Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

European bank shareholders can expect more pain to come. That's the single message to draw from two stories about two different firms on Friday: Deutsche Bank is planning to sell more assets to raise cash, and the Dutch government blocked a plan by Nordea to merge with ABN Amro of the Netherlands. 

Declining Deutsche
The German bank's shares have lost more than half their value in the past 12 months
Source: Bloomberg

 

These two examples neatly underline the extent to which the post-crisis clean-up of European banks is firmly in the hands of regulators and politicians.

It's a good sign that Europe's bank CEOs are finally recognizing they can't just go on as before in a world of negative rates, tougher capital requirements and wobbly financial markets. Mergers and asset sales show they realize they need new business models, not just more infusions of cash.

But it isn't encouraging regulators are rejecting big cross-border deals that could make sense, like the Nordea-ABN tie up, in favor of a constant shrinking that might not make sense, like Deutsche Bank selling one of its best-performing divisions.

Despised and Rejected
European bank stocks have fallen about 70% over the past decade, trailing the wider benchmark
Source: Bloomberg

Complicating matters is shareholders' own rejection of the European banking industry in recent years. European bank stocks have fallen and many firms' shares trade at steep discounts to the value of their assets if they were wound up tomorrow.

Book Discount
Many of Europe's biggest banks are trading at steep discounts to their book value
Source: Bloomberg Intelligence

For managers, depressed valuations make acquisitions expensive and rights offerings more painful. Lenders in need of capital are thus less likely to turn to shareholders first and are more likely to offload good and profitable assets first.

The result can be harmful in the long-term.

Take Deutsche Bank. The bank is weighing a capital-raising, and needs to be able to entice investors with a new strategy. There are no easy options here, but surely selling some or all of the asset-management unit isn't a great one.

Star Performer
Asset management has the highest return on tangible equity of all Deutsche Bank's businesses
Source: company filings for second quarter

The division is one of the bank's few strong performers: at 29 percent, its return on tangible equity was the highest of all the bank's businesses in the second quarter. It also allows the bank to diversify away from investment banking, the real drag on profits and revenues.

Then there's ABN-Nordea. You can see why the Dutch government might object. It bears all the hallmarks of the last crisis -- a big cross-border merger that could also have allowed Nordea to escape Sweden's more stringent capital requirements.

But this isn't the hubristic takeover of ABN by Royal Bank of Scotland in 2007. It would be a defensive tie-up in a low-growth environment. Combining two skill sets in two different countries makes sense: they can cater for a bigger customer base across a bigger market while sharing costs and the process of creating financial products.

The fact a deal was rejected suggests things will have to get worse before sensible large-scale deals get accepted. That is not encouraging.

Today's stakeholders of European banks are regulators and taxpayers, not fund managers. As long as that persists, investors will be stuck in a situation where bank CEOs recognize they need to change their business models but regulators and shareholders will only be prepared to support shrinkage. That won't help the industry's long-term profitability -- making a bad situation even worse.

You can see why Credit Suisse CEO Tidjane Thiam has described the industry as un-investable.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net