Credit crunch - Banks staring Into An Abyss

British banks are "staring into the abyss" and European lenders may need to raise 83 billion euros ($107 billion) more capital as a credit crisis bites hard and drives up bad debts, analysts warned on Thursday.

"Things are getting worse, faster than we thought," Jonathan Pierce, analyst at Credit Suisse, said in a note on British banks entitled "Staring into the abyss?"

That could renew strain on capital even after 44 billion pounds ($70 billion) has been raised in recent months, and leave Royal Bank of Scotland facing a loss this year and next, Pierce said.

Banks across Europe face a grim outlook and could need to raise 83 billion euros and slash dividends, said Huw van Steenis, analyst at Morgan Stanley.

"Deleveraging, funding stresses, weaker macro and re-regulation make us think it's still too early to buy the banks sector," van Steenis said in a note. He cut 2009 earnings forecasts by more than 30 percent for many banks.

Trading updates from a batch of European banks this week have flagged a sharp rise in bad debts as consumers and businesses struggle to cope with a deepening credit crisis.

Many are also struggling to reduce their balance sheets, or reported continued asset growth, which could add to strain on capital even after governments have stepped in with rescue funds for banks in Britain, Germany and beyond.

Britain slashed interest rates by a surprising 1.5 percentage points on Thursday and the European Central Bank and Swiss national bank cut rates by 50 basis points in attempts to ward off deep recessions.

CREDIT CYCLE "TURNS SHARPLY"

The deterioration for Britain's banks this quarter and in the first quarter of 2009 "will be relatively severe" as the global credit crisis affects markets and the economy, Credit Suisse's Pierce said.

RBS is his favorite UK bank stock, but it is unlikely to see much good news for some time. "We think the bank will generate a loss at a group level in 2008, and wouldn't rule out losses for next year as well," Pierce said.

RBS warned on Tuesday it faced more writedowns and rising bad debts this quarter, which could drag it to its first ever full-year loss.

"Recent trading statements demonstrate -- if evidence were needed -- that the credit cycle has turned sharply," Pierce said. "The tightening in credit availability in the last few months bodes badly for economic and bank-related news in the coming months, and conditions have, if anything, got worse since government support was announced in October."

Credit Suisse cut its 2009 and 2010 earnings forecasts by a further 40 percent and said the threat of higher bad debts created further substantial risks to forecasts and could reignite concerns about capital "at one or more of the banks."

Pierce predicted none of the domestic UK banks would pay dividends in 2009 and 2010. Analysts at Keefe, Bruyette & Woods forecast Barclays is the only UK domestic bank likely to pay a dividend next year.

By 9 a.m. EST the DJ Stoxx European bank index was down 3.9 percent as the interest rate cuts added to worries about gloomy prospects across the sector.

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