UPDATE: Portugal's Banks Face Estimated EUR6.95 Billion Shortfall-EBA

Portugal's banks are facing a combined shortfall of EUR6.95 billion in meeting the European Banking Authority's recapitalization target, EBA data provided by Portugal's Central Bank showed Thursday, although some have already taken measures to close the gap.

The announcements are part of a "capital exercise" under which 71 European banks have to demonstrate they are adequately capitalized, even in the context of the current stressed market conditions for sovereign debt. The banks were asked to unveil whether they are on track to meet the EBA's recapitalization plan, which requires banks to maintain a Core Tier 1 capital ratio of 9% after adjusting the values of their government bond portfolios to reflect market prices.

As of September-end, four of Portugal's largest banks reported shortfalls: Banco Comercial Portugues SA (BCP.LB) faced a EUR2.13 billion shortfall; Banco BPI SA (BPI.LB) a EUR1.389 billion shortfall; Espirito Santo Financial Group SA, the holding company of Banco Espirito Santo SA (BES.LB), a EUR1.597 billion shortfall; and state-owned Caixa Geral de Depositos SA a EUR1.834 billion shortfall.

Espirito Santo Financial Group also reported a separate shortfall for its banking unit of EUR810 million, which allows for better comparison with its peers. That figure was included in the group's EUR1.597 billion total.

The country's total shortfall is down from a combined EUR7.8 billion capitalization shortfall reported when the capital exercise was last completed in October.

Two banks have taken action to reduce their shortfalls further since the latest test was carried out. BCP said it raised its Core Tier 1 ratio by EUR405 million on Oct. 13 through a share swap that reduced its shortfall to EUR1.725 billion compared with EUR2.4 billion when the exercise was last carried out.

Meanwhile, Banco Espirito Santo said it has reduced its EUR810 million shortfall, a subset of the holding company's total, to EUR188 million following a share offer Dec. 5 that allowed it to increase its Core Tier 1 ratio by EUR622 million.

BPI and Caixa Geral de Depositos also reduced their capitalization shortfalls from previous levels of EUR1.72 billion and EUR2.24 billion, respectively, when the exercise was last carried out.

BCP and BPI both said they will consider the best way of covering the shortfall ahead of EBA's June 2012 deadline, including tapping a EUR12 billion fund made available to banks under Portugal's EUR78 billion bailout program.

BES, ESFG and CGD also said they are committed to meeting the June 2012 deadline, although the latter two didn't outline any capital-raising plans. The state-owned bank CGD isn't allowed to tap the bank lines provided under the bailout.

Banks across Europe are required to submit proposals outlining their plans to meet the EBA's capital requirements by Jan. 20, 2012.

Bank recapitalization is one element of a multiple-part effort to restore confidence in the credit of Europe's banks and sovereigns.

-By Alex MacDonald, Dow Jones Newswires; [phone]; [e-mail]