Print Edition
September 2010 
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Restructuring In The European Banking Sector |
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Pauline Renaud, August 2010 |
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In the aftermath of the financial crisis, the European banking sector has undergone a dramatic transformation. Many financial institutions have been forced to take restructuring and consolidation actions in order to avoid collapsing. In addition, European banks’ exposure to Greece’s huge debt load has reinforced the need for new rules regulating the industry. Although considered necessary by most experts, wide ranging legal requirements present many uncertainties for financial institutions, which are expected to continue reorganising in an effort to protect net interest income and profitability.
Although the turmoil that started in 2007 is now easing, the consequences continue to be felt by most banks in Europe. There is pressure on profitability, liquidity and capital, as well as mistrust in European financial institutions. “We believe banks in all countries across Europe have been affected to a greater or lesser extent and there is some correlation with the financial crisis’ impact on the overall economy of individual countries,” explains Fredrik Johansson, a director at PricewaterhouseCoopers LLP (PwC). “Countries such as Iceland, Hungary and the Baltic states were severely affected early in the crisis.
The UK and Spain have been impacted through the scarcity of liquidity and the surge in non-performing loans – in the case of Spain this has been amplified through the fall in the property market. More recently, the banks in countries such as Greece, Portugal and Romania have become affected. In contrast, we believe banks in France, and to some extent Scandinavia, have been impacted to a lesser extent,” he adds.
European banks in the turmoil
The plight of Icelandic banks in mid-2008 was confirmation that Europe was not immune to the financial crisis that had seen the collapse of Lehman Brothers in the US. In just a few weeks, all three of Iceland’s major banks went bankrupt following difficulties in refinancing their short-term debt and a run on deposits in the UK. In September 2008, it was announced that the Glitnir bank would be nationalised. The following week, control of Landsbanki and Glitnir was handed over to receivers appointed by the Financial Supervisory Authority (FME). Soon after, the same organisation put Iceland's largest bank, Kaupthing, into receivership. Relative to the size of its economy, Iceland’s banking collapse has been the largest experienced by any country in history.
In 2010, another blow hit European banks. Between mid-March and early May, Greek sovereign spreads rose by 650 basis points. Mid-May, figures from Barclays Capital suggested that half of Greece’s ‘junk’ debt, as rated by agency Standard & Poor’s (S&P), was resting on the balance sheet of banks owned or controlled by Germany. France was also exposed to Greece’s debt, acting as the country’s largest creditor with close to €50bn in holdings. The announced €110bn emergency loan from the EU and the International Monetary Fund (IMF) at the beginning of May served to ease some of the pressure. But the announcement late May that S&P had downgraded Spanish government debt indicated that Greece’s difficulties had spread. There were fears that this crisis could develop into a full-blown bond market crash. While some large banks, including UBS Credit Suisse and Deutsche Bank, listed their exposure to Greece as mainly non-material, the spread of problems to other countries and a loss of confidence in European markets had negative implications for business performance.
Recently, it was even feared that European banks may not be able to repay a one-year loan from the European Central Bank (ECB) to keep the system afloat. But the results of two operations indicated most banks were ready to forego emergency funding provided by the ECB at the height of the financial crisis. The ECB said 78 banks borrowed €111.2bn for six days in a special operation on 1 July, just before a record €442bn in 12-month loans came up for repayment. The day before, 171 banks borrowed a less-than-expected €131.9bn for three months. The result of the two operations meant that the ECB cut the amount being lent to euro zone banks by about €200bn, or 25 percent of its total lending at present. According to reports, although the ECB has been reducing the length of loans to commercial banks in order to gradually normalise conditions, it continues to provide as much capital as banks ask for to keep the credit flow active.
Structural issues
While European banks have calmed fears of a funding crisis, most of them still need to reposition themselves for recovery. Their priorities include regaining trust by increasing transparency and governance, as well as managing risk and identifying strategies to return to higher levels of profitability. The main risks faced by European banks are structural rather than cyclical – for instance, the leverage of the private sector. “As private sector debt grew, so did bank revenues and, as a rising tide lifts all boats, there have not been many examples of unsuccessful banks in the run up to the 2007 crisis,” says Marco Troiano, an equity analyst at Standard & Poor’s Equity Research. “Looking forward, it seems unlikely that the private sector will continue to leverage up at the same pace and, in fact, we could be entering a period of deleveraging. Hence, volume growth will be modest and pricing power, cost efficiency and risk management will take centre stage in determining success in the banking business,” he adds.
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