EU Banks Seek Funds Ahead of Stress Tests

Three European banks have revealed capital-raising plans as they sought to reassure markets hours before the results of stress testson the financial health of 91 of the region’s lenders were due to be made public.

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National Bank of Greece , Greece’s biggest bank, on Friday announced that it had strengthened its capital base by €450m ($579m) through a private placement of a lower tier two note, while Slovenia’s NLB confirmed that it would seek to raise €400m via a rights issue.

In Spain, Banca Civica, which was formed from the merger of three smaller savings cajas, said on Friday it plans to place €450m in convertible bonds. In a statement, the lender said it had signed an agreement with JC Flowers, the US private equity group, which will subscribe to the full amount of the issue.

European bank were mostly lower ahead of the results of the tests, expected after the market closes on Friday, led by UK banks.

HSBC was down 2.1 per cent, Standard Chartered was 2 per cent weaker and Barclays was 1.8 per cent lower in London. Deutsche Bank was 1.2 per cent lower in Frankfurt, while BNP Parisbas and Crédit Agricole, the French banks, were also lower. Santander and BBVA, two of Spain’s largest banks fell, reversing earlier gains.

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On the currency exchanges, the euro slumped against the dollar after a draft document said the 91 banks being stress-tested were only examined on European sovereign debt losses for the bonds they trade, rather than those they hold to maturity.

Switzerland’s regulators will also publish the results of their banking stress tests on Friday, an exercise the country’s bankers say was “twice as tough” on Credit Suisse and UBS as the EU stress tests.

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The announcement by National Bank of Greece followed last-minute revisions by Athens banks on Wednesday after criteria for Greece on bond portfolios and non-performing loans were unexpectedly tightened.

Analysts said concern was mounting that several of the six Greek banks included would fail the stress tests under the revised criteria.

If a Greek bank fails the test, it would be able to seek a capital injection from a €10bn financial stability fund set up this month under the terms of Greece’s €110bn bail-out by the European Union and International Monetary Fund.

NBG said its tier two note would be issued on August 3 by a UK-based subsidiary. Last week the bank denied Greek media reports it was planning a capital increase. The issue would strengthen NBG’s total capital ratio by 66 basis points under Greek central bank regulations in tier two securities.

Greek banks have transferred the bulk of their bondholdings, estimated at around €45bn, from trading to hold-to-maturity portfolios.

With estimated bondholdings of around €22bn, NBG has the largest portfolio of sovereign debt of any Greek bank.

Banca Civica’s bond deal with JC Flowers carries an initial interest rate of 7.5 per cent. Banca Civica said that was 25 basis points cheaper than accessing funds from the government’s bank restructuring fund, or FROB.

The deal follows concerns in Spain that several of the country’s 18 savings banks would fail the stress tests and would need more capital. Earlier this month the government decreed new rules allowing unlisted regional savings banks, or cajas, to issue a form of share, including voting rights and making it easier for them to issue debt.

In Slovenia, NLB, with a tier one capital ratio of 7.2 per cent, is widely expected to underperform in the stress tests compared with its peer group. NLB has for months made no secret of its desire to raise capital. If the new plan fails, the bank said it would adjust its operations to its present capital capacities, acknowledging that its balance sheet used capital instruments that were “essentially debt instruments and so far still included in equity, but will fall due in the following years”.

The group made a €34.6m loss in the first half of this year because of large provisioning.