* Global regulators put new emphasis on leverage in June
* Barclays, Deutsche already announced measures to fill gap
* Deutsche seen likely to have to do more
* Credit Agricole also under the spotlight
By Christian Plumb and Edward Taylor
PARIS/FRANKFURT, Aug 21 A regulatory crackdown
on debt could hit Deutsche Bank harder than expected
and embroil Credit Agricole despite the French bank's
insistence that its ownership structure reinforces its capital
Global regulators meeting in the Swiss city of Basel in June
surprised banks with a new focus on leverage to measure risk,
prompting banks holding large amounts of financial derivatives
such as Barclays and Deutsche Bank to either tap
investors for more equity funding or make plans for yet another
purge of assets to free up capital.
With euro zone banks still considered too large - their
assets are over three times the size of the bloc's economy -
others are expected to have to raise capital and shrink with
Credit Agricole seen by some analysts as most at risk.
France's third-biggest bank will have to reduce its balance
sheet by 242 billion euros, or 14 percent, and generate 17
billion euros in capital over the next three to five years to
meet new regulatory requirements, according to a recent study by
analysts at Royal Bank of Scotland (RBS).
The analysts estimate that banks in the euro zone will have
to cut 3.2 trillion euros in assets over the next three to five
years, with the 11 largest, including Credit Agricole, Deutsche,
Societe Generale and Commerzbank, axing 661
billion euros and having to raise 47 billion in capital.
The capital cloud is putting off some investors.
"I have a neutral stance on banks worldwide at this point
for several reasons, but I am more underweight the euro zone
banks because they have a chronic problem of being
undercapitalized, even if there are some exceptions," said
Jacques-Pascal Porta, a portfolio manager for OFI Optima
Credit Agricole has declined to disclose capital or leverage
ratios for its listed bank under the proposed new Basel III
rules. The regulations call for a leverage ratio of 3 percent,
meaning for every dollar of assets and some off-balance-sheet
commitments, a bank has to hold at least three cents of equity.
Credit Agricole has said regulators and rating agencies are
focused only on the capital of the broader Credit Agricole
group, which is bolstered by its wealthy regional savings banks.
At a group level, Credit Agricole says it has a 3.5 percent
leverage ratio using existing European requirements, which are
less strict than the proposed new rules. On a standalone basis,
the listed bank's leverage ratio is 1.6 percent, the lowest
among large euro zone banks, according to RBS research.
Credit Agricole said RBS's estimate reflected transactions
between its regional savings banks and the listed bank.
"So the only good way of looking at things is to calculate a
leverage ratio at the group level," said a spokeswoman.
Key to Credit Agricole's confidence is a guarantee, or
"switch mechanism", from the parent company set to be
strengthened early next year, but details of which remain sparse
pending an "Investors' Day" in November or December.
Fitch ratings agency said Credit Agricole's group structure
was a key support - if the listed arm needed more capital, it
could raise it internally without resorting to the market as
long as the wider group had enough capital of its own.
Not everyone is convinced the "switch" is iron-clad.
"A guarantee is never the same as having the capital at hand
for emergencies," said KBW analyst Jean-Pierre Lambert. "There's
still a risk of a capital increase," Lambert said. "There will
be a component of switch, yes, but they could balance this by
doing some form of capital increase."
Issuing debt or equity or curbing dividends would cap a
recent rally in Credit Agricole stock. It has gained 35 percent
in 2013, nearly triple the European sector, as confidence grows
over its exit from Greece and a refocus on its home market.
Until recently, regulators focused mainly on getting banks
to hold more capital and liquidity so they can better absorb
losses in future financial crises. But concern that banks might
be underestimating the riskiness of their lending prompted
regulators to lean more heavily on the leverage ratio, which
does not rely on banks' in-house risk models.
The Basel III proposals on leverage, which measure a bank's
capital against all its assets, including loans and derivatives,
require the ratio to be based on gross derivatives rather than
lower net figures, hitting banks such as Deutsche and Barclays.
Shrinking bank balance sheets by trillions of euros is
likely to cut lending and weigh on the fragile European economy.
Given the large banks on their patch and the severity of
their banking crises, the British, along with the Swiss and the
United States, are taking a tougher line on leverage beyond the
Basel III rules. For a factbox
Heeding a warning from the Bank of England not to damage the
domestic economy in trying to meet the leverage target, Barclays
opted for a 5.8-billion-pound rights issue and issued 2 billion
pounds in debt to meet a June 2014 deadline for a 3 percent
leverage ratio, up from 2.2 percent now.
Barclays stock has dropped nearly 12 percent since rumours
of a rights issue first surfaced late last month, but the
capital hike has pleased some investors.
"We're taking another look at Barclays because they've
finally managed to put their house in order - they are now a bit
less bothered by undercapitalisation," said Porta.
Having already tapped investors for 3 billion euros in a
rights issue in April, Deutsche Bank is planning to shrink its
balance sheet, one of Europe's biggest, by some 250 billion
euros by 2015, to meet the new Basel III leverage rules.
A study by JP Morgan analysts argued that Deutsche Bank
needed to axe 500 billion euros rather than 250 billion euros.
Deutsche has already said that shrinking its balance sheet
as planned could cost it approximately 600 million euros in
one-off costs and roughly 300 million euros in future pretax
Any further cuts could see its profits further crimped.
A spokesman for Deutsche Bank declined to comment on the JP
Morgan estimate, and referred to recent comments by Chief
Financial Officer Stefan Krause, who said the bank meets all
current regulatory demands and has sufficient flexibility to
meet more severe requirements if necessary.
Deutsche's balance sheet has already contracted by 15
percent to 1.91 trillion euros in less than a year, putting
pressure on its flagship fixed-income business, which
underperformed in the second quarter.
"Deutsche meets the rules on leverage and capital, where
German regulators have taken a less aggressive approach than
their UK, U.S. and Swiss counterparts. That said, the bank faces
pressure from investors to comply with the rules in all
jurisdictions," said Chris Wheeler, analyst at Mediobanca.
"The big worry is what additional cutbacks on balance sheet
size will mean for earnings."