* Banks in Europe shrinking to meet tough capital rules
* Regulatory uncertainty puts banks off snapping up bargains
* Private equity and hedge funds stepping in to buy
* Investors fear Basel III will not be the final word
By Carmel Crimmins and Steve Slater
DUBLIN/LONDON, Dec 21 Regulatory uncertainty is
putting large banks off buying the assets of smaller rivals,
complicating the sector's restructuring and giving hedge funds
and private equity a golden opportunity to swoop in.
Banks are facing a regulatory crackdown in the wake of the
financial crisis, with national regulators increasingly opting
to go it alone with stricter rules, creating confusion for
lenders trying to calculate the merits of buying a rival's
assets and for fund managers running the slide rule over bank
"The regulatory environment is such that you are seeing
increasing capital standards for banks, but we don't know yet
where they are going to," said Niall Gallagher, manager of the
GAM Star Continental Europe Equity fund.
"There's a lot of investor angst out there at the moment,
and unless you have a crystal clear view, it is very hard to
invest in these stocks."
Despite hundreds of billions of euros' worth of loans for
sale in Europe, senior bankers complain that they can't get some
deals past their credit committees because there is uncertainty
over how much capital they would need to hold after the
"We are looking at assets. But the regulatory uncertainty is
making us wary," said one senior U.S. banker.
With investors reluctant to plough more money into bank
shares, lenders are under huge pressure to shrink their bloated
loan books - by running them down or selling them - to meet
tougher capital requirements.
Europe's banks, including Royal Bank of Scotland,
Lloyds, Commerzbank and others in Ireland,
France, Spain and beyond, have shed hundreds of billions of
euros since 2008 but still have further to go than their U.S.
rivals because they grew so much during the boom.
The IMF has estimated banks will shrink by $2.8 trillion,
but in an extreme scenario that could reach $4.5 trillion as
firms rid themselves of unwanted loans and "rightsize" for a
lower growth environment.
With their loan books still bloated, European banks are
capping new lending to shore up capital.
Weak credit growth has already hit the European economy
hard, with the IMF warning earlier this year that deleveraging
would squeeze credit availability in the euro area by 1.7
percent over the next two years.
PricewaterhouseCoopers (PwC) has estimated that European
banks have more than 2.5 trillion euros of non-core loans, or
about 6 percent of their assets. It has estimated about 500
billion euros of those loans will trade in the next decade.
Banks are only four years into what is expected to be a
10-year process of cutting assets. Next year could surpass 2012
as the peak for asset sales.
Richard Thompson, European portfolio advisory group partner
at PwC, expects a record 60 billion euros of loans will be sold
next year up from an estimated 50 billion this year and 36
billion euros in 2011.
"It's the opportunity to acquire customers at a relatively
cheap price. Some banks will emerge as buyers when they see
assets at relatively competitive prices. But a lot of banks are
being very cautious on capital," said Thompson.
PRIVATE EQUITY BUYERS
With U.S. banks facing tough regulatory hurdles on
acquisitions in the aftermath of the financial crisis, Canadian,
Japanese and Australian banks, which emerged largely unscathed
from the credit crunch, are the most obvious trade buyers.
Japan's Mitsubishi UFJ Financial Group bought U.S.
bank Pacific Capital Bancorp for $1.5 billion in February this
year, while Sumitomo Mitsui Financial bought Royal Bank of
Scotland's aircraft leasing business for $7.3 billion in
More recently, private equity houses have been the buyers,
with Apollo Global Management acquiring a 1.47 billion pound
book of troubled Irish property loans at a 90 percent discount
from Britain's LLoyds.
Spanish lender Popular this month finalised the
sale of a 1.14 billion euro portfolio of distressed consumer
loans to Nordic distressed debt group Lindorff and private
equity firm AnaCap, a source told Reuters.
One international investor said a stricter, more uniform
approach to dealing with banks' bad debts across Europe would
trigger more asset sales, particularly in Spain, which recently
created a so-called "bad bank" to take over the soured assets of
"We have been in very, very regular communication with banks
in Spain. Our inclination is it is a bit early to do things
there," said the investor, who requested anonymity.
"They (the Spanish) haven't really worked through the good
bank/bad bank scenario, and there really hasn't been
crystallised yet the framework for pan-European banking
BASEL IV OR V?
Confusion over financial regulation is set to continue as
efforts to introduce universal standards for banks go awry.
Both the United States and Europe, the world's two largest
banking markets, are delaying the introduction of tougher global
capital rules for banks, the so-called Basel III accords, which
were meant to start rolling out on Jan. 1, 2013.
While the biggest European and U.S. banks already comply
with Basel III's minimum requirements, investors are worried
that a delay in introducing the new regime will encourage some
regulators to devise their own firewalls, leading to a series of
"If you always go for more capital, more safety, more
everything, then you get into a position where you stop
shoplifting by not having any shops," said Robert Hingley,
director of investment at the Association of British Insurers,
which represents some of the UK's largest investors.
The U.S. Federal Reserve has proposed raising the capital
requirements on foreign banks to ensure they are in line with
The Bank of England, meanwhile, signalled last month that UK
banks still needed to raise tens of billion of pounds in
additional capital as many of them had underestimated the cost
of loans going sour and future fines for misconduct.
Despite the problems in getting it off the ground, there are
also fears that Basel III will not be the final word.
The current accord relies heavily on banks using in-house
models to assess risks and capital. But with investors
increasingly wary of the wide variety of methods used, the
committee that oversaw Basel III is probing these in-house
models and will report back next year with its findings.
"We don't know whether Basel III is it, or whether we'll
have Basel IV or V," said Gallagher.