The story of global banking in the past year has been one of riches to rags. On April 1st it became clear that this might be a good time for a whip round.
That, in a nutshell, was the message UBS and Lehman Brothers transmitted to their troubled banking peers when the Swiss bank announced plans to raise SFr15 billion ($15 billion) through a rights issue, and Lehman raised $4 billion from selling additional shares.
Far from balking at the new calls on their cash, shareholders leapt at the opportunity—Lehman raised $1 billion more than it had initially sought and its battered shares rose 18%. UBS’s share price also climbed steeply, even though it announced another $19 billion in write-downs on subprime-related and other mortgage securities. Part of the price paid by UBS to its long-suffering shareholders was the head of Marcel Ospel, its chairman and architect of the 1998 merger that transformed the bank into one of the world’s biggest. It was little consolation, however, that he will be replaced by Peter Kurer, the bank’s general counsel, rather than an outsider untainted by the mess.
Under normal circumstances, rights issues are no cause for celebration. At times of duress, they can sound suspiciously like a mobster’s “cough up or else” (“or else” meaning severe share-dilution).
But these are not normal times. For one, the near-collapse of Bear Stearns has shown that some banks’ very survival may be at stake. If a rights issue makes survival more likely, shareholders may prefer to pay the price rather than risk everything—or almost everything. Secondly, investors are now so underweight in banks that share offerings may be a good opportunity to get back in if a corner has been turned. Better a bank that is acting conservatively than one that is in denial.
But has a corner been turned? The liquidity line thrown to investment banks by the Federal Reserve has given bullish investors the hope that the authorities will do what it takes to prevent any big bank going bust. On the other hand, first-quarter profit warnings from UBS and Germany’s Deutsche Bank were anything but encouraging. UBS still has $31 billion of subprime and other ropy American mortgages on its books, not far below the $37 billion that it has already written down. Morgan Stanley and Oliver Wyman, a consultancy, estimate there could be up to $80 billion of additional mark-downs among the top 20 banks this year. Returns will be further hit by the need to raise new capital and use it more conservatively.
Already, there is a growing acceptance among investors that banks need to recapitalise, either by selling assets, reducing dividends or issuing new shares. Regulators are increasingly letting it be known that once the worst of the crisis is over, higher levels of capital will be an essential quid pro quo for the liquidity support they have provided to banks since last year.
There is a danger of moving too quickly, however. A senior European banker expressed concern this week that onerous new capital requirements could have a crippling effect on lending, especially when fair-value accounting may be exaggerating the losses. That, he said, could cause the crisis to deepen further.