London/Frankfurt: First-quarter results from two more European banks showed bad debts soaring in the face of tough economies, as US rivals prepared to raise $75 billion to provide a cushion for the deepest recession in decades.
US regulators told their top 10 banks late on Thursday to raise a total of $74.6 billion, which was less than investors once feared and helped lift European and US bank shares early on Friday.
Yet top European banks continue to show the impact of the looming recession as companies and consumers are increasingly running into trouble.
Royal Bank of Scotland now 70% state-owned, fell to a slim January-March loss after bad debts quadrupled to 2.9 billion and it took a 2.1 billion pound writedown on risky assets.
“We expect credit conditions to continue to deteriorate over the next few quarters consistent with these trends and that there will be a slowdown in financial market activity compared with the very buoyant conditions seen in Q1,” Chief Executive Stephen Hester said.
He said bad debts this year will be at least four times the Q1 level, so over 11.4 billion pounds, more than 50% above last year’s level.
Meanwhile Germany’s Commerzbank made an 861 million euro ($1.2 billion) loss in the quarter, after a €1.2 billion charge from the investment bank and a €54 million charge from its commercial real estate unit.
The Frankfurt-based bank which has been hit by writedowns on debt products related to the US residential mortgage market unveiled bullish targets as part of a planned overhaul, which included a reshuffle of its board.
The DJ Stoxx Banking sector rose 2.2% to 182.2 points, and the index has now doubled in two months.
By 2:10pm, RBS’s shares were up 10% as investors said there were no nasty shocks, while Commerzbank added 0.5%.
US bank plan
Several of the US banks that were told to raise capital responded quickly with plans to do so.
Bank of America, which accounted for almost half of the total capital shortfall with $33.9 billion to be raised, said it planned to sell assets, issue $17 billion in common stock, and take other steps to fill the hole.
BofA’s Frankfurt-listed shares jumped 15%. The Frankfurt listed shares of Citigroup rose 13% and Wells Fargo added 1.5%.
“It was clear that the US banks had a shortage of common equity. That has been increasingly corrected in recent months with some more to go, as has been revealed,” said RBS’s Hester, whose bank owns Citizens, one of the biggest US lenders.
“We’re moving from a period of massive uncertainty to less uncertainty. That’s not to say it’s positive, there’s still gloom to deal with for some time, but all of us feel more cheerful when we know what we have to deal with,” he told reporters on a conference call.
The relatively modest size of the hole discovered by regulators carrying out the tests, which were based on an “adverse” economic scenario, led to both applause from investors who believe the worst is over and scepticism among those who think the examination wasn’t rigorous enough.
Wells Fargo was found to need $13.7 billion and Citigroup was told it needed $5.5 billion.