Italian, Portuguese and Spanish lenders will bear the brunt of a100 billion-euro ($139 billion) plan to recapitalize Europeanbanks, while their counterparts in the U.K., Germany and France mayavoid raising additional funds.

European policy makers, trying to reach agreement before ameeting in Brussels tomorrow on how to tackle the euro zone crisis,may force banks to boost core Tier 1 capital to 9 percent ofrisk-weighted assets by the end of June, two people with knowledgeof the talks said. UniCredit SpA, Italy's largest bank, BancoComercial Portugues SA, Portugal's second-biggest, and Banco BilbaoVizcaya Argentaria SA, Spain's No. 2, are among the companiesanalysts say may have to raise the most capital.

Lenders may be able to mark up the value of bonds that aretrading above face value, allowing them to mitigate the cost ofwriting down their southern European sovereign debt, the peoplesaid. That may benefit U.K. and German lenders such as Royal Bankof Scotland Group Plc and Deutsche Bank AG, whose biggest holdingsof bonds are those issued by their own governments. It may alsoallow French banks to avoid further fundraisings.

“The mark-ups will definitely help German, northern European andBritish banks while hurting the peripheral countries,” saidChristopher Wheeler, a London-based analyst with Mediobanca SpA.“If we really allow banks to offset sovereign haircuts with gainson other bonds, then I'm not sure that's going to calm themarkets.”

Government Bonds

The euro weakened against the dollar and yen in Asian tradingtoday. The European currency fell to $1.3903 as of 12:01 p.m. inTokyo from $1.3929 in New York yesterday and slipped to 105.79 yenfrom 106.

Policy makers still haven't provided details about theirmethodology or how much individual banks will have to raise,according to Carla Antunes-Silva, an analyst at Credit Suisse GroupAG in London. Analysts estimate lenders will need to raise 90billion euros to 110 billion euros, depending on the size of theirsovereign-debt writedowns.

Banks with large holdings of U.K., German and French bonds mayavoid raising additional capital, while those with Greek, Irish,Italian, Portuguese and Spanish debt will have to raise the most,according to London-based analysts at JPMorgan Chase & Co. andMF Global Ltd.

Greek government bonds maturing in 2020 were trading at about 38cents on the euro yesterday and Portuguese 10-year bonds at 55cents. Spanish debt of a similar maturity was at 99.8 cents, whilethe French equivalent was at 99.5 cents. U.K. 10-year gilts were at110 pence on the pound and German 10-year bunds at about 101 centson the euro.

Banks that can't raise money privately will have to acceptcapital from their government or the European Financial StabilityFacility, which may come with limits on dividends and bonuses,European Commission President Jose Barroso said Oct. 14.

Lenders' Opposition

Lenders including Deutsche Bank have opposed further capitalinjections because they risk diluting shareholders withoutaddressing the underlying problem of a potential Greek default. BNPParibas SA, France's largest bank, is among financial firms thathave said they can meet demands for increased capital without cashinjections.

European bank stocks have dropped 29 percent this year, asmeasured by the 46-member Bloomberg Europe Banks and FinancialServices Index. UniCredit has tumbled 42 percent in Milan trading,valuing it at about 17 billion euros, 56 percent less than bookvalue. Banco Comercial Portugues has tumbled 69 percent in Lisbon,and BBVA is down 15 percent.

UniCredit, BBVA

Executives at UniCredit and BBVA declined to comment, whileBanco Comercial didn't immediately respond to an e-mail seekingcomment. UniCredit has said its plan to raise capital will beoutlined when the firm presents its industrial program by year-end. A spokeswoman for the European Banking Authority, which isoverseeing the capital review, declined to comment.

UniCredit may need 9.4 billion euros and Intesa Sanpaolo SpA,Italy's second-largest lender, 950 million euros, JPMorgan analystKian Abouhossein wrote in a report to clients yesterday. BancaMonte dei Paschi di Siena SpA, which Abouhossein doesn't track, mayneed 4 billion euros, according to MF Global's Simon Maughan.

In Portugal, Banco Espirito Santo SA, the country's largestlender by market value, may require about 3.4 billion euros, andBanco Comercial Portugues about 3.9 billion euros, according to MFGlobal.

Spain's two largest banks, Banco Santander SA and BBVA mayrequire about 3.1 billion euros each, Banco Popular SA 2.8 billioneuros, Banco de Sabadell SA 2 billion euros and Bankinter SA 914million euros, according to JPMorgan.

'Big Question'

“The amount of money we are talking about is affordable inplaces like Germany and France,” Maughan said in an interview withBloomberg Radio's “Bloomberg — The First Word” today. “It's notaffordable in places like Portugal and Greece. So ultimately theissues over those two nations remain. The big question is overItaly. Can they raise the money?”

Abouhossein and Maughan's estimates are based on Basel 2.5risk-weightings and assume that lenders will mark the value of alltheir southern European sovereign debt to market prices.

The mark-to-market proposal “has the neat side-effect of leavingthe French banks with a minimal capital requirement, important toprotect the French triple-A rating, and the troublesome Brits withnil,” Anke Richter, credit strategist at Mizuho International Plcin London, said in an e-mail. “Given that the banks almostcertainly won't be able to raise the extra capital required,governments will have to step in, but their indebtedness is theunderlying problem, so that doesn't seem to reduce stress on thesystem.”

Lloyds, RBS

RBS and Lloyds Banking Group Plc, two of Britain's four biggestlenders, may avoid having to raise any additional capital, JPMorgansaid. The British government owns about 82 percent of RBS afterproviding a 45.5 billion-pound ($73 billion) bailout to the lenderin 2008 and 41 percent of Lloyds.

“It's increasingly clear that U.K. banks won't have to face anyrecapitalization, but they will benefit from anything at the marginthat takes away the logjam in the interbank market, frees up thecost of funding or removes uncertainty,” said Maughan, who advisesclients to buy U.K. and Swiss bank shares.

Societe Generale SA may be the only French bank required tobolster capital, requiring about 3.7 billion euros, according toJPMorgan. Of the German banks, Deutsche Bank faces a shortfall of2.2 billion euros and Commerzbank AG 845 million euros, Abouhosseinsaid.

Lenders that don't have large capital shortfalls may look toboost their capital ratios before the June 2012 deadline byshrinking their assets rather than raising capital privately.

“This may involve retaining earnings, cutting expenses anddividends, selling and running off assets to maturity,” AlbertoGallo, senior credit strategist at RBS said in an Oct. 21 report toclients.

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