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European bank deleveraging - Capital gain, asset loss | Whitepaper


European bank deleveraging - Capital gain, asset lossEurope’s banks have been reducing their balance sheets in the wake of the financial crisis. Increasing capital requirements, funding pressures, concerns over banks’ resolvability, culture change and strategic shifts are all contributing to the need to re-size and re-shape.

Deloitte has undertaken a survey of 18 financial institutions across eight European countries to gather their views on the drivers, pace, volume, location and impact of bank deleveraging. These banks had assets of approximately €11 trillion, and their feedback revealed the following:

  1. Higher capital requirements are the key driver of bank deleveraging
    More than two-thirds of banks surveyed cited regulators’ demand for higher capital as being an “important” or “extremely important” driver of their divestment and deleveraging plans.
  2. Liquidity constraints are also a significant cause of deleveraging
    Just over half of banks rated it as “important” or “extremely important,” with eurozone banks even likelier to cite it.
  3. Deleveraging is expected to yield a neutral/positive impact on capital ratios
    82% of those surveyed anticipate a neutral or up to 100 basis point increase in their Core Tier 1 ratio. Banks must balance the capital release from deleveraging against losses on disposal. Some banks aim for a neutral capital impact from deleveraging, reflecting other drivers.
  4. Banks expect deleveraging to be modest relative to past crises and to the credit boom
    Plans represent less than 7.5% of total assets for almost two-thirds of respondents. This contrasts with a doubling of large banks’ assets in the Netherlands, and a more-than-quintupling in the UK, between end-2000 and end-2008.
  5. Banks expect to re-size through run-offs more than through divestments
    56% of banks cited natural run-off as making a “material” or “very material” contribution to deleveraging, against 44% for divestments. Sales, which played a bigger role in past crises, are now less appealing . The eurozone crisis has raised buyer caution, with economic uncertainty widening bid-offer spreads.
  6. A slow burn
    Over two-thirds of respondents expect European deleveraging to take at least five further years to complete. Many banks cannot afford to deleverage fast. With run-off the dominant strategy, the duration of deleveraging should be correlated with the life of assets being run-off. Divestments can be swifter.
  7. High proportion of divestitures expected to be assets in Western Europe
    88% of respondents propose to shrink in their home region of Western Europe. Many banks have already contracted their foreign lending.
  8. Banks’ models are changing
    Banks are planning to sell loan books, having already divested non-bank activities. Commercial real estate books are first on the block, but also rated hardest to sell.
  9. Pricing disconnect between banks and potential buyers
    Over two-thirds of respondents rated price agreement the key challenge, ahead of finding a buyer or recognising losses on disposal. Typically, the ‘stickier’ assets are those where pricing cannot easily be benchmarked (e.g. commercial real estate loans).
  10. Private equity firms and non-European banks seen as the likeliest buyers
    86% of respondents expect to sell to private equity and investment firms, or non-European banks, with just 14% of respondents expecting European banks to be buyers.

Discover the full results of this survey in the attached PDF. This survey is available in PDF format only.

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