Steve Slater
Europe's scarred banks face a long haul to shake off their 2008 hangover as recession, political intrusion and further capital raising leave their valuations — the lowest for decades — far from being a bargain.
European lenders face hefty losses as corporate and consumer loans sour and more asset writedowns loom, while funding markets remain tough.
Banks may need to raise up to 100 billion euros ($137 billion) in capital as the recession bites, analysts reckon.
Investors are trying to gauge whether the grim outlook is reflected by some of the lowest sector valuations ever seen.
"Clearly the banking sector on a global basis is still under a lot of pressure over their balance sheets. Until asset values stabilise it's very difficult to know where the bottom is," Ian Henderson, fund manager at JP Morgan, said.
"You can say price-to-book value looks attractive with most banks trading at or below book value. But that isn't a backstop if that book value proves to be illusory. It's a very tricky situation," he said.
The likelihood capital will continue to be raised was underscored on Thursday when Germany injected 10 billion euros ($13.7 billion) into Commerzbank in the face of more writedowns and "an economically stormy environment".
The scale of fundraising surged last quarter as governments stepped in to backstop banks in trouble and regulators demanded bigger capital cushions.
Some banks, notably Santander and Standard Chartered, also moved to raise cash before it was an emergency, hoping to make it less dilutive for investors.
"All bank managements are now acutely conscious of the costs of misjudging their capital needs: nationalisation," UBS analyst Alastair Ryan said in a note this week.
"We believe there is substantial share issuance ahead for the banks in 2009, both from those who will because they can; and from those who have to," he said.
UBS analysts said there was a high likelihood of share issues by Spain's BBVA, France's BNP Paribas, Germany's Deutsche Bank and Italy's Unicredit that could dilute earnings by between 15 and 50 percent.
Most of the capital raised last year was to cover big losses on complex capital markets instruments, and the worry now is that capital is needed to cover fourth-quarter writedowns and bad loans feeding through from the real economy.
SHUDDERING HALT
Losses on corporate loans and commercial real estate are the major areas of concern after several benign years came to an abrupt end.
Britain's HBOS, whose rescue takeover by Lloyds TSB should be sealed next week, last month showed a sharp deterioration in corporate credit, raising alarm that industry losses may exceed those of the early 1990s recession.
Rising unemployment will keep bad debts on mortgages and other consumer loans on an upward path, especially in Britain, Spain and Ireland, analysts say.
Bad debt charges could be three times as high as normal, reaching 2.1 percent of loans, and drag more than one in three banks into loss-making territory, Deutsche Bank analyst Matt Spick said.
Most banks are due to report 2008 results in the next 3-8 weeks, but some may be forced to report early if they are sitting on more big writedowns.
Switzerland's Credit Suisse and BNP have already warned of fourth-quarter investment bank hits, and U.S. peers have shown October and November were bad months.
TIME TO BUY?
The prospect that earnings will crash and financial industry turmoil would last well into 2009 was to blame for much of the collapse in bank stocks last year when European bank shares tumbled by an average 65 percent.
Valuation metrics show shares trading at multi-decade lows. The sector is trading on about seven times forecast earnings for 2009, although profit risk has made that measure unreliable, while the price to book value averages about 0.6 times, with most stocks trading at a discount to book.
"Are banks cheap? Optically yes; realistically no," Simon Samuels, analyst at Citi, said in a note this week.
"Despite trading at 0.9 times 2009 price to tangible book, the risk of banks making retained losses and raising more capital may not be fully priced in yet," he said.
