European banks face major cash crunch

A red traffic light is seen next to the headquarters of Germany's Deutsche Bank in Frankfurt, Germany, January 26, 2016.
Kai Pfaffenbach | Reuters

More than a dozen European banks facing exposure in excess of $100 billion to energy sector loans may need to sell assets to bolster against future losses.

Potential buyers of those assets include a mix of large private equity firms, a select group of pension investors, U.S. banks and hedge funds. Due to the recent decline in major European banks' shares and increasing scrutiny over the bad loans the banks hold, investors are starting to gravitate toward the idea of getting actively involved in European banking names.

"European banks are under pressure because they have to continually raise capital ratios" in order to offset troubled loans, Julien Jarmoszko, senior investment manager at S&P Capital IQ, told "We're seeing more restructuring being initiated."

The cash crunch is in part due to slower management of post-crisis and regulatory issues that European banks faced several years ago. It just happens to be coming home to roost at a crucial time, both in terms of banks' share prices and at a time when liquidity issues are threatening investors globally.

"U.S. banks were faster to raise capital, raised more of it, strengthened balance sheets and restructured faster" than their European counterparts, CLSA bank analyst Mike Mayo said.

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The four U.S. banks with the highest dollar amount of exposure to energy loans have a capital position 60 percent greater than European banks Deutsche Bank, UBS, Credit Suisse and HSBC, according to CLSA research using a measure called tangible common equity to tangible assets ratio. Or, as Mayo put it, "U.S. banks have more quality capital."

Analysts at JPMorgan saw the energy loan crisis coming for Europe, and highlighted in early January where investors might get hit.