Some Banks in Denial on Deleveraging Impact: Analyst

French and German lenders are in denial over the impact of deleveraging and the need to raise capital, Chris Wheeler, bank analyst at Mediobanca, told CNBC.

Some of Europe's biggest banks reported steep losses on Thursday and their executives warned the weak economy is likely to impact earnings further.

“Banks have told us about these wonderful deleveraging programs and in many cases they made very good progress. The problem is they seem to give us very skinny numbers on what that means in terms of lost revenue,” Wheeler said.

Analysts at Morgan Stanley estimate that European banks [.SX7P  Loading...      ()   ] will reduce their balance sheet by between 1.5 trillion euros ($2 trillion) and 2.5 trillion euros during the next 18 to 24 months.

Wheeler believes that French and German banks should consider tapping the investing public for capital, instead of selling revenue-generating assets.

“Why trade in some assets you might like to keep, why give away revenues, rather than just go to the market,” Wheeler said. “If you have a strong equity story, like a Deutsche Bank, like a BNP Paribas, deal with the capital issue and take a rather more leisurely view about deleveraging your balance sheet.”

Wheeler believes that the next three-year long term refinancing operation (LTRO) by the European Central Bank will be crucial to getting banks back on a solid footing.

“It’s only three-year money but it’s a matter for the banks to try to get themselves sorted out in terms of longer-term funding needs,” he said, adding that the operation will not sap demand for bank debt.

“One of the good pieces of news in the LTRO is that you’re going to get into a situation where banks are seen as desperate to raise debt, therefore the ECB can be a bit more selective and have a little bit more time to get into the market and start to create a buoyant private market for bank debt again,” he said.

Disclosure:

Mediobanca has a neutral recommendation for the European banks sector and favors Italian and UK banks, specifically Banca Popolare di Milano, Intesa Sanpaolo, Banca Generali, Credito Emiliano, Barclays, Standard Chartered and HSBC.

View the original article here