Deutsche Bank Research
Banking & regulatory trends in Europe Stockholm, 21 October 2014
Deutsche Bank Jan Schildbach Research
Jan Schildbach 21 October 2014
Agenda
Deutsche Bank Research
Jan Schildbach 21 October 2014
1
Big picture: EU bank performance
2
Regulatory trends & their impact
3
Swedish banks
4
Outlook: Banking Union
2
European banks are struggling – US peers enjoying record profitability Net income
Total revenues
USD / EUR bn, up to Q2 14
Q1 2006 = 100, up to Q2 14
80
130
60
120 40 20
110
0
100 -20
90
-40 -60
80
Sources: FDIC, ECB, company reports, Deutsche Bank Research
Deutsche Bank Research
Jan Schildbach 21 October 2014
US banks
Q1 14
Q1 13
Q1 12
Q1 11
Q1 10
Q1 09
Q1 08
Q1 07
US banks Large European banks All EU banks (quarterly share of annual data)
70 Q1 06
Q1 14
Q1 13
Q1 12
Q1 11
Q1 10
Q1 09
Q1 08
Q1 07
Q1 06
-80
Large European banks
Sources: FDIC, company reports, Deutsche Bank Research
3
Weak asset quality and shrinking loan books in Europe Loan loss provisions
Lending to the private sector
USD / EUR bn, up to Q2 14
% yoy, up to Aug 14
80
12
70
9
60 6
50 3
40 30
0
20
-3
10
-6
0 06
07
08
US banks
09
10
11
12
13
Large European banks
Sources: FDIC, company reports, Deutsche Bank Research
14
-9 08
09
10 US
11
12
13
14
Euro area
Sources: ECB, FDIC, Deutsche Bank Research
Deutsche Bank Research
Jan Schildbach 21 October 2014
4
... as well as margin pressure due to low interest rates Main official interest rates
Net interest income
%
EUR bn, top 20 European banks
7
140
6
135
5
130
4
125
3 120 2 115 1 110 0 1999
01 US
03
05
07
09
Euroland
Sources: Federal Reserve, ECB, BoE
Deutsche Bank Research
Jan Schildbach 21 October 2014
11
13 UK
105 H1 10 H2 H1 11 H2 H1 12 H2 H1 13 H2 H1 14 Sources: Company reports, Deutsche Bank Research
5
Agenda
Deutsche Bank Research
Jan Schildbach 21 October 2014
1
Big picture: EU bank performance
2
Regulatory trends & their impact
3
Swedish banks
4
Outlook: Banking Union
6
Re-regulation is comprehensive – and potentially overwhelming Regulatory initiatives
Reduce the likelihood of shocks
Higher capital requirements in terms of quantity and quality Increased minimum liquidity standards Improved transparency Contingent capital Countercyclical capital buffers Macro prudential oversight addressing system wide risk across banks
Limit potential spillover effects of affected institutes
Improved transparency, especially in terms of market infrastructure Levy cum funds Bankruptcy regimes Recovery and resolutions regimes (e.g. living will concept) Reform of deposit guarantee schemes
Non-conducive initiatives
Limitation re the size of banks Cap regarding maximum leverage ratio ‘Re-nationalisation’ of international banks´ subsidiaries Compensation restrictions Tighter regulation of hedge funds Restriction of prop trading FTT “Structural” bank reforms to split up universal banks
Objections
Multitude of initiatives leads to complexity and uncertainty about interaction Lack of international coordination creates competitive distortions, lack of effectiveness and regulatory arbitrage Large cumulative effects increase danger of recessionary effect Increasing divergence between policy agendas adds to the risk of market (re)fragmentation Aggressive timetable
Bias against large banks
Deutsche Bank Research
Jan Schildbach 21 October 2014
7
Leverage down, capital up Euro-area banks' leverage ratio Total assets / equity capital
Core Tier 1/Common Equity Tier 1 ratio* of Europe's 20 largest banks
20
% 13
19
12
18
11
17
10
16
9 15
8 14
7 13
6 12
5 11
Sources: ECB, Deutsche Bank Research
Deutsche Bank Research
Jan Schildbach 21 October 2014
