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European banks face major cash crunch

More than a dozen European banks facing exposure in excess of $100 billion to energy sector loans may need to sell assets to bolster against future losses.

Potential buyers of those assets include a mix of large private equity firms, a select group of pension investors, U.S. banks and hedge funds. Due to the recent decline in major European banks' shares and increasing scrutiny over the bad loans the banks hold, investors are starting to gravitate toward the idea of getting actively involved in European banking names.

"European banks are under pressure because they have to continually raise capital ratios" in order to offset troubled loans, Julien Jarmoszko, senior investment manager at S&P Capital IQ, told "We're seeing more restructuring being initiated."

The cash crunch is in part due to slower management of post-crisis and regulatory issues that European banks faced several years ago. It just happens to be coming home to roost at a crucial time, both in terms of banks' share prices and at a time when liquidity issues are threatening investors globally.

"U.S. banks were faster to raise capital, raised more of it, strengthened balance sheets and restructured faster" than their European counterparts, CLSA bank analyst Mike Mayo said.

The four U.S. banks with the highest dollar amount of exposure to energy loans have a capital position 60 percent greater than European banks Deutsche Bank, UBS, Credit Suisse and HSBC, according to CLSA research using a measure called tangible common equity to tangible assets ratio. Or, as Mayo put it, "U.S. banks have more quality capital."

Analysts at JPMorgan saw the energy loan crisis coming for Europe, and highlighted in early January where investors might get hit.

"[Standard Chartered] and [Deutsche Bank] would be the most sensitive banks to higher default rates in oil and gas," the analysts wrote in their January report.

In fact, on Monday, Standard Chartered stock fell more than 27 percent intraday for the year, and Deutsche Bank stock had dropped more than 37 percent in a tumultuous trading day in Europe and in the U.S.

European banks may need to hasten asset sales to generate provisional capital; the problem is exacerbated because, although EU banks have exposure similar in size to U.S. banks', most have less in total assets than their American counterparts, magnifying the damage.

The three largest U.S. banks' energy exposure, according to a Goldman Sachs analyst report, represents less than $60 billion in loans and is divided among Bank of America, Citigroup and Wells Fargo. But those banks together also manage nearly $6 trillion in total assets.

While BNP Paribas' balance sheet is more comparable to that of the major U.S. banks, others within the EU banking sector, like Standard Chartered, Credit Suisse and UBS, are substantially smaller. So the $9.4 billion and $6.1 billion in energy loans weighing on Credit Suisse and UBS, respectively, may have a greater impact on those banks, Jarmoszko said.

"[W]e will see losses," he said, "but UBS generates $6 billion in pretax pre-provisions so they will cover these through earnings without damaging capital."

Virtually all European banks can offset their cash crunch by dealing assets out to interested parties; it comes as many of them face post-crisis lows for share prices and as the value of assets have been pummeled to start 2016, making it more difficult to raise provisional capital to back up their loans.

"Bank boards are responding to financial and regulatory pressures by continuing to divest noncore assets," said Tim Hanford, head of J.C. Flowers in Europe. "We have had success acquiring these businesses and repositioning them with refreshed strategies."

J.C. Flowers is a leading private equity firm that invests in the financial sector and has about $8 billion in assets under management.

Other bidders could come in the form of public pensions, according to a source who advises on financial services deals, who spoke on the condition of anonymity.

Canadian pensions, in particular, have taken on more direct investing in recent years, which was highlighted by the Canada Pension Plan Investment Board's deal to buy General Electric's Antares lending unit and a loan portfolio in a $12 billion deal last year. Still others could come in the form of U.S. banks and hedge funds willing to take on additional exposure to underperforming loans at a deep discount.

Market watchers noted that different regions of Europe are facing varying levels of pain within their loan portfolios; and it appears bidders have taken note.

"We have spent time looking at Italy, where we are already invested in the insurance sector, in order to figure out the best way to invest in the banking sector where (nonperforming loans) are the primary driver of recapitalization needs," J.C. Flowers' Hanford said. "The Austrian banks and others also expanded rapidly across Eastern Europe and we are seeing deal flow there as they look to reconfigure."

[Source: By Joan Marino and Sema Mody, CNBC, 08Feb16]

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small logoThis document has been published on 10Feb16 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.