Financial Regulatory Forum

ANALYSIS-European banks swallow soaring bad debts, fog starts to lift

August 12, 2009

USA/    By Steve Slater, European Banking Correspondent
   LONDON, Aug 12 (Reuters) – Investment bankers have reversed their role as villains of the financial crisis, delivering bumper half-year profits to offset a startling rise in retail bad debts at Europe’s banks, but may need to repeat the trick.
   Bad debts at the region’s top banks soared a dramatic 160 percent in the first half of the year to over 60 billion euros — based on the 13 biggest banks to report. And the numbers are expected to stay high for up to another two years.
   So far, investment bank earnings cushioned the impact, and profits from the top banks totalled 21.4 billion euros, according to analysis by Reuters, down 20 percent from a year earlier but helping improve capital after the turmoil of the last few months of 2008, investors and analysts said.
   It marked a stark turnaround for investment bankers blamed for creating the deepest financial crisis since the 1930s, and helped lift some of the fog that has clouded the sector for more than two years.
   “2008 was all about the fear of recapitalisations, but for the most part the bank Tier 1 (capital) ratios are starting to look robust and the sector’s come through the downturn,” said David Williams, analyst at Fox-Pitt Kelton.
   The DJ STOXX European bank index <.SX7P> has rallied 12 percent since the start of the earnings period, leaving the benchmark more than double its March low but still a quarter below its year-ago level.
   “The banks have clearly spent the first half of the year managing their balance sheets so they have enough capital, not just for now but for any regulations that may be introduced in the next two years,” said Simon Maughan, analyst at MF Global.
   Among the banks positively surprising with their capital were HSBC <HSBA.L>, BNP Paribas <BNPP.PA>, Barclays <BARC.L> and UBS <UBSN.VX>. The trend was reinforced with a surprise placing by Standard Chartered <STAN.L> to top up its capital.
   “That means looking forward the banks can put capital to work where they see growth, they can concentrate on their cost cutting programmes (and) can gain control of the income statement where they didn’t have it before,” Maughan added.
   Sustaining the momentum will require them to overcome some high hurdles in the coming years, however.
   
   LONG, FAT TAIL?
   Soaring bad debts are the biggest threat and could remain high as in past cycles there has been a lag of one to two years before the full bad debt pain is felt, tracking unemployment trends.
   “We shouldn’t underestimate the impact of high loan losses still coming through … 2009 and 2010 and maybe beyond will still be about loan losses and they are going to be substantial,” said Jaap Meijer, analyst at Evolution Securities.
   Lloyds Banking Group <LLOY.L> may have cheered investors by saying its bad debts peaked in the first half, but that was a hefty 13.4 billion pounds, five times its impairment level a year ago and easily the biggest of any European bank. [ID:nL4423910]
   More typical was Italy’s UniCredit <CRDI.MI>, where impairments jumped but improvements in capital and underlying results softened the blow.
   Other stiff headwinds facing banks include the threat that more intrusive regulation will require banks to hold more capital and margins will slip further, both eating into profits and returns.
   Repaying government loans and the sale of massive state shareholdings will also hang over some banks for years, and some will be forced to sell key assets to keep regulators happy.
   First-half results showed banks able to keep out of state hands are already pushing home their greater flexibility and freedom.
   These winners, taking market share in investment banking, are led by Credit Suisse <CSGN.VX> and Barclays, according to several analysts, citing their respective capital strength and successful integration of Lehman Brothers’ U.S. operation. 
   Other lenders taking advantage of good fixed income conditions include BNP Paribas and Deutsche Bank <DBKGn.DE>, while HSBC, Santander <SAN.MC> and Standard Chartered are benefiting from capital and liquidity advantages, offsetting headwinds they face in key retail markets.
   Investment banking revenues will drop off in the second half, bankers acknowledge, but low interest rates, government bond issuance, and a possible pickup in equity, M&A and hedge fund activity may see revenue hold up.
   Since Credit Suisse reported on July 23, its shares have climbed 6 percent, Barclays and HSBC have each jumped about 17 percent, and Santander and BNP have gained near 9 percent.
   Many of the sector’s most beaten down shares have rallied even sharper, led by KBC <KBC.BR>, Natixis <CNAT.PA> and Lloyds.
   (Editing by Sitaraman Shankar)
   ((steve.slater@reuters.com; +44 207 542 4367; Reuters Messaging: steve.slater.reuters.com@reuters.net))
 Keywords: BANKS/EUROPE 
  
 
 Keywords: BANKS/EUROPE =2
  
 
 Keywords: BANKS/EUROPE =3
  
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 Wednesday, 12 August 2009 12:20:56RTRS [nLC583388] {EN}ENDS

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