Q2 14
13
Q2 13
12
Q2 12
11
Q2 11
10
09
Q2 10
Jun 14
Dec 13
Jun 13
Dec 12
Jun 12
Dec 11
Jun 11
Dec 10
Jun 10
Dec 09
Jun 09
Dec 08
Jun 08
Dec 07
Jun 07
10
Q2 09
08
4
* Basel II; Basel 2.5 applied from Q4 11 on, Basel III from Q1 14 on Sources: Company reports, Deutsche Bank Research
8
Driven by de-risking and shrinking, not retained earnings
EUR bn
EU banks: Change in riskweighted assets
250
% yoy
Net income of EU-27 banks
1 200
0 -1
150
-2 100
-3 -4
50
-5 -6
0
-7 -50 2007
08
09
10
11
12
13
-8 2009
10
11*
12
13
Sources: ECB, Deutsche Bank Research
* significant increase in RWA due to introduction of Basel 2.5 Sources: ECB, Deutsche Bank Research
Deutsche Bank Research
Jan Schildbach 21 October 2014
9
Corporate borrowing is partly shifting to capital markets Loans to the private sector in the euro area % yoy
Non-financial firms in the EMU: Cumulative change in outstanding funding instruments
18
EUR bn, January 2009 = 0 600
15
400
12 9
200
6
0
3 0
-200
-3
-400 -6
-600
-9 03
04
05
06
Households
07
08
09
10
11
12
13
14
Non-financial corporations
Sources: ECB, Deutsche Bank Research
09
10
11
12
Loans*
13
14
Bonds**
* Including loans transferred to national bad bank in Spain in Dec 12. ** Adjusted for reclassification of issuers in Germany in Jan 11. Sources: ECB, Deutsche Bank Research
Deutsche Bank Research
Jan Schildbach 21 October 2014
10
... as banks are also unable to securitise loans European securitisation issuance EUR bn 447
250
European securitisation issuance by retention EUR bn 900 800
200 700 600
150 500 400
100
300 200
50
100 0
0 2007
08
09
10
11
12
13
14
2006
07
08
Placed
Source: AFME
09
10
11
12
13 H1 14 ann.
Retained
Sources: AFME, Deutsche Bank Research
Deutsche Bank Research
Jan Schildbach 21 October 2014
11
Cross-border banking on the retreat, too Market share of foreign-owned banks in the EU-27
Foreign claims of European banks by reporting country
% of total assets
March 2008 = 100
30
130 120
25
110 100
20
90 15
80 70
10
60 5
50
EU banks
Banks from third countries
Sources: ECB, Deutsche Bank Research
Deutsche Bank Research
Jan Schildbach 21 October 2014
DE
FR
UK
ES
Jun 13
Jun 12
Jun 11
Jun 10
Jun 09
Jun 08
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Jun 07
0
Jun 06
40
SE
Sources: BIS, Deutsche Bank Research
12
Funding: Stronger focus on deposits Customer deposits in % of total assets
Loan-deposit ratio with non-banks
60
180
%
160
50
140 40 120 30
100
20
80 60
10
40 DE
0 DE
FR 1999
IT
ES
2006
2013
EMU
1999
FR
IT 2006
ES
EMU
2013
Sources: ECB, Deutsche Bank Research
Sources: ECB, Deutsche Bank Research
Deutsche Bank Research
Jan Schildbach 21 October 2014
13
Overall, Europe’s influence in global finance is declining; EM financial centres gain in importance European banks losing ground
As of mid-June each year, 2014: Oct 6
Rank New York London Hong Kong Singapore Zurich Tokyo Seoul Boston Geneva San Francisco Frankfurt Luxembourg Washington D.C Toronto Chicago Montreal Vancouver Shenzhen Vienna Shanghai Tel Aviv Calgary Sydney Monaco Buenos Aires Qatar Busan Munich Dubai Stockholm
Sources: Bloomberg, The Banker, Thomson, DB Research
Sources: Z/Yen, CityUK
Market cap of the world's 25 largest banks by region 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1999 US Japan Emerging markets
Deutsche Bank Research
2004
2007
2009
2014
Europe Other developed countries
Jan Schildbach 21 October 2014
GFCI 2014 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
GFCI 2007 2 1 3 4 5 9 43 14 10 13 6 26 20 12 8 21 27 35 24 7 25 29
14
Agenda
Deutsche Bank Research
Jan Schildbach 21 October 2014
1
Big picture: EU bank performance
