Banks Grappling With ECB Exams a Boon for BlackRock, KPMGCharles Penty and Boris Groendahl
Cleaning up Europe’s banks is proving to be a boon to accountants and consultants.
BlackRock Inc., PriceWaterhouseCoopers and KPMG are some of the firms hired by regulators and banks for the European Central Bank’s review of 3.7 trillion euros ($5.1 trillion) of assets at 128 of the region’s largest lenders. Advisers stand to reap about 400 million euros, based on publicly disclosed costs in Spain, Austria and the Netherlands.
“It’s an economic stimulus package for auditors,” said Louis Hagen, chief executive officer of Muenchener Hypothekenbank eG, a Munich-based mortgage lender. His firm, which has 35 billion euros of assets, is one of 24 German banks under review.
The ECB is trying to prevent the kind of bank bailouts that happened after Lehman Brothers Holdings Inc.’s 2008 collapse. Industry groups aren’t happy: The European Banking Federation complained in a letter to the ECB last month about “extremely detailed questionnaires,” unrealistic deadlines, and unnecessary requests, according to a copy of the letter.
Regulators are examining an estimated 1,250 credit files at each bank, a process that ECB Supervisory Board Chair Daniele Nouy estimated would take, on average, 1.5 man-days per file. The asset quality review, the second stage of the three-part exams, will be followed by stress tests before the ECB officially takes over as supervisor in November.
Muenchener Hypothekenbank’s Hagen said the lender has 20 auditors from PriceWaterhouse combing its books at 2,000 euros per person a day.
“All in all, I’d expect costs of 3 million euros to 4 million euros for us, which is quite a drag on our earnings if you also add all the other increased regulatory requirements,” he said when presenting the firm’s annual results last week.
There are signs the inspection is working: banks from Italy to Germany have boosted loan-loss reserves and capital, helping to restore investor confidence.
The 29-company Euro Stoxx Banks Index has jumped 27 percent since Sept. 12, 2013, when the European Parliament voted on legislation that paved the way for establishing a banking union, which includes the ECB as supervisor.
UniCredit SpA, Italy’s largest bank, rose 6.2 percent in Milan trading on March 11 after posting a record 15 billion-euro fourth-quarter loss. Investors applauded moves to clean up its balance sheet.
National authorities in the 18-nation bloc have engaged about 5,000 auditors to help carry out the asset review, ECB Vice President Vitor Constancio said to the European Parliament in Brussels today.
The central bank is paying 14 million euros to Oliver Wyman, which led stress tests of Spanish banks in 2012, for “consultancy services,” according to a list of tenders on the ECB’s website. Oliver Wyman is a unit New York-based March & McLennan Cos.
Calculating the cost of the exercise is complex because banks are diverting their own staff as well as hiring outsiders in some cases to prepare the data for the review.
While the Dutch central bank is passing the cost on to lenders, Italy’s central bank is assuming at least some of the expense.
“It’s a huge exercise and a big burden in terms of the number of people involved,” said Harald Benink, a banking and finance professor at Tilburg University in the Netherlands. “A lot of bankers are complaining about it but they also see it’s a useful and necessary exercise.”
Banks in Spain will pay the estimated 33 million-euro cost of hiring auditors, including PriceWaterhouse and KPMG, to go over the books of the 16 Spanish companies being examined, while the Dutch central bank estimates the exercise will cost as much as 62 million euros. Costs in Austria, where six banks are being examined by auditors including Deloitte, PriceWaterhouse and KPMG, are about 30 million euros.
The extra cost of the exercise for the Spanish, Dutch and Austrian banks amounts to 0.6 basis points of their combined 2.2 trillion euros in risk-weighted assets. A basis point is a hundredth of a percentage point. Extrapolated to all 128 banks, costs could exceed 400 million euros.
“Consultants have been hired and we are putting all the means in place because the work is complex,” said Angel Ron, chairman of Madrid-based Banco Popular Espanol SA, in an interview.
Bayerische Landesbank, a state-owned lender based in Munich, has as many as 100 auditors working on the asset quality review, while Banco Sabadell SA, a Spanish lender, hired Deloitte to help it compile data for the exercise. The bank raised 1.38 billion euros last September after Oliver Wyman conducted a stress test on its balance sheet.
Rabobank Groep, the biggest Dutch mortgage lender, has about 500 employees working on the review and as many as 70 external advisers, said Rene Loman, a spokesman for the Utrecht, Netherlands-based bank. ABN Amro Group NV has about 350 staff working on it, said Hans van Zon, an Amsterdam-based spokesman.
“It’s a very complex and multifaceted operation for a bank and the time scales are very tight,” Richard Barfield, a director in the financial services risk and regulation team at PriceWaterhouseCoopers in London, said in a phone interview. “It’s like organizing and running the Olympic Games.”
BlackRock Solutions, a unit of the New York-based money manager, is helping the Dutch central bank with the exams.
The ECB review is a major focus for Alvarez & Marsal Inc.’s 400 staff in Europe, said Tom McAleese, a managing director with the firm’s financial industry advisory services in London.
“Banks have to meet so many requirements,” said Patrick Lemmens, who oversees about $10 billion in global financial stocks at Orix Corp.’s Robeco Groep in Rotterdam. “The amount of data they have to supply, it’s not a matter of simply pushing a button. They need help.”