Emerging market pain adds to bank capital strain

By Steve Slater - Analysis

LONDON (Reuters) - Banks exposed to emerging markets could need to cut dividends or raise capital as recessions in developed economies feed through to Asia and Latin America and leave no bank immune from strains on capital.

HSBC and Santander, Europe's two biggest banks, felt the pain more than most.

Other western banks have been hit hard but up to now those with emerging market exposure were regarded as unlikely to need extra cash. They had strong capital and liquidity and there was optimism that these markets would resist the gloom.

"There's a crisis of confidence in global equities and emerging economies in particular. All this nonsense about decoupling that was talked about is now looking like a distant dream," said Colin Morton at Rensburg Fund Management.

HSBC shares tumbled 15 percent to 685 pence by 1415 GMT. Before Friday its shares had dipped 4 percent this year, whereas the DJ Stoxx European bank index had more than halved.

"Market conditions have caught up with HSBC," said Niall Paul, chief investment officer for equities at Aviva Investors, the 13th biggest investor in the bank with a 0.6 percent stake, according to Thomson Reuters data.

"There's no doubt that economic conditions of emerging markets are deteriorating quite rapidly and it will undoubtedly mean that on normalized banking activity HSBC is going to suffer," he said.

Investors were unsettled by fears that HSBC could cut its dividend to preserve cash, and Morgan Stanley analysts forecast it will be halved next year.

"Once you would have dismissed that but given what's going on at the moment you can't dismiss anything," said Renburg's Morton, who said he was underweight UK banks and HSBC.

Santander could have to take more drastic action after worries stirred about Latin America, where the Spanish bank derives about a third of its revenue.

"We now see increasing risk of earnings downgrades, deteriorating risk profiles and growing pressure to strengthen capital," Antonio Ramirez, analyst at Keefe, Bruyette & Woods, said in a note.

Santander shares have slumped 23 percent this week, while BBVA, its Spanish rival also active in Latin America, has shed 19 percent and Asia-focused Standard Chartered has crashed 30 percent.

Hedge funds facing massive redemptions may have been behind much of the selling of banks that have held up far better and continued to trade at a premium to book value while their rivals slumped to sharp discounts.

"All of the emerging market decoupling theories are coming undone and on top of that there's a wave of hedge fund redemptions which means the safest banks to date have to be sold," said Simon Maughan, analyst at MF Global.

European banks have five times as much exposure to emerging markets as the United States and Japan, and have the biggest loan books in Asia, Latin America and eastern Europe, according to Morgan Stanley.