2
Regulatory trends & their impact
3
Swedish banks
4
Outlook: Banking Union
15
Swedish banks are highly profitable and efficient
Deutsche Bank Research
Jan Schildbach 21 October 2014
16
... with growing business volumes – a rare exception
Deutsche Bank Research
Jan Schildbach 21 October 2014
17
... but strong reliance on market funding and relatively high absolute leverage
Deutsche Bank Research
Jan Schildbach 21 October 2014
18
Agenda
Deutsche Bank Research
Jan Schildbach 21 October 2014
1
Big picture: EU bank performance
2
Regulatory trends & their impact
3
Swedish banks
4
Outlook: Banking Union
19
Banking Union: The ESFS Comprehensive approach, but multiple players
European System of Financial Supervision (ESFS)
European Supervisory Authorities (ESAs)
ESRB
ECB (Fft/M.) SSM
(Frankfurt/M)
EBA
ESMA
EIOPA
(London)
(Paris)
(Frankfurt/M)
National competent authorities
Joint Committee of the ESAs (incl. Sub-Committee on Financial Conglomerates)
Board of Appeal (6 members, 2 each nominated by each ESA Mgt. Board)
Deutsche Bank Research
Jan Schildbach 21 October 2014
20
Interdependence of financial and budget (in)stability
• support for financial firms • lower tax revenues • higher expenditure
Financial instability
Budget instability • potential default of sovereign debtors • concerns on inflation
Deutsche Bank Research
Jan Schildbach 21 October 2014
21
Breaking the bank-sovereign nexus
How? Financial sector rescue must not fall on national budget!
Financial instability
Budget instability
How? Funding and assets should be diversified!
Deutsche Bank Research
Jan Schildbach 21 October 2014
22
BU elements are interdependent: Common supervision needs complementary resolution arrangements
Deutsche Bank Research
Jan Schildbach 21 October 2014
23
BU framework established, implementation under way Motivation: − Breaking the link between financial and fiscal instability − Securing the single financial market; avoiding (re-)fragmentation
Necessary elements
Status quo
Single Rule Book
- incl.CRD IV /CRR, deposit insurance and resolution - some progress, not perfect.
Single Supervisory Mechanism (SSM)
− To start November 2014 − for 120 significant credit institutions (85% of assets) the ECB will be in charge directly; for others joined responsibility with national authorities − Precondition: comprehensive assessment (supervisory risk assessment, AQR, stress test) currently under way with results expected end of Oct. 2014
Single Resolution Mechanism (SRM)
− basis: common rules for resolution, crisis prevention; bail-in as basic principle instead of bail-out > agreement reached and new rules being implemented − Single resolution mechanism: agreement to set up a joint mechanism to decide about resolution incl. financing
Single Resolution Fund (SRF)
− so far only national funds in some member states − SRF: Common resolution fund financed by banks; 55bn € target level to be reached over 8 years, gradual mutualization of compartments
Current critical issues: − Communication of AQR results: ensure dialogue with ECB, appropriate validation, transparent & robust process − Detailed rules for calculation of fund contributions Deutsche Bank Research
Jan Schildbach 21 October 2014
24
Contact
Jan Schildbach Deutsche Bank Research Banking, Financial Markets, Regulation Taunusanlage 12 D-60325 Frankfurt/Main Phone: +49 69 910-31717 E-mail:
[email protected] Internet: www.dbresearch.com
Deutsche Bank Research
Jan Schildbach 21 October 2014
Disclaimer
© Copyright 2014. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. . Deutsche Bank Research
Jan Schildbach 21 October 2014
