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European bank deleveraging to take at least a further five years

11 October 2012

A new banking report from Deloitte, the business advisory firm, highlights the huge challenges European banks face in deleveraging to improve their capital positions.  

Five years after the start of the banking crisis, nearly three-quarters (71%) of financial institutions surveyed by Deloitte expect European bank deleveraging to take at least a further five years to complete.

The report - Capital gain, asset loss, European bank deleveraging’ - also reveals:

  • More than half of banks (56%) expect to resize through run-offs - greater than the proportion (46%) that expect divestments to play an important role in deleveraging. Asset sales, which played a bigger part in past crises, are proving difficult in Europe.
  • More than two-thirds of respondents rated price disagreements between buyers and sellers as a major barrier to sales of loans. Some 59% cited finding a buyer as the biggest problem.
  • Two-thirds of banks say deleveraging plans represent less than 7.5% of their total assets.

Zahir Bokhari, lead UK banking partner at Deloitte, said:

“Deleveraging is the single biggest challenge facing banks across Europe. In normal circumstances, banks have a range of options for improving capital ratios including, for example, equity raising, generating and retaining earnings and selling assets.

“However, a stagnant economy and eurozone volatility is making it extremely difficult for banks to raise capital by issuing new equity or through increased profitability. Instead, they are relying on defensive strategies, including deleveraging their balance sheets, to improve capital ratios. The Deloitte Bank Survey shows respondents believe natural run-off will play the most important role in asset reductions, particularly in countries affected by the eurozone debt crises where there are fewer potential buyers.

“Disagreements over valuations are the biggest barrier to sales. Buyers of European assets are demanding higher risk premiums, while banks are reluctant to sell assets at a loss. Instead, many prefer to run-off assets, hold them until either valuations improve or their capital position is healthier providing greater leeway in price negotiations. These factors explain why the period of deleveraging for European banks is likely to be much longer than the experience of previous banking crises.”

Ends

Note to editors

About the Deloitte Bank Survey 2012

Deloitte surveyed 18 financial institutions across eight European countries to gather the banking sector’s views on the drivers, pace, volume and cumulative impact of bank deleveraging. In total these banks had assets worth €11trillion.

About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.

Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

The information contained in this press release is correct at the time of going to press.

Member of Deloitte Touche Tohmatsu Limited

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