You are here

European banks' capital may be hit as bonds fall: JPMorgan says

Thursday, July 2, 2015 - 17:35
nabmEUBANKS2715.jpg
European banks holding sovereign debt may see a reduction in their capital ratios from falling bond prices, with lenders in southern Europe among those most affected, according to JPMorgan Chase & Co analysts.

[ZURICH] European banks holding sovereign debt may see a reduction in their capital ratios from falling bond prices, with lenders in southern Europe among those most affected, according to JPMorgan Chase & Co analysts.

Banca Monte dei Paschi di Siena SpA, CaixaBank SA, Bank of Ireland and UniCredit SpA may be hit hardest, the analysts, led by London-based Kian Abouhossein, wrote in a note Thursday. The analysis excludes any mitigating effect from possible hedges because these aren't disclosed, the note said.

European five-year sovereign bond yields have increased by 38 basis points on average in the second quarter, led by Portuguese, Italian and Spanish debt, the analysts said. Most European banks would have to adjust bond prices in their books to market levels, taking unrealized gains and losses to their Basel III common equity ratios.

The analysts said capital ratios would decline almost a quarter of a percentage point on average. The impact would be three times that much for Italian banks and almost a third of a percentage point for Spain's CaixaBank and the Bank of Ireland.

If Greece exits the euro area, this would probably lead to a further increase in bond yields for the peripheral countries, increasing the potential impact on bank capital, the analysts said.

Greek voters are almost evenly split heading into a referendum in three days over whether the country would endorse austerity and the international bailout.

BLOOMBERG