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DealBook: British Banks Told to Raise $38 Billion in Capital

March 28, 2013 by Leave a Comment

Mervyn King, the departing governor of the Bank of England.Franck Robichon/European Pressphoto AgencyMervyn King, the departing governor of the Bank of England.

LONDON — British banks must raise a combined £25 billion, or $38 billion, in new capital by the end of the year to protect against future financial shocks, according to a report on Wednesday from the country’s authorities.

The Bank of England, which takes over the direct supervision of British firms like HSBC and Barclays next week, said the new reserves were needed to protect against losses connected to risky loan portfolios, future regulatory fines and the readjustment of banks’ bloated balance sheets.

Mervyn A. King, the departing governor of the Bank of England, said on Wednesday that the need to raise new capital “is not an immediate threat to the banking system and the problem is perfectly manageable.”

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The report follows a five-month inquiry by British officials into the financial strength of the country’s banking industry. With the world’s largest financial institutions facing new stringent capital requirements, the Bank of England had been concerned that British banks did not have capital reserves large enough to offset instability in the world’s financial industry.

Earlier this month, the Federal Reserve also released the results of so-called stress tests of America’s largest banks, which indicated that most big banks had sufficient capital to survive a severe recession and major downturn in financial markets. Citigroup and Bank of America, after a disappointing performance the previous year, now appeared to be among the strongest.

British banks were not so lucky.

The reported released on Wednesday said that local banks had overstated their capital reserves by a combined £50 billion, which authorities said would now be adjusted on the firm’s balance sheets. Many of the country’s banks already have enough money to handle the accounting adjustment, the report said on Wednesday.

The country’s regulators also said that British banks must raise a total of £25 billion in new capital by the end of the year, but authorities say they believe roughly half of that amount has already been allocated under the banks’ capital-raising plans for 2013. The Bank of England did not name which firms needed to meet the shortfall.

Analysts said on Wednesday that many of the affected firms had enough time to raise new capital by the end of the year, despite the market volatility caused by the banking crisis in Cyprus.

Local regulators have set a deadline for the end of 2013 for banks to increase their reserves to a core Tier 1 capital ratio, a measure of a bank’s ability to weather financial crises, of at least 7 percent under the accounting rules known as Basel III.

Regulators urged banks on Wednesday to increase their reserves by raising new equity, selling noncore assets or reorganizing their balance sheets. British policy makers are concerned that firms will cut lending to the country’s economy as part of their efforts to increase their capital.

“We need safer banks,” said Andrew Tyrie, a British politician who heads a Parliamentary committee on banking standards. “We also need banks that return to normal lending.”

As part of increased oversight of British banks, the Prudential Regulatory Authority, a newly created division of the Bank of England that will have daily regulatory control of the country’s largest firms, will have a direct say in how banks raise the new capital.

The authority’s board is expected to meet over the next couple of weeks to decide which banks will be forced to raise new money. British firms must receive regulatory approval for their capital-raising plans.

Attention is likely to focus on both the Royal Bank of Scotland and the Lloyds Banking Group, which both received multibillion-dollar bailouts during the financial crisis. The banks, which are part nationalized, have recently announced the sale of some of their divisions, including the Royal Bank of Scotland’s American subsidiary, the Citizens Financial Group, in a bid to raise new money.

“We see R.B.S. as most exposed,” Citigroup analysts said in a research note to investors on Wednesday.

Despite the capital increases being in line with many analysts’ expectations, most British banking stocks fell in early afternoon trading on Wednesday, with Royal Bank of Scotland’s share price tumbling the most, at 3.1 percent.

In a statement, the Royal Bank of Scotland said it had announced plans last month to strengthen its capital position. The Lloyds Banking Group declined to comment.

Others firms are taking a different route. After raising $3 billion in November of so-called contingent capital, or CoCo bonds, which converts to equity if a bank’s capital falls below a certain threshold, Barclays is looking to tap investors again through a similar product.

The push to increase cash reserves for Britain’s largest banks is part of an effort to prevent future financial crises. Starting in 2014, the Bank of England plans to conduct regular stress tests of the country’s financial institutions to check that they have sufficient capital reserves.

