At the expense of future profit and economic growth, European banks are selling some of their fastest-growing businesses to competitors outside the region in order to bolster their capital to meet new regulations.
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Spain’s Banco Santander SA , Belgium’s KBC Groep NV , and Germany’s Deutsche Bank are all exiting profitable operations outside their home markets in order to meet the European Banking Authority’s new capital reserve requirements.
Santander, which said in October it needs to raise 5.2 billion euros in capital, sold its Colombian unit last week to Chile’s Corpbanca for $1.16 billion. Deutsche Bank is still weighing its options, which include the possible sale of most of its asset-management unit. KBC may dispose of businesses in Poland.
Lenders are scrambling to boost their core capital to 9 percent by June 2012. Unwilling to raise equity because their prices are too low, and struggling to find buyers willing to pay enough for their troubled loans to avoid a loss that would erode capital, banks are being forced to sell profitable assets, leaving them focused on their stagnant local economies while depriving them of economic growth from outside the region.
“These are the most profitable parts of their business,” said Azad Zangana, European economist at London-based Schroders Plc, referring to Spanish and Portuguese banks selling assets in Latin America. “They’re being forced by regulators to sell them off. You begin to become a less profitable organization. Your business model stops working if you’re being forced to lend only to an economy that’s going through a very deep recession.”
Analysts say the divestitures are likely to hurt banks’ profitability in coming years, their returns on net asset value to be cut by 1.5 percent on average, according to Huw van Steenis, a Morgan Stanley analyst in London. He says return on asset value at Deutsche Bank will shrink by almost 1 percent and at Santander by about 0.8 percent, while the shrinking economy will help cut returns by an additional 2.5 percent.
Return on equity for French banks BNP Paribas , Societe Generale , and Credit Agricole may drop to between 7 percent and 9 percent in 2013, from 12 percent to 21 percent in 2007, said Christophe Nijdam, an analyst at AlphaValue in Paris. If the economy recovers, the ratio may rise to between 10 percent and 12 percent by 2015.
While the sales will make European banks less profitable, they will also make them less risky, says Nijdam. Banks across Europe have pledged to cut more than 950 billion euros of assets over the next two years, about two-thirds of which will come from sales of profitable units and performing loans, said van Steenis.
Many are concerned that the sales will not only cut profitability, but have a negative impact on European growth. “A big chunk of private sector loans can’t be reduced because they involve property that will be inactive for years, perhaps a decade. So, once banks trim their healthiest borrowers, and perhaps reduce their overseas exposures, they quickly run into the need to cut loans to small and medium enterprises,” said Richard Mattione, a portfolio manager at Boston-based Grantham, Mayo, Van Otterloo & Co.