Banks fight to rebuild balance sheets

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The Independent Online

The world's major banking groups are facing unprecedented pressure to repair balance sheets and restore their liquidity as the ongoing credit crisis shows few signs of easing. Conventional commercial pressures are also refusing to go away.

HSBC, the world's third-biggest bank, whose business strategy has been under critical scrutiny for some time, has been given six months by the major pension fund and investor CalPERS (the California Public Employees' Retirement System) to outline plans for radical change.

Christy Wood, CalPERS' head of global equities, said: "We want to see this unfold in the next few months. If they do not set it out before 1 July then there is a problem."

These are the first words CalPERS has uttered about its holding in HSBC, although it backed an aggressive campaign for change led by the activist investors Knight Vinke which manages $330m (166m) for CalPERS. Knight Vinke, run by Eric Knight, launched its attack on HSBC's management last spring, describing HSBC executives as "complacent" for their failure to focus on the Chinese market. Rumours over the past few days that HSBC is set to sell off its car finance division are unlikely to stem the flow of criticism.

Reports also emerged over the weekend that John Thain, the new chief executive of Merrill Lynch, is in talks with Chinese and Middle Eastern sovereign wealth funds that could lead to the sale of another big stake in the US bank, to restore the group's balance sheet in the wake of multi- billion dollar losses on the sub-prime exposure. Merill Lynch has already sold $5bn of its equity to the Singaporean government investment firm Temasek. Including Switzerland's UBS, stakes taken by state investment funds in investment banks in the past month have hit nearly $30bn. Temasek now owns 18 per cent of Standard Chartered and bought a 2.1 per cent stake in Barclays to support the British bank's attempt to buy ABN. The China Development Bank bought a stake in Barclays at the same time.

However, sovereign wealth funds are unlikely to supply all the funding the banks need. Banking analysts believe that a series of other capital-raising exercises by leading banks is inevitable. "What looks very likely for 2008 is a wave of capital increases by financial institutions looking to repair their stretched balance sheets," said Viswas Raghavan, head of International Capital Markets at JP Morgan, while Cazenove recently suggested that the highly leveraged Royal Bank of Scotland group would need to raise 5.8bn through a rights issue. However banks may be reluctant to issue pure equity in the light of already depressed share prices; convertible bonds would be another way of raising capital.

The banks' attempts to shore up their positions are badly affecting an already precarious commercial property market. Research from estate agent Savills, showed eight of the 97 lenders in the UK commercial real estate market have ceased to transact business in the sector, while 11 more are "reluctant" and almost 30 will only lend on a "qualified" basis. Credit Suisse, Lehman Brothers, Bear Stearns, Deutsche Bank and Barclays Capital are thought to be among those now withdrawing from commercial property.

All financial institutions will find their positions complicated by the imminent introduction of the Basel II requirements on capital adequacy, which formally come into effect tomorrow in the EU, and on 1 January 2009 in the US. Mark Wheaton, head of management consultant Accenture's UK risk management practice, said: "The typical bank will spend 50-100m implementing Basel II."