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Deutsche Bank, UniCredit AT1 coupons most at risk -analysts

By Steve Slater

LONDON, June 14 (IFR) - Deutsche Bank (LSE: 0H7D.L - news) and UniCredit (EUREX: DE000A163206.EX - news) are most likely among European banks to struggle to pay coupons on their Additional Tier 1 bonds, analysts at Morgan Stanley (Xetra: 885836 - news) said, suggesting more may need to be done to strengthen balance sheets.

The latest assessment reflects concerns about their capital strength and ability to generate earnings, and on that basis Credit Agricole (Swiss: ACA.SW - news) , BNP Paribas (LSE: 0HB5.L - news) and Credit Suisse (LSE: 0QP5.L - news) 's AT1 coupons could also be at risk, the analysts said.

AT1 bonds - dubbed contingent capital, or CoCos - convert into shares or are wiped out, sometimes temporarily, if a bank's capital falls below a certain level and are intended to provide an extra cushion of capital for banks.

Concerns over capital-constrained banks' ability to pay coupons was heightened in February when the value of Deutsche Bank's AT1s fell sharply on fears it lacked sufficient available distributable items (ADI), which determine the payment of AT1 coupons.

Deutsche rejected those worries, but concerns persist it needs to raise billions of euros of equity to strengthen its capital.

"The ability of issuers to service AT1 coupons will remain a central risk that ideally should be quantified," Morgan Stanley analysts Greg Case and Jackie Ineke said in a research note.

"While there are many variables that will determine this risk, the key is capital - specifically CET1," they said, referring to common equity ratios.

The analysts screened Europe's banks to examine how well capitalised they are, how well they might fund future capital requirements, their leverage, capacity for earnings generation and the stability of that income stream.

Deutsche Bank ranked bottom of Morgan Stanley's assessment of 26 European banks.

The German bank has sold 5bn-equivalent of AT1s, and has said it plans to issue more, even though CEO John Cryan said he dislikes them and regards them as expensive. Deutsche is expected to sell another 3bn-4bn, but is unlikely to start until it has reassured investors and paid its next annual coupon at the end of April 2017, industry participants have said.

Under Morgan Stanley's assessment, UniCredit and Credit Agricole screen worst after Deutsche Bank.

BNP Paribas, Spain's Popular (NasdaqGS: BPOP - news) and Credit Suisse fill out the bottom six European banks most at risk in the analysts' assessment.

The best firms under the assessment are Nordic and Benelux banks and UBS (LSE: 0QNR.L - news) , HSBC, Lloyds and Standard Chartered (HKSE: 2888.HK - news) .

"More surprising outcomes are the relative strength of Standard Chartered and the weak screening of both BNP (Paris: FR0000131104 - news) and CS," the note said.

It (Other OTC: ITGL - news) said the capital generation of BNP on a return on risk-weighted assets measure was not enough to significantly improve its low capital level.

Credit Suisse, meanwhile, is embarking on a major restructuring that is weighing on capital strength and earnings generation, although the analysts said they were upbeat on its CoCos due to its stable wealth management business, smaller investment bank and structure of Swiss CoCos. (Reporting by Steve Slater)