If the European Union decides to require large banks to bolster their capital positions, raising equity will likely be their last choice, say Fitch Ratings.
The rating agency says that the simplest option to increase capital is by raising equity. “However, with many banks trading at substantial discounts to their net balance sheet assets, this is the least desirable option currently for most banks,” it says. And, this would dilute existing shareholders too. “So banks are likely to prefer other options if available,” it says.
Other options for shoring up capital will include cost cuts and (potentially mandatory) dividend suspensions, Fitch says, although these may take time to have the desired effect — especially in the many banks where earnings are under pressure. Raising capital through some form of hybrid capital is a possibility, but it would have to overcome local regulatory hurdles and, for convertibles, dilution risk, it adds.
Selling off overseas assets is likely to be the ‘least bad’ option for many banks if they have assets to sell and can execute in a reasonable time scale, it adds. “Asset sales are an option, but selling assets within Europe, if all banks are pursuing the same strategy, is likely to result in an excess of supply — depressing prices at best or making sales of some assets impossible,” it says.
“Fitch suspects that where possible, banks will try to sell other foreign assets instead — allowing them to benefit from a more diverse set of buyers, and with assets which are not tarnished by eurozone linkages.”