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(Bloomberg) -- Banco Santander SA’s 7.5 billion-euro ($8.9 billion) capital boost will probably add to investor pressure on other European banks to expand their buffers as regulators urge them to boost reserves.

“This has people wondering which bank is next,” Lutz Roehmeyer, who helps manage about 11 billion euros including Santander shares at LBB Invest, said by phone today from Berlin. “The most likely candidates are the banks with the lowest capital ratios as well as those in Spain, Italy and Portugal.”

Santander is cutting its dividend and strengthening capital amid investor concern that the lender’s buffers aren’t as strong as those of some competitors. The European Central Bank is also pushing lenders to raise equity levels and take a more conservative view of their assets after becoming the supervisor of the continent’s biggest banks last year.

“We see increased pressure on other banks to raise capital,” Nick Anderson, an analyst at Berenberg Bank wrote in an e-mailed report from London today. He estimates that Santander still has a 5 billion-euro capital shortfall and recommends investors sell the shares.

Paschi Request

Santander dropped as much as 11.4 percent to 6.076 euros as of 11:50 a.m. in Madrid. That was the biggest decline among banks tracked by the 49-member Stoxx 600 Banks Index, which fell as much as 2.1 percent.

The ECB, which examined the loan books of Europe’s biggest banks and tested their resilience to times of financial stress last year, has said it will now take a closer look at how banks judge the risk of their assets when calculating capital ratios.

Banca Monte dei Paschi di Siena SpA, the Italian lender with the biggest capital hole after the health check, today said it has received an initial request from the ECB to target a common equity Tier 1 ratio of 14.3 percent on a transitional basis, according to a statement from the bank. The lender had a phased-in ratio of 12.8 percent as of Sept. 30, and already has plans to raise 2.5 billion euros selling stock to boost buffers.

“The ECB will likely be tougher on optimizing risk- weighted assets, and this raises the question on whether other banks will also need more capital,” said Inigo Lecubarri, who helps run the Abaco Financials Fund.

Santander Chief Executive Officer Jose Antonio Alvarez told reporters yesterday that the bank hadn’t come under pressure from the ECB to raise capital.

Common Equity

The Spanish bank’s common equity Tier 1 ratio under fully- applied Basel III standards, a key measure of financial strength, will rise to about 10 percent this year from 8.3 percent at the end of December, the company said yesterday.

Twenty one of Europe’s 23 biggest publicly traded banks, excluding Santander, had a common equity Tier 1 ratio of more than 10 percent at the end of September, according to data compiled by Bloomberg Intelligence.

Many investors and regulators are still focused on loss- absorbing buffers and are calling on banks to raise capital as a share of total assets to serve as a backstop to the risk-based approach.

Deutsche Bank AG, which runs Europe’s biggest investment bank, has a 5 billion-euro capital deficit while France’s BNP Paribas SA, Societe Generale SA and Credit Agricole SA each have a 10 billion-euro gap, according to the Berenberg note today. Switzerland’s Credit Suisse Group AG has a 10 billion Swiss franc ($9.8 billion) shortfall while Germany’s Commerzbank AG has a 1 billion-euro deficit, Anderson wrote.

While other European banks need to address their leverage, they may opt to shrink their balance sheets rather than sell stock because they’re more cheaply valued than Santander, Stefan Bongardt, a Frankfurt-based analyst at Independent Research GmbH said by phone yesterday.

“It is a lot more expensive for many other banks to raise capital,” Christian Hamann, an analyst at Hamburger Sparkasse who has a neutral recommendation on Santander shares, said by phone yesterday. “I couldn’t recommend Deutsche Bank to go out and sell shares right now.”

--With assistance from Chris Malpass in Berlin, Blanche Gatt in London and Sonia Sirletti in Milan.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net Jon Menon

Bloomberg