Europe banks fail to cut assets after Draghi loans

Reducing Incentive

The ECB money has removed the incentive for banks to clean their balance sheets, according to Olivetree’s Maughan.

“Some banks, especially in Spain and Italy, are just taking in the money that they can get from the ECB, which should be a short-term measure in order to enable them to manage while they implement structural reforms,” Maughan said. “It successfully staved off a funding crisis, but its real aim of facilitating restructuring hasn’t even started.”

For lenders in southern European countries, the strategy may not be as risk-free as it looks. Yields on bonds sold by the governments of Spain and Portugal hit euro-area records this year on investor concern that they would require bailouts.

Yields on Spanish 10-year government bonds increased to 5.97 percent on Sept. 14 from about 4.2 percent two years ago, down from their 7.75 percent high on July 25. Similar Italian bonds rose to 5.11 percent from 3.93 percent in the same period.

Intesa, UniCredit

Intesa Sanpaolo SpA, Italy’s second-largest bank, will continue to purchase Italian government bonds, Chief Executive Officer Enrico Tommaso Cucchiani, 62, said in an Sept. 7 interview at a conference in Cernobbio. The Milan-based bank boosted its holding of Italian government bonds to more than 80 billion euros in June from 64 billion euros a year earlier. Total assets rose by about 3 percent to 666 billion euros in the year ended June 30.

UniCredit increased assets by 4 percent to 955 billion euros in the same period. CEO Federico Ghizzoni attributed the rise in part to the ECB loans and reiterated the Milan-based bank’s desire to shrink.

“The issue of deleveraging is still considered one of the most important things that need to be achieved,” Ghizzoni, 56, said in an interview in Cernobbio. “But only talking in terms of shrinkage is a bit dangerous internally for the bank because it doesn’t encourage employees to do business. To be balanced you have to look where it makes sense to stay.”

Steep Discounts

Banks trying to sell assets are finding that buyers are demanding steep discounts for their worst assets, according to executives at private-equity and hedge funds acquiring the loans. They’re seeking discounts of as much as 50 percent to face value for underperforming loans, said Andrew Jenke, a director at KPMG LLP in London who advises on such transactions. Selling a loan at a discount to the value marked on the books requires the bank to crystallize a loss that erodes capital.

British and Irish lenders are selling the most because European Union regulators have forced them to divest divisions and loans in return for state aid.

RBS, which received a 45.5 billion-pound ($74 billion) rescue in 2008, cut assets to 1.4 trillion pounds at the end of June from 2.4 trillion pounds at the time of its bailout. The Edinburgh-based lender last week began selling a stake in its Direct Line insurance unit in an initial public offering after struggling to attract private-equity bidders.

Lloyds Banking Group Plc, which got a 20.3 billion pound bailout, has trimmed about 66 billion pounds from its balance sheet since 2009, taking it to 961 billion pounds. Assets at HSBC Holdings Plc, which didn’t seek a bailout, were $2.65 trillion in June compared with $2.69 trillion a year earlier.

Allied Irish Banks Plc, Bank of Ireland Plc and Permanent TSB Group Holdings Plc have eliminated 42.6 billion euros of assets, more than half the 70 billion-euro target they have to meet by the end of 2013.

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