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What’s next for the restructuring of Europe’s banks?

Forced restructuring of bailed-out banks. Aid from national governments often comes with restrictions and conditions. One key feature of the support extended by European and national authorities is the requirement of banks to divest assets to increase liquidity and pay back the aid. The result is that many CEOs of European banks now face restructuring programs to satisfy the terms of agreements signed with European or national regulators. In extreme cases, the asset base of some banks may be cut in half, and painful measures will be unavoidable.

Government divestiture. Bailouts put billions of euros of financial-services assets into government hands. In general, the authorities do not consider themselves to be a natural owner of banks. There is an expectation that ownership will be returned to the private sector when conditions in capital markets permit it. Growing public deficits, pressure from public opinion, and the desire to promote competition and realize profits will naturally drive governments to divest their holdings. Some divestments are already under way.

Pressure to strengthen the capital base. Governments across Europe are encouraging banks to rid their balance sheets of toxic assets. For example, in Spain, the European Union required the establishment of a so-called bad bank—the Company for the Management of Assets proceeding from Restructuring of the Banking System, or SAREB—as a precondition in exchange for aid of up to €100 billion to the Spanish banking sector. By the end of February 2013, SAREB had acquired €52 billion of property-development loan assets from Spanish institutions.

Moreover, despite efforts to deleverage and improve capital ratios, banks are still hungry for capital. Given its scarcity in the market, banks are being forced to divest assets in order to raise capital—and such sales may be practically necessary before investors will again open their wallets. We estimate that European banks need to raise more than €100 billion of equity to meet their capital needs.

Pressure to improve returns. Industry returns are expected to be substantially (and structurally) lower than before 2008. To boost them, financial institutions must build critical mass in their core businesses and divest subscale, noncore, and capital-consuming operations. Consequently, there will be a shift toward scale and to having business lines run by their best natural owner. This will result in the unraveling of some acquisitions made in the last M&A wave and, perhaps, a spate of mergers among equals looking to create scale in their core business.


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