Séverin Cabannes offers a simple but telling explanation of the current rush by European banks to tap their shareholders for fresh funds. “The market reopened the window to do this kind of thing,” says the deputy chief executive of Société Générale, one of France’s biggest lenders, which joined the stream of rights issues this month. “And nobody knows if the equity markets will stay open.”
First there was BNP Paribas , followed swiftly in the latest spate by SocGen, Italy’s Unicredit, Norway’s DnB Nor, Swedbank of Sweden and Alpha Bank of Greece. Then, on Monday, ING of the Netherlands. In the past four weeks, seven of continental Europe’s largest banks have asked in all for some €25bn ($37bn, £23bn) to repay government bail-out money.
Now, investors are braced for deals from the UK’s two biggest rescues – Lloyds, which is 43.5 per cent owned by the government, and Royal Bank of Scotland, 70 per cent state-owned. Lloyds has put together a plan to raise £15bn-£20bn of new money as part of a £25bn refinancing plan, while RBS, keen not to be left behind, is looking at a smaller fundraising of up to £5bn.
Barely a year on from the height of the financial crisis, when governments around the world were forced to pour billions of pounds into their countries’ banks, many of those institutions are dashing in the other direction, desperate to throw off the shackles of state control. Suddenly they feel sufficiently upbeat about the outlook to want to go it alone again. As fast as they can, they are buying out the bail-out money – equity stakes, preference shares, subordinated bonds – and spurning governments’ debt guarantees.
Matthew Westerman, global head of equity capital markets at Goldman Sachs, dates the latest batch of capital raisings back to a bold decision by the UK’s HSBC in the spring to launch a £12.5bn ($20bn, €14bn) rights issue – the biggest on record for any type of company anywhere – at what proved to be a six-year low point in the equity markets. Since then, the FTSE World Banks Index has climbed 155 per cent. “HSBC was the major trigger for both the rights issue wave and the upturn in sentiment towards financial services stocks,” says Mr Westerman, who advises HSBC, adding that as a result of the crisis “many shareholders are relatively underinvested” in the sector.
The buoyancy of markets through the summer months was a twin boost for the banks. On the one hand, issuing new shares at healthier prices meant less dramatic dilution of value for existing shareholders. On the other, buoyant markets have been good for the banks’ underlying business – in particular for the French groups that began the rights issue craze, both of which have strong investment banking units that were boosted by the health of stock and bond trading revenues.
But bullish markets are only part of the explanation. The bigger trigger, bankers agree, was the Group of 20 meeting last month, at which the world’s most powerful politicians mapped out the future regulatory environment for the banking industry. Besides the much-publicised restrictions on banker bonuses, more significant for the banks themselves was the decree that they must in future hold bigger capital buffers.
It may be tempting to conclude that the G20 push for higher capital prompted the spate of rights issues as banks acted to comply. But things are not as simple as that. Indeed, there is a sense in which the tattered titans of the world’s financial sector, having smartened themselves up again, are raising the minimum possible to repay bail-out money and relying on future earnings to do the rest.
“The G20 timetable for increasing capital only by the end of 2012 means that they can rely on three years of retained profits,” says Cyril Court, a capital markets banker at HSBC, which ran BNP’s rights issue. “G20 was essential in determining the [smaller] quantum of capital that banks would have to raise.” In other words, the vast capital raisings that some banks had feared they would have to launch have been unnecessary. Those that have taken place have been relatively modest, and largely restricted to banks that have government bail-out money to repay.
Within two days of the G20 leaders leaving Pittsburgh last month, BNP had announced its €4.3bn rights issue, followed the same evening by Unicredit and a week later by SocGen, both with similarly sized cash calls. BNP’s issue, completed last week, proved very popular, with 99 per cent of investors taking up their rights – the kind of evidence that will persuade rivals to follow. “We had seen the reaction in the marketplace to other European banks exiting government support,” says Marinos Yannopoulos, finance director of Alpha Bank. “And so we thought we should open the way for Greek banks to exit the Greek scheme.”
ING’s decision on Monday to raise €7.5bn – using €5bn to repay half its government bail-out money and another €1.3bn to fund a fee to the government for a mortgage support scheme – illustrates another dimension of the rights issues: the bigger bail-out schemes, such as those for ING, Lloyds, RBS and Germany’s Commerzbank, are subject to European Commission rulings on state aid. ING’s €1.3bn fee, dictated by Brussels, was higher than originally expected and so demanded additional funds.
