio, which will drop to 4.5 percent after the 9 billion euro acquisition.

Ireland's AIB, Anglo Irish and Bank of Ireland also have capital positions that are under pressure.

The longer they wait, the less likely they are to get their deals done.

"You can only tap the well so many times," another veteran banker said.