European Banks Set to Cash in on Subprime Sales
Europe's banks, which were among the biggest buyers of U.S. mortgage bonds before the financial crisis, are set to cash in on America's housing recovery by selling the once "toxic" assets back to U.S. lenders.
U.K. banking group Lloyds sold a portfolio of U.S. subprime mortgages for 3.3 billion pounds ($5.02 billion) on Friday, as it shores up its balance sheet and capital reserves. Shailesh Raikundlia, European bank analyst at Espirito Santo, said U.S. banking giants Morgan Stanley, Bank of America and Goldman Sachs and Credit Suisse were the buyers.
Lloyds booked a 540 million pound pre-tax gain from the sale, as U.S. banks - which are not hampered by Europe's Basel III capital restrictions - snapped up the assets. The sale's success could spark further sales of mortgage backed securities (RMBS) to U.S. banks as their European counterparts are required to meet more stringent capital requirements, according to analysts.
(Read More: Subprime Is Back: Will This End Badly?)
"Lloyds seem to have sold them at a significant profit, so it has been very positive for them. This was quite a large transaction, apparently it is the largest since 2010 as one single transaction," Raikundlia told CNBC.
"There would be some banks in Europe with quite a lot of these assets on their books, and a lot of the banks have been shedding non-core assets. These assets are actually quite negative for capital if you are holding them on your balance sheets, especially if you are holding them under the new Basel III regulations, capital deductions on them are quite onerous, so certainly the banks which need capital could come to the market for this."
Returns on subprime mortgage bonds rallied last year, jumping 41 percent, and have climbed a further 12.7 percent this year, according to Barclays' data. Mortgage trend publication Inside Mortgage Finance's data shows that investors outside the U.S. hold 20 percent of the country's subprime mortgage bond market, totaling more than $194 billion.
Raikundlia said German banks, which have been raising significant capital recently in an effort to manage down their high non-core loan books, would be in a good position to sell these types of assets to U.S. banks.
"Commerzbank has had a significant amount of rights issues, Deutsche also raised capital recently, these banks still have these types of assets remaining, so they could take advantage," he said.
"I think in the long term, if you take a view that the housing market will recover, then they look cheap even now. So those banks which are not restrained by capital, like some of the U.S. banks who have quite strong capital positions, are happy to hold onto these assets and take a turn on them at some point in the future," he added.
Credit Suisse analysts led by Carla Antunes-Silva noted that the sale would be a positive sign to other banks with similar assets.
(Read More: Housing: Picking Up the Pieces)
"This is a positive read to other banks with credit market assets – the sale highlights the improvement in the valuation of these assets. We think the portfolio was marked at 79c (cents on the dollar) on Lloyds books, so the sale price would indicate a disposal at close to par," she said.
—By CNBC's Jenny Cosgrave; Follow her on Twitter @jenny_cosgrave.