Citi says Europe banks face capital strain in downturn

LONDON (Reuters) - European banks will need to raise much more capital if there is a repeat of the extreme economic downturns of the past, as recent cash calls largely replenished a "woefully under-capitalised" sector, a leading analyst said.

"Despite raising so much capital, our conclusion is that if this current cycle replicates the European recession of the early 1990s, many banks would still be approaching absolute minimum levels of capital, with several actually in breach," said Simon Samuels, analyst at Citi.

"A repeat, however, of one of the more extreme periods of stress would result in much more capital being needed," he said in a research note.

Citi estimated that 22 European banks had raised over 210 billion euros (178 billion pounds) since the third quarter of 2007, half in the last eight weeks. That easily exceeds the writedowns of 81 billion euros on structured credit assets the industry has made.

The vulnerability of banks varies depending on which capital ratio is used, but Citi said Deutsche Postbank, Hypo Real Estate, SHB, Nordea, Danske and Bankinter looked most vulnerable based on its stress tests.

The banks that appear most resilient to the credit cycle are HSBC, KBC, Credit Suisse and Julius Baer, the report said.

(Reporting by Steve Slater, editing by Will Waterman)