Shares in Fortis NV, one of Europe's largest banks, tumbled Thursday after it said it would issue shares, sell non-core operations, suspend cash dividends and sell real estate in order to shore up its capital position by around 8 billion (US$12.5 billion).
The company's stock, which has been sliding since it agreed to buy parts of ABN Amro last year in the banking industry's largest-ever takeover, dropped 18 percent to 10.40 (US$16.30) in Amsterdam.
Fortis said it would issue 1.5 billion (US$2.35 billion) worth of new shares and suspend the payment of a 1.3 billion (US$2.04 billion) dividend for the first half of in 2008. The full year dividend will be paid in shares, further preserving capital _ but diluting the stock.
Chief Executive Jean Paul Votron said there is no threat to the solvency ratios the bank is required to keep by banking authorities, and the current moves are intended to make sure they do not come in danger if markets worsen.
The immediate trigger was that the sale of 300 million (US$470 million) worth of commercial banking activities in the Netherlands won't take place on as favorable terms as the company had previously expected.
Fortis was required to sell the activities by the E.U. competition authorities as part of approval for the ABN Amro deal. "This is the number one reason we are going to expand" the bank's capital base, he said on a conference call with analysts.
Credit rating agency Standard & Poor's said it was reviewing the bank's ratings with an eye to downgrading them as a result of the news.
"The fact that Fortis has to sell some Dutch commercial banking assets under unfavorable conditions to comply with a European Commission request illustrates the execution risks related to the integration of ABN Amro," S&P credit analyst Elisabeth Grandin wrote in a note.
"While Fortis remains committed to its initial capital targets for year-end 2009, the implementation of these measures will take place in a difficult environment," she said.
The share issue announced Thursday comes on top of 13.4 billion in stock Fortis sold last year to help finance the 24 billion it paid for its share of ABN Amro, which included the largest retail banking operations in the Netherlands.
The Dutch economy is growing and Votron said that at present the company's second quarter earnings were shaping up to be better than in the first quarter, with integration of ABN Amro proceding well.
However "this is all done, one would agree, against a background of difficult (global) market circumstances which we all have been experiencing," he said.
Analyst Ton Gietman of Petercam repeated a "reduce" advice on shares, and said he took Fortis's remarks about market conditions as a negative signal.
"We should be extremely cautious with our profit forecast and moreover should not exclude further write-downs," he said.
Like other major financial organizations, Fortis has had to write down investments in the wake of the U.S. mortgage crisis _ more than 6 billion (US$9.4 billion) so far.
Gietman said further writedowns would likely lead in turn to another capital expansion.
He estimated Fortis's current plans will increase outstanding shares by 15 percent.
"Evidently we will reduce our estimates" for the bank's per-share earnings, he said.
