Funding costs pose "material risk" to Europe banks

LONDON (Reuters) - Europe’s banks face “material risks” from higher funding costs as investors fret about sovereign debt risks because lenders need to refinance about 1.6 trillion euros (1.3 trillion pounds) by the end of 2012, analysts said.

Concerns about sovereign debts have raised the cost of funding for many banks, particularly those in Greece, Portugal and Spain.

“Wholesale funding as a transmission mechanism of elevated sovereign funding costs remains one of our key concerns,” analysts at Morgan Stanley said in a report on Wednesday.

The report said Europe’s banks have about 3.3 trillion euros of senior wholesale funding, of which almost half is due 2010-12, so there were “material risks from elevated sovereign risks.”

“Current dynamics are likely to put more pressure on weak loan growth as well as impact margins, despite the fact that we think many banks’ balance sheets and funding are better prepared than 2008, that openings do exist and that massive ECB funding support is in place,” the report said.

Morgan Stanley said Commerzbank CBKG.DE, Natixis CNAT.PA, Banesto BTO.MC and Sabadell SABE.MC are only about one-third of their way through their senior funding plans for this year.

Europe’s largest banks are on average 65 percent of the way through the senior funding they had hoped to issue for 2010, the analysts estimated. “This is better than some investors may have thought, but with a wide range,” the report said.

In addition to the four banks with 35 percent or less of their funding covered, the analysts said BBVA BBVA.MC, Credit Agricole CAGR.PA, Royal Bank of Scotland RBS.L and Erste ERST.VI each had only about half of the funding covered.

The report said banks’ use of direct private placements and retail offerings for term funding in recent months might distort the calculations.

The analysts said some banks might need to issue in the primary bond market in large size when it re-opens and have to pay significant price concessions.

Reporting by Steve Slater and Alex Chambers; Editing by Louise Heavens