Banks put assets on block, but face price shock

LONDON (Reuters) - Royal Bank of Scotland (RBS) (RBS.L) and other European banks are having to sell assets to repair their battered balance sheets and will have to settle for low prices.

Buyers are scarce because funding is tight for private equity firms and because the better capitalized banks that might be interested can afford to hold off on acquisitions until the price is right.

"RBS Insurance is a classic example where a bank has in mind what it thinks is a fair price but the reality is people's ability to pay is pretty constrained," said Simon Maughan, analyst at MF Global.

"If we do see asset sales it could take a few more months for the sellers to capitulate (and lower price expectations)," he said.

RBS may struggle to achieve the 6 to 7 billion pounds ($12-14 billion) it wants for its insurance arm and it is not alone in looking to sell assets in tough markets, bankers say.

Still, cut-price deals may be better than dilutive share issuance.

Multi-billion-euro rights issues are repairing the most stretched balance sheets, but with more writedowns on toxic holdings and low growth ahead, asset sales could be the key.

"Banks will want to minimize capital calls, so they will naturally think a lot harder about selling assets," said Larry Slaughter, co-head of European M&A at JP Morgan. "So we may see more coming up for sale."

France's Credit Agricole (CAGR.PA), Citi (C.N) in Europe and Italian and other UK banks are all expected to make disposals.

"There are many, many assets available for sale given the need to reinforce balance sheets, but counter-cyclical deals are rare," said one analyst, who asked not to be named.

Bargains may be available after a steep fall in sector valuations and pressure to offload assets, but prices could drop further and buyers can be choosy. And some of the best capitalized, like HSBC (HSBA.L) and Santander (SAN.MC), are targeting investment in emerging markets.

"Banks with a capital advantage will want to be careful not to squander it too early in the cycle in case things get worse," the analyst said.

NEW ASSETS ON THE BLOCK

The list of potential assets for sale is long, and includes stakes in other firms, capital-intensive insurance operations and even books of loans to narrow focus or improve liquidity.

"We've barely scratched the surface of the deleveraging that is necessary in all the banks," said Neil Dwayne, chief investment officer Europe for RCM, an investment house owned by Allianz with about 70 billion euros under management.

"All their balance sheets are still far too big. You can delever in two ways: sell the assets or raise the capital. I think they've not sold too many assets so far and quite a few are raising capital as fast as they can," Dwayne said.

The pressure is on from both regulators and investors to keep core tier 1 capital ratios above 6 percent.

RBS's prized insurance arm is the highest profile auction, and even though it says it won't sell at a knock-down price, it has pledged to boost capital by 4 billion pounds from asset sales this year.

It is expected to shortly sell its train leasing business Angel Trains and will probably follow with the sale of ABN's Australian business. There are other ABN assets it jointly owns with Fortis (FOR.BR) and Santander, such as a 40 percent stake in the Saudi bank Saudi Hollandi 1040.SE.

Those shared assets would also help Fortis, whose capital is tight despite a big rights issue last year. Analysts say it has some flexibility before it needs to tap investors again, and that it may sell its UK non-life insurance business.

Credit Agricole has pledged 5 billion euros in asset sales, but has not said what is on the block. Sales could include its 3 billion euro stake in Italian bank Intesa Sanpaolo (ISP.MI) or its holding in French investment firm Eurazeo (EURA.PA), analysts say.

Italian and UK banks are also under pressure to boost capital. Unicredit (CRDI.MI) could follow recent branch sales with other disposals, as could Intesa and Banco Popolare (BAPO.MI), while UK deals could include Barclays (BARC.L) selling its domestic closed life assurance book.

Troubled U.S. bank Citi has put its German retail bank up for sale, and more side deals could surface once heavy consolidation gathers pace, possibly soon.

(Additional reporting by Mathieu Robbins and Simon Challis; Editing by David Cowell and Andrew Callus)