Europe Bank Cleanup Driving $1.72 Trillion of Asset SalesNicholas Comfort
Europe’s largest banks are finally putting hundreds of billions of dollars of unwanted assets up for sale amid mounting competition among buyers and regulatory pressure. A wave of deals could be a boon to the region’s economy if the banks free up capital to increase lending.
Banks led by London-based Barclays Plc and including UniCredit SpA in Milan and Credit Suisse Group AG in Zurich have shunted more businesses, bad loans and spoiled investments into units to be sold or wound down. Such assets jumped by 65 percent since the end of 2013, to more than $1.72 trillion, according to data compiled by Bloomberg.
“The list of deals coming in across the asset classes and markets at this point is higher than it’s ever been,” said Jody Gunderson, a senior managing director at CarVal Investors LLC in Minneapolis. Banks are “driven by regulatory considerations to sell, but also market pressures for them to get back to the business of trying to produce good profits.”
Tougher capital rules have made some once-lucrative bond businesses less attractive, while regulatory scrutiny has pushed lenders to admit that soured loans won’t be repaid. Selling bad debts and underperforming operations frees up funds firms can use to increase lending. That’s important for European economies stuck in the doldrums six years after a credit squeeze and a raft of bank bailouts spilled over into a sovereign-debt crisis.
“Stronger banks will be good for credit in Europe,” Paul Tucker, a former deputy governor of the Bank of England, said in an interview in Salzburg, Austria. “Weak banks don’t lend.”
For years, investors have been looking to buy assets banks haven’t been willing to sell. Now, private-equity firms and other funds are ready to pay more to win real estate loan auctions, said Federico Montero, a partner at New York-based broker Cushman & Wakefield Inc.
“Two years ago, everyone was talking about 20 percent investment returns,” Montero said by phone from London. “You started seeing in the U.K. and Ireland about eight to 10 months ago that, in order to win these mandates, you had to reduce your expectations a bit because there’s a lot of competition. Returns have been compressed to the low teens or less.”
CarVal, where Gunderson oversees the global loan portfolios and structured-product businesses, was the third-largest buyer of European commercial real estate loans in the first half after Lone Star Funds and Cerberus Capital Management LP, according to Cushman & Wakefield. CarVal, the credit-investment unit of commodities trader Cargill Inc., has acquired loans with a face value of about $12 billion in Western Europe and the U.S. since 2011, according to the company.
Banks sold 40.9 billion euros ($54 billion) of European loans tied to property in the first six months of the year, more than seven times the amount in the first half of 2013, Cushman & Wakefield said in a report last month. Sales may be about 40 billion euros next year, according to Montero.
“Banks are in a better position to move on some of the noncore asset sales,” Gunderson said. “There’s a ton more supply coming to the market of all these noncore assets, and the capital has formed to capitalize on the opportunity.”
Barclays increased the assets at its wind-down unit in May, when it announced a plan to exit some trading businesses with high capital requirements as well as mortgages in Spain and Italy and long-term corporate loans that offer insufficient returns. The bank had 468.6 billion pounds ($777 billion) of assets in the unit at the end of June.
Credit Suisse created divisions in October to dispose of investment- and private-banking businesses it doesn’t consider strategically relevant and said last month it would exit most commodities trading. The company previously had announced a plan to cut risk-weighted assets at its investment bank.
UniCredit, Italy’s largest bank, started to quantify the bad loans it’s disposing of in March, while smaller competitor Intesa Sanpaolo SpA set up a vehicle the same month to wind down unwanted assets. More may follow as the European Central Bank reviews the books of euro-area banks and tests their ability to withstand an economic contraction, said Nick Anderson, an analyst at Berenberg Bank in London.
The review by the ECB, which takes over supervision of banks in the region in November, is part of an effort to rebuild confidence in the European financial system by forcing lenders to cleanse their balance sheets. Elsewhere in Europe, the Bank of England is testing the strength of U.K. banks, while Switzerland is discouraging risk-taking by holding lenders to some of the world’s strictest capital rules.
“We still have a lot further to go,” Anderson said by phone. “The banks that are being honest may be the ones to have been very quick to say the world changed and that they had a ton of stuff that were bad investment decisions.”
Banks that hang on to impaired assets tend to face higher funding costs and charge more for loans, Benoit Coeure, a member of the ECB executive board, told bankers in Paris in March.
The ECB’s desire to nurse Europe’s economy back to growth inspired it to offer banks cheap cash for four years on the condition they boost lending. Firms that want to tap the funds through the targeted longer-term refinancing operations must submit data about their loan books to national central banks by Aug. 28. Funds will be allotted on Sept. 18.
