European Bank Shares Rally On Easier Capital Standards

27th Jul 2010 11:08

By Margot Patrick Of DOW JONES NEWSWIRES LONDON (Dow Jones)--European bank shares rallied Tuesday after news late Monday that new international bank-capital standards have been watered down, meaning most banks won't have to immediately raise significant amounts of new capital. Analysts said French, U.K. and Italian banks were clear beneficiaries of changes including allowing minority interests and deferred tax assets in capital calculations, and broadening the range of assets that count toward short-term liquidity, sparking a 7.8% jump in Societe Generale SA (GLE.FR) shares and a 6.5% rise in Barclays PLC (BCS) stock. German bank shares also rose and the STOXX Europe (600) Banks index was up 3.8%, at 1005 GMT, as the overall proposals were deemed to be less-stringent than expected. "We see confirmation of the changes as a positive catalyst for the sector, especially following on from the European bank stress tests," Nomura analyst Jon Peace said in a note. The rules, known as Basel 3, are being readied by the Basel Committee on Banking Supervision to start from next year, with the aim of making the financial system stronger and safer. Many of the proposals won't come into effect until 2018 or later, including a binding 3% leverage ratio that will set a minimum level of core capital banks must hold, and a "net stable funding ratio" that some analysts estimate could force the sector to raise trillions of euros in new long-term funding. A final agreement is expected by November. The latest modifications are seen as a positive for bank shareholders, since banks should have more cash on hand to pay out in dividends than they might have had under the tougher version of the rules when proposals were first laid out in December. "Timing is in the heart of the economic recovery, and the Basel Committee seems to be understanding that by postponing some of the requirements. This is the time for banks to be lending, not retaining capital," a person at one of the Big 4 U.K. banks said. In France, analysts said the country's banks would have seen their capital positions considerably reduced if they couldn't include minority interests in adequacy measures. Exane BNP Paribas analysts repeated their positive call on French banks, while Nomura also highlighted French banks as "particular beneficiaries of the changes to capital, leverage and liquidity requirements." Francesco Previtera at Banca Akros said Italian banks had also been handed a big win, by being allowed to apply deferred tax assets--"a pretty large item in the balance sheet of many Italian banks"--to their capital measures. Banks store up the tax assets when they have losses on loans that can't be fully deducted in any one tax year. Shares in Germany's Deutsche Bank AG (DB) and Commerzbank AG (CBK.XE) each rose about 3%, tracking the broader sector gain. "As an investment bank, Deutsche Bank would have been penalized by the leverage ratio proposal in its original form. I think few people thought the original proposal would have gone through unamended, but it is still a relief for Deutsche Bank that a sensible compromise was reached," said Matthew Clark, an analyst with Keefe, Bruyette & Woods. The initial and longer-term requirements under Basel 3 are tougher than those in place now, but the latest details indicate that banks were successful in their lobby against some of the harsher proposals made in December. -By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451; [email protected] (Patricia Kowsmann in London, Elena Berton in Paris and William Launder in Frankfurt contributed to this article.) (END) Dow Jones Newswires July 27, 2010 06:08 ET (10:08 GMT)