Europe’s banking sector is ready for a shake-up as its largest financial institutions try to slim down their operations in response to the sovereign debt crisis.
Banco Santander , Deutsche Bank and others are trying to sell assets and loan portfolios to reduce their exposure to worrisome private and sovereign debt as part of a broad strategy to refocus on their home markets and comply with new regulatory requirements.
It is an extraordinary fire sale.
Europe’s financial sector is expected to sell or write down more than $1.8 trillion in loan assets in the next decade, according to the consulting firmPricewaterhouseCoopers. That compares with just $97 billion from 2003 to 2010.
“The list of asset sales is the longest I’ve seen in 10 years,” said Richard Thompson, a partner at PricewaterhouseCoopers in London, who added that the final figure could rise well above $1.8 trillion. “Banks want to reshape their balance sheets to focus on specific territories or sectors.”
Sales are already under way. Last week, Ireland’s nationalized Anglo Irish Bank sold $3.3 billion in commercial real estate loans in the United States to Wells Fargo . In all, the Irish bank wants to offload nearly $10 billion in American loans as part of a government requirement to reduce its assets and trim its operations.
In debt-ridden Spain, Banco Santander and BBVA, the country’s largest financial institutions, as well as a number of struggling savings banks are also lining up buyers for their loan portfolios. With home prices dropping 24 percent in the last four years, local banks that aggressively sold low-interest mortgages across the country are looking to reduce their real estate holdings.
With so many assets up for grabs, potential buyers with large reserves of capital are looking at potential bargains. Major private equity firms, including the Blackstone Group , Cerberus Capital Management and Apollo Global Management , are raising funds for distressed assets.
Cash-rich sovereign wealth funds have also been active. Last month, financial companies connected to the Qatar Investment Authority announced plans to acquire banking assets in Turkey and Luxembourg. The deals came after a $686 million investment in August from a fund controlled by the royal family of Qatar as part of the merger of Greece’s Alpha Bank and Eurobank.
For many struggling banks, sales cannot come quickly enough. Spain’s unemployment is 22.6 percent, the highest in the European Union. And the amount of nonperforming loans held by banks has increased by 36 percent since 2010, according to Citigroup analysts.
“Ireland and Spain have been the center of most of the activity in the last 12 months,” said Graham Martin, a partner at the consulting firm KPMG in London. “That’s now spreading to other European markets as banks look to reduce their exposure.”
Regulatory pressures are forcing financial institutions to dump risky assets, too. The European Banking Authority announced plans last month to compel banks to increase their core Tier 1 capital ratio, a measure of their ability to withstand financial shocks, to 9 percent by June 2012.
To meet the new requirements, authorities say Europe’s banks will need to raise $146 billion, either by selling assets or raising capital. That includes a combined $41 billion for struggling Greek banks.
New global banking standards, known as the Basel III, are also driving the deleveraging efforts.
Under the plans, which take effect in 2013, banks must meet new restrictions on the amount of money they are allowed to borrow and put aside extra capital reserves mostly from asset sales to offset potential future losses.
“The wave of new regulation will increase scrutiny on how banks operate,” said Larry Tabb, chief executive of advisory firm TABB Group in New York.
In the short-term, Mr. Thompson of PricewaterhouseCoopers says European banks are focused on reducing their multibillion-dollar loan books of commercial property and residential mortgages. To avoid criticism from politicians and the public for selling assets in their home markets, banks are prioritizing sales in foreign markets as they look to slim down their balance sheets.
Yet some big banks may also be buyers. With so many undercapitalized financial institutions looking to offload loan portfolios, Ralph Silva, director of the London-based financial consulting firm SRN, says solidly funded global banks could use the opportunity for expansion, particularly into emerging markets.
This year, Banco Santander, the largest bank by market capitalization among the 17 countries using the euro, bought the Polish bank Bank Zachodni WBK for $5.6 billion, while London-based HSBC is looking at the Turkish arm of the troubled French-Belgian bank Dexia .
“The major banks know there are good bargains out there,” Mr. Silva said. “But as long as the price keeps going down, they’ll hold off on buying until we reach the bottom of the market.”