Euro banks must refinance half of their debt by 2013

EUROPEAN banking M&A activity was largely replaced by government capital injections last year, the European Commission (EC) has said in a research report presented in Brussels yesterday, compounding fears that the EU could now be host to a legion of “zombie banks”.

In its annual financial stability and integration report for 2010, the EC said that governments’ role in recapitalising banks had “caused a decline in the overall volume of private sector M&A”. The report comes after economist Tyler Cowen said recently that the region is full of “zombie banks”.

The EC also warned that half of all bonds issued by Eurozone banks will mature by the end of 2013. The scramble to raise capital has resulted in a six per cent increase in rights issues by EU banks in 2010. But, the report adds: “The growth rate... declined during the year (from 8.2 per cent in the first quarter to five per cent in the third), amid the rising cost of equity financing, i.e. declining share prices.”

Despite the drop in banking stocks, however, returns on equity are up compared to 2009, averaging 7.2 per cent in the first half of 2010.

Banks’ balance sheets have also made progress towards Basel III capital requirements. Tier one capital ratios for large and complex banks in the Eurozone averaged 10.4 per cent, an improvement of three percentage points on 2007.

However, the EC expressed concern about the effect of the ongoing sovereign debt turmoil given “a new negative feedback loop between public finances and the banking sector”.