UPDATE 2-Bank asset sale stand-off threatens European lending
By Gareth Gore
LONDON, Nov 25 (IFR) - A stand-off between cash-strapped European banks and possible buyers of trillions of euros of loans, mortgages and real estate they are trying to off-load is putting pressure on the European Central Bank (ECB) to provide more help.
The impasse is not only putting in peril plans by the banks to cut their funding needs and meet tougher capital demands, it is also crimping their ability to lend to small and medium-sized businesses, the companies expected to drive economic recovery.
Some of the continent's biggest banks, in France, the UK, Germany and Spain, have pledged to sell assets and run off existing loans in a bid to shrink balance sheets by as much as 5 trillion euros over the next three years.
This is in reaction to a sudden and dramatic squeeze on funding since the summer, which saw traditional sources of bank funding dry up completely.
As old debts come due - some 1.7 trillion euros is due to roll over in the next three years alone - banks need to find cash from other sources to avoid bankruptcy.
Pressure from senior bankers has led the ECB to consider extending the term of loans it offers to the region's banks to two or even three years in an effort to prevent a credit crunch that would choke the bloc's economy, sources familiar with the matter told Reuters earlier this week.
"Banks are feeling pain on both sides of the balance sheet," said Alberto Gallo, head of European credit strategy at RBS. "On the one side you have a funding squeeze, with banks unable to raise cash in the capital markets. At the same time, many of the assets they hold are deteriorating in quality."
The resulting asset sales by banks such as BNP Paribas SA , Societe Generale , Credit Agricole SA and Natixis SA in France have been stepped up since August, senior banking sources said. More recently, they have been joined by Spain's Banco Santander SA and Italy's UniCredit SpA , the sources added.
Loans that have been put up for sale include those made to companies ranging from India's Reliance Industries to Italy's Enel and the State of California in the United States, according to Thomson Reuters LPC data.
However, such sales are piecemeal and require time-consuming bilateral negotiations with potential buyers.
Price is proving to be the major sticking point, people involved in the asset sales said.
Banks want to sell higher-quality assets at as near to "par," or face value, as they can. If they sell below this level they are forced to swallow a loss, which eats further into already depleted capital.
The trouble for Europe is that potential buyers - a mix of private equity firms, hedge funds, banks in the United States and Asia and insurers - have the upper hand, with cash to spend, but at the same time an eye for a bargain.
"There is a huge amount of liquidity among investors right now, but they only want to buy at distressed prices," said Stefano Marsaglia, a chairman within the financial institutions group at UK investment bank Barclays Capital.
This gulf is forcing the region's banks to find other ways of minimising capital requirements - the amount of equity they have to hold to cushion themselves against bad loans and other shocks - and look at ways of using the assets they can't sell as collateral to borrow from central banks.
There is also a vast overhang of unsold assets from the first stage of the financial crisis.
Many banks such as Germany's Commerzbank AG and WestLB AG , the UK's Royal Bank of Scotland Group Plc and even the Irish government set up so-called "bad banks" whose job it is to wind down and dispose of assets.
In many cases, these assets are hard to distinguish from each other. Several investment bankers advising on the process cited Dutch lenders looking to sell very similar mortgage-backed securities, which would be a struggle to off-load.
"Many banks in Europe have been looking to sell assets for the past couple of years. If those disposals haven't been closed in better markets, what makes anyone think they can do it now in larger amounts and much more volatile markets?" said Marc Tempelman, head of EMEA financial institutions capital markets and financing at Bank of America Merrill Lynch.
Without the cash that would have been generated through outright asset sales, struggling European banks are now looking at alternatives. The problem is that traditional options such as issuing equity, increasing deposits or consolidation are not feasible, given the intensity of the European debt crisis.
For European politicians and central bankers struggling to bring the euro zone's debt crisis under control, the lack of buyers for the unwanted bank assets is yet another headache.
"The problem is that there just aren't enough buyers. Most banks will be forced to hold on to much of this stuff to maturity, which will affect their ability to lend and impact on the real economy," Gallo at RBS said.
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