European Banks Might Not Face a Massive Capital Hole After All

(Bloomberg) --

European banks may avoid a widely anticipated capital shortfall that investors feared would force the lenders to issue new shares or scale back payouts.

Analysts at Citigroup Inc. say it’s “realistic” to assume that the European Union can adopt new global capital standards, known as Basel III, with only “a minimum increase in capital required.”

That view adds to a growing narrative that after years of underperforming the wider market, European banking stocks are poised to reward investors.

European politicians have consistently said that the new rules wouldn’t materially increase the amount of capital banks need to hold to protect themselves against losses, but investors largely expressed doubt. Bank watchdogs have recently highlighted the flexibility they have to offset the burden. While other recently agreed legislation may soften the blow, banks are also indicating that a slowdown in Europe’s bank-dependent economy is helping them make their case to lawmakers.

According to Citigroup, the EU may allow for exceptions to the rules on capital buffers for parts of banks. It may also be flexible on loans to companies that don’t have credit ratings and officials may consider alternatives to a strict limit on banks using their own calculations to quantify the risks they face.

The analysts cited feedback from visits last week to bank lobbyists, watchdogs, regulators and government officials in Frankfurt, Paris and London.

Banks can also take actions such as getting ratings for unrated companies, canceling loan commitments that haven’t been tapped, selling assets and charging more for their services, Citigroup said.

--With assistance from Alexander Weber.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Marion Dakers

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