By Steve Slater
LONDON (Reuters) - UBS(UBSN.CH)and Deutsche Bank took a $23 billion hit on their risky assets and the Swiss bank asked investors for more cash on Tuesday, but Europe's bank shares rallied on hopes that the end of another torrid quarter could mark a turning point.
"The one saving grace in this is that banks are acting quickly to highlight their exposure," said Peter Dixon, economist at Commerzbank. "The quicker the bad news is out in the open, then the quicker we can start to repair the problems."
"The Japanese crisis of the early 1990s was exacerbated by the failure of banks to admit the degree of their problems," he noted.
News that UBS is seeking to raise 15 billion francs ($15 billion) through a rights issue in a second emergency attempt to shore up its balance sheet was not a surprise, but the scale of the capital-raising was more dramatic than many expected.
Its shares leapt 11 percent as some viewed the bold move as more positive than smaller, regular writedowns, which one analyst had said could result in "death by a thousand cuts."
"It's a kitchen sink job. They've separated all their toxic waste. If they're going to finance that, then everyone is saying this is the beginning of the end, this is the last capital increase," one trader said.
By 1325 GMT the DJ Stoxx European banking sector index <.SX7P> was up 4.6percent at 359 points, its highest level for a month and 16 percent above its 3-1/2 year low two weeks ago.
"It's too early to say we're definitely through the worst of this, but it would appear from the market's reaction today to what UBS has done, and from recent interest in buying distressed assets, that maybe we can at least start to see the end of the apparent freefall in certain asset values," said Leigh Goodwin, bank analyst at Fox-Pitt, Kelton.
The sector's revival was also aided by signs that U.S. Treasury Secretary Hank Paulson and central bankers are considering radical strategies to boost liquidity.
Banks are hoarding cash in case they need it and as concern lingers about counterparty risk, which has driven up the cost for all banks and corporates of borrowing funds.
"More significant (than UBS) is the anticipation that Paulson is going to lead a global concerted effort to free up the credit crunch," said Simon Maughan, analyst at MF Global.
"For a long time we've been worried about moral hazard ... we're now past that point, what we're trying to do now is save the banking system, and the price that banks will pay is tougher regulation going forward."
A banking conference in London hosted by Morgan Stanley attended by top executives and investors had also helped to lift the mood, analysts said.
"Deutsche Bank took advantage of the timing, coming on the heels of UBS so as not to have to rattle the market a second time," said Heino Ruland, analyst at FrankfurtFinanz.
But some analysts warned that the sector still needs to work through further pain.
European banks which need to rebuild their capital will also have to compete with U.S. rivals for funds.
The bank said it wanted to quash concerns about its stability after speculation it did not have enough funding, heightened after smaller rival Bear Stearns was forced into a firesale.
(Additional reporting by Rebekah Curtis, Sitaraman Shankar and Dominic Lau in London and Peter Starck in Frankfurt)
(Editing by Louise Ireland, Jason Neely and Andrew Hurst)