Analysts predict that the likes of Commerzbank, Allied Irish Banks and Bank of Ireland will lead the next wave of cash calls. “Sitting in Ireland or Germany, you should be encouraged by what has been going on in other European countries,” says Goldman’s Mr Westerman. But at JPMorgan, analyst Kian Abouhossein cautions: “It’s much more difficult for banks like these because of the high level of government involvement.” Commerzbank, for example, has €16.4bn alone in so-called silent participations from the state – a form of preference shares – dwarfing its market capitalisation of some €10bn.
Tougher still will be the fightback to normality for groups that were fully nationalised in the crisis – including the Icelandic banks, Ireland’s Anglo-Irish and Northern Rock in the UK. Even part-nationalised Lloyds and RBS have a slim chance of ditching their government money any time soon, despite their cash call plans.
Those funds are merely designed to avoid, or mitigate, participation in another element of the bail-out – buying insurance from the state against a combined £585bn of toxic assets. It will be the government’s decision when to sell its equity and that process is likely to take years.
T he current clutch of bank capital raisings looks set to continue until an economic upset prompts equity markets to turn down again, closing the window for cash calls.
Some deals have come from banks with no government involvement – notably HSBC’s record rights issue in the spring and Nomura’s $5.6bn offering last month. The first repayments of government money came in the US in June when 10 banks, including Goldman Sachs, JPMorgan Chase and Morgan Stanley, repaid a combined $68bn received eight months earlier under the so-called troubled asset relief programme. As a prerequisite for that deal, Washington forced them to raise fresh equity and bond finance.
The closest comparable move in Europe was when UBS this summer issued SFr3.8bn ($3.7bn, €2.5bn, £2.3bn) of equity a few weeks before the Swiss government placed its
9 per cent UBS stake in the market.
For all these banks, the motives for extricating themselves from government ownership are the same. “I don’t think many bankers will tell you that they like having the government as an investor,” says Mr Yannopoulos at Alpha Bank.
Besides the reputational stigma of having to rely on a government crutch, and the management distraction of having to liaise with state representatives, banks around the world complain about three big constraints.
Of most concern to commercial investors in the short term are the limitations imposed on share dividends and bond coupons. Lloyds, like RBS, is expected to be told by the European Commission that some coupons must be suspended.
There has also been significant pressure on state-controlled banks to increase lending and help prop up companies and individuals struggling in the economic downturn. In some countries there are no precise targets. In the US, Citigroup, which is 34 per cent owned by the federal government, has made no specific promise but has outlined plans to lend an additional $50bn on the back of its bail-out money. In the UK, the targets have been among the most extreme, with RBS and Lloyds under orders to lend an additional £39bn between them to mortgage customers and companies.
Some banks complain in private that targets can be unrealistic, while analysts and investors worry that there is pressure to lend to unsuitable customers at uneconomic rates – a practice that could backfire in months and years to come, compounding the fall-out from this financial crisis. Other groups are sanguine. SocGen, for one, insists it is not worried. “We have not sacrificed risk guidelines and risk policy,” says Mr Cabannes. “There has been no pressure from the government in terms of risk taking.”
The most contentious issue of all for the banks with governments as investors has been pay. Last week, it emerged that the US government was to slash by 90 per cent the cash pay of the top 25 staff at all companies that still have government bail-out money, including Citi and Bank of America Merrill Lynch. The response elsewhere in the world has been less extreme, but many banks have submitted to pressure to contain pay and bonuses. Angry staff say governments are setting the world up for a two-tier market, as bailed-out banks lose their best staff to higher-paying rivals.
Nonetheless, if the economic recovery is sustained, it may not be long before the vast majority of banks that were bailed out around the world are standing once again on their own feet, recalling the financial crisis and the unprecedented government action that followed as a surreal aberration in the history of capitalism.
But the imprint of government ownership will be felt for a long time to come. Government representatives on the boards of banks will not disappear instantly. And the changes to banker compensation – though derided by populist critics as minimal – will continue to be felt for years, as will the determination of politicians and regulators alike to ensure that nothing like this ever happens again.
“Government scrutiny of banks around the world will be very close, even after bail-out money has been repaid, because of systemic risk,” says SocGen’s Mr Cabannes. “The way governments and central banks and regulators manage systemic risk will be the main mark of this crisis.”
But at least they will not be doing so as controlling shareholders.
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