Capital gain, asset loss European bank deleveraging
Margaret Doyle Head of Financial Services Insight, Deloitte UK ECMI Annual Conference 18 October 2012 © 2012 Deloitte LLP. All rights reserved.
The Deloitte Bank Survey: executive summary
2
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Higher capital requirements are the key driver of bank deleveraging
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Liquidity constraints are also a significant cause of deleveraging
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Deleveraging is expected to yield a neutral/positive impact on capital ratios
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Banks expect deleveraging to be modest relative to past crises and to the credit boom
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Banks expect to re-size through run-offs more than through divestments
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A slow burn – deleveraging expected to take at least five further years
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High proportion of divestitures expected to be assets in Western Europe
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Banks’ models are changing – many banks have divested non-bank business lines
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Pricing disconnect between banks and potential buyers
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Private equity firms and non-European banks seen as the likeliest buyers
© 2012 Deloitte LLP. All rights reserved.
Higher regulatory capital is driving European deleveraging Deleveraging drivers % of respondents who rated each of the following drivers 4 or 5 (on a scale of 1-5, 5 = extremely important) for their bank’s deleveraging plans Higher capital requirements Higher liquidity requirements EU state aid requirements Change in strategy
Deleveraging drivers
Increased cost of funding/funding constraints Pressure to improve returns
Structural reforms- Dodd-Frank, ring-fencing etc Other Increase in risk aversion Reduced demand for credit/weaker economic activity 0%
10%
20%
30%
40%
50%
60%
70%
80%
Source: The Deloitte Bank Survey 2012, Deloitte analysis 3
© 2012 Deloitte LLP. All rights reserved.
The scale of expected deleveraging is modest relative to the preceding credit boom, which saw assets at large UK banks quintuple... Amount of further asset reduction to be achieved through deleveraging % of respondents who expect the percentage of their total assets to be deleveraged, to be one of the following
Bank asset trends across European banks in credit boom phase Assets of 32 largest banks in Europe between end-2000 and end-2008 500% 450%
11.8%
400% 350%
29.4%
300% 250% 200% 35.3%
5.9%
150% 100% 50%
17.6%
0% -50%
Less than 2.5%
2.5%-5.0%
7.5-10.0%
Greater than 10.0%
5.0-7.5%
2000 2001 2002 2003 2004 2005 2006 2007 2008 France
Germany
Ireland
Italy
Netherlands
Portugal
Spain
United Kingdom
Source: The Deloitte Bank Survey 2012, Deloitte analysis 4
© 2012 Deloitte LLP. All rights reserved.
..and loan-to-deposit ratios at large banks across Europe increase by a third between 1996 and 2008 Average loan-to-deposit ratio for large banks in Europe, 1996-2011 Based on 13 large banks in France, Germany, Ireland, Italy, the Netherlands, Portugal, Spain and the UK
160%
150%
140%
130%
120%
110%
100% 1995
1997
1999
2001
2003
2005
2007
2009
2011
Source: Bloomberg, Financial statements, Deloitte Insight 5
© 2012 Deloitte LLP. All rights reserved.
Deleveraging is also modest vs the correction after previous crises, where bank credit-to-GDP fell 27%, on average, to pre-crisis levels Change in bank credit to GDP during previous systemic banking crises T=peak credit to GDP ratio. Bank credit is defined as domestic credit to private sector
120%
110%
100%
90%
Norway (T=’89) 80%
Japan (T=’99) Sweden (T=’90)
70%
Finland (T=’91)
60%
50% T-5
T-4
T-3
T-2
T-1
T
T+1
T+2
T+3
T+4
T+5
Source: IMF, Deloitte Insight 6
© 2012 Deloitte LLP. All rights reserved.
By contrast, the overall adjustment process for European banks has barely begun Change in bank credit to GDP during the current financial crisis
120%
Italy 110%
US Spain Germany
100%
UK Ireland
90%
80%
70%
60%
50% 2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: IMF, Deloitte Insight 7
© 2012 Deloitte LLP. All rights reserved.
The Deloitte Bank Survey found that banks expect to re-size through natural run-off more than through divestments How deleveraging will be achieved % of respondents who rated each of the following processes 4 or 5 (on a scale of 1-5, 5 = very material contribution) in deleveraging
Natural run-off
Divestments
Constraining asset growth
Write-offs/provisions
0%
10%
20%
30%
40%
50%
60%
Source: The Deloitte Bank Survey 2012, Deloitte analysis 8
© 2012 Deloitte LLP. All rights reserved.
European deleveraging will be a slow burn – over two-thirds of respondents expect it to take at least five more years Deleveraging time frame for European banking sector % of respondents who expect the timeframe for European bank deleveraging, to be one of the following
Less than 3 years
3 years
4 years
5-7 years
8-10 years
More than 10 years
0%
10%
20%
30%
40%
50%
60%
Source: The Deloitte Bank Survey 2012, Deloitte analysis 9
© 2012 Deloitte LLP. All rights reserved.
© 2012 Deloitte LLP. All rights reserved.