The program is starting as Europe’s recovery stalls. The euro area posted zero growth in the second quarter as its three biggest economies -- Germany, France and Italy -- failed to expand. Credit to the private sector contracted 1.7 percent on an annual basis in June, the 26th consecutive monthly drop, ECB data show.
Europe’s efforts to clean up and recapitalize its biggest banks lagged behind those in the U.S., where the Treasury Department set up the $700 billion Troubled Asset Relief Program in October 2008 after the housing-market meltdown and collapse of Lehman Brothers Holdings Inc.
“The U.S. forced its banks to take money, while we in Europe thought we could sit it out, and we still are in many places,” said Hans-Peter Burghof, a professor of banking and finance at the University of Hohenheim in Stuttgart, Germany. “U.S. banks had an easier time disposing of assets, which is why they’re in a better situation today.”
The $1.72 trillion of loans, shareholdings and securitized products up for sale or slated to be wound down at the 23 European banks with the largest such holdings rose from about $1.04 trillion at the end of 2013, when 21 firms disclosed such information. The assets amount to about 7.9 percent of their combined $21.7 trillion balance sheet.
Those figures are in addition to $817.6 billion of holdings at entities backed by taxpayers in Spain, Ireland, Belgium, France, Germany, Austria and the Netherlands, which are winding down banks that have failed since the 2008 credit crunch.
The sooner banks unload bad assets, the sooner the holdings will stop hurting profits. At 12 companies that report earnings for the assets they plan to sell, including Frankfurt-based Deutsche Bank AG and Danske Bank A/S in Copenhagen, the holdings generated combined pretax losses of about $7 billion in the first half of this year.
“European banks pushed this into the long grass to work off losses year by year,” said Burghof, the finance professor. “Shareholders are hurt by lower dividends as well as the uncertainty around the quality of a bank’s assets and the time it will take to wind them down.”
In June, Frankfurt-based Commerzbank AG sold 4.4 billion euros of commercial real estate loans in Spain and Portugal to a group comprising Dallas-based Lone Star Funds and New York-based JPMorgan Chase & Co., and about 700 million euros of similar debt in Japan to investors led by private-equity firm PAG.
Commerzbank, Germany’s second-largest lender, shrank the size of a unit containing shipping and commercial real estate loans by 41 percent to 92 billion euros in the two years through June, surpassing a goal originally set for the end of 2016.
UniCredit Chief Executive Officer Federico Ghizzoni told analysts on a call this month that the bank’s disposal efforts are “going in the right direction.” The bank has said it intends to cut the loans at its asset-reduction unit to 33 billion euros by the end of 2018, from 81 billion euros in June.
Investors are stepping up to buy debt at a discount as central banks hold interest rates near record lows to stimulate the economy, cutting the returns available elsewhere.
Increased investor demand will help Royal Bank of Scotland Group Plc cut the cost of winding down assets by about 1.5 billion pounds, the company said last month. That will release about 1.5 billion pounds of capital the Edinburgh-based bank hadn’t previously anticipated, its filings show.
“People are after these assets, and that is certainly helping us,” CEO Ross McEwan told analysts last month. “We’ve got a very, very experienced team there that have got really good skills, and we’ve got a good market now.”
Spokesmen for RBS, UniCredit, Commerzbank, Credit Suisse, Barclays, Intesa and Deutsche Bank declined to comment beyond their filings. Danske Bank didn’t respond to an e-mail.
Some assets aren’t fetching the prices sellers are after. Banco Popolare SC, based in Verona, Italy, abandoned the sale of a majority stake of its unit for winding down unwanted loans because the offers were unsatisfactory, Italian news agency Radiocor cited Popolare CEO Pier Francesco Saviotti as saying on a conference call with analysts this month. The German government abandoned plans to sell bailed-out lender Hypo Real Estate Holding AG’s Dublin-based Depfa Bank unit in May, saying it would get “a higher value” by running down assets.
The money private-equity firms have to spend on all deals globally reached a record $1.074 trillion in 2013, according to data provider Preqin Ltd. Funds for investment, known as dry powder, surpassed the previous high of $1.067 trillion in 2008, the company said in December.
Private-equity firms typically pool money from pension plans and endowments for a 10-year period. The buyout firms get to keep 20 percent of the profit from investments. The pressure for investors to allocate capital is heating up competition for assets in Spain and Italy, Ronald Rawald, head of European real estate advisory at Cerberus, said at a conference in May.
“The low-interest-rate environment is increasing demand,” said Michael Huenseler, who helps manage 12.5 billion euros, including bank bonds, at Assenagon Asset Management SA. “Prices for some of these assets are recovering, so there may be a new wind for disposals.”