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Europe banks may feel profits squeeze after US raises capital bar
[LONDON] European regulators could raise the bar on capital for banks like Deutsche Bank and BNP Paribas in response to tough US proposals to make banks less risky, potentially depressing profitability, Barclays analysts said.
The US Federal Reserve has proposed that eight big US banks should hold an extra capital cushion, which could require many to hold core capital of 12 per cent of risk-weighted assets, significantly above the global minimum.
In Europe, regulators in Nordic countries, Switzerland and Britain have already set higher capital requirements than the global standard, but the bar is lower in most eurozone countries.
"The US move to higher requirements ... begs the question whether Eurozone requirements also now move higher," Jeremy Sigee, analyst at Barclays, said.
Barclays analysts said Deutsche Bank, BNP Paribas and Societe Generale would be most affected, and could need 15-20 per cent more capital if they had to move to a 12 per cent minimum standard.
That would depress their return on tangible equity, a measure of profitability, by between 1.6 and 1.9 percentage points each, Mr Sigee said in a note on Wednesday.
Deutsche Bank's return on equity was less that 3 per cent in the first nine months of the year, below the 12 per cent it aims for in 2016 and a long way from its pre-crisis 20 per cent.
It could also force banks to restrain dividends. Some, particularly French banks, could revise business plans and scale back activities, he said.
The changes would have little impact on Europe's other major banks, UBS, Credit Suisse and HSBC, as they are already planning for higher capital standards. Sigee said for them the US move could mark a welcome levelling of the playing field.
The analysts do not cover Barclays Plc.
But Mr Sigee and other analysts said it was too early to predict how the US rules will play out.
Omar Fall, analyst at Jefferies, said most banks were already working towards higher capital levels than the minimum, with market pressure on banks to hold core capital of 11-12 per cent.
The Fed wants US banks whose failure could threaten markets to fund themselves more through shareholder equity and less by borrowing. Its proposals would take effect in 2016.
JPMorgan could need US$20 billion of extra capital. It said it will not keep as much excess capital over required levels as it might have and will make "surgical" changes to its business model.