Article source: http://dealbook.nytimes.com/2013/03/27/regulators-find-british-banks-must-raise-38-billion/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: More European Bank Loan Sales Expected

January 4, 2013 by Leave a Comment

11:45 a.m. | Updated

LONDON – At the start of 2013, European banks are cleaning out their closets.

The Continent’s largest financial institutions, including HSBC and Deutsche Bank, are expected to sell a combined 60 billion euros, or $78 billion, of so-called noncore loans this year, a 33 percent rise compared with 2012, according to estimates from the accounting firm PricewaterhouseCoopers released on Friday.

The renewed effort to offload unwanted assets comes as European banks are eager to reduce costs and shrink their balance sheets to comply with tougher capital requirements demanded by regulators. Europe’s persistent financial problems also have altered the industry’s economics, leaving many banks with bloated balance sheets and reduced profitability.

A string of recent scandals, including multibillion-dollar fines for the British bank Barclays and its Swiss counterpart UBS related to the manipulation of benchmark interest rates, have placed increased pressure of firms to pull back from underperforming and risky business units.

Many of Europe’s largest banks also have announced wholesale jobs cuts, particularly in their investment banking divisions, while the number of people working in financial services in London, Europe’s financial capital, has fallen to its lowest level since the mid-1990s, according to the British research organization Center for Economics and Business Research.

The fire sale has already included the Royal Bank of Scotland‘s sale of property loans to the private equity firm Blackstone Group and its aviation leasing business to the Sumitomo Mitsui Financial Group, the Japanese bank, for $7.3 billion. HSBC also is considering the sale of United States real estate and personal loans worth a combined $6 billion after it already offloaded a number of operations in emerging markets like Pakistan and Colombia to local competitors.

“Banks have been doing the right thing by selling off loan portfolios,” said Richard Thompson, a partner at PricewaterhouseCoopers in London. “Some of stronger firms also may now be looking to pick up assets on the cheap.”

PricewaterhouseCoopers said that it expected that European banks would focus on corporate and real estate loan disposals, particularly in countries like Spain where prices in the local housing market fell 15 percent annually in the third quarter of last year, according to the latest available government figures.

The creation in Spain of a so-called bad bank that will oversee the sale of up to 60 billion euros of unwanted assets like delinquent mortgages and unsold real estate on behalf of local banks is also expected to draw interest from potential buyers.

European banks are keen to sell, but bankers and lawyers say financial institutions continue to demand high prices for assets despite the glut of loan portfolios up for sale. So far, analysts add that differences over price have kept potential buyers, including private equity firms that specialize in distressed assets, from picking up more underperforming loan assets because the firms believe they remain overvalued.

Last year, the average discount on loans for a range of unwanted European bank assets was 20 percent to 50 percent, according to PricewaterhouseCoopers. That percentage is expected to rise this year, though analysts say the banks’ access to cheap short-term financing from the European Central Bank has given them some breathing room to demand higher prices for their unwanted assets.

“In 2012, we saw a large number of different banks bringing their portfolios to market,” Mr. Thompson said. “The issue of price will clearly remain a key challenge in future for sellers.”

European banks still have a lot of work to do.

PricewaterhouseCoopers estimates that firms still have more than 2.5 trillion euros of noncore loans that they are looking to sell. As the 60 billion euro estimate for loan portfolio sales in 2013 represents just 2.4 percent of that total, Europe’s banks are likely to remain eager sellers for many years to come.

Article source: http://dealbook.nytimes.com/2013/01/04/more-european-bank-loan-sales-expected/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

China’s Banking Leaders Seek to Calm Concerns Over Lending

November 12, 2012 by Leave a Comment

The regulators and bank chairmen said during a rare joint news conference that they were managing the industry prudently and that effective measures had been taken to limit risk even as lending expands briskly.

“The risks are within control,” Shang Fulin, the chairman of the China Banking Regulatory Commission, said on two separate occasions.

Loans have been climbing steeply as a share of the economy for four years, prompting foreign bank analysts to question the sustainability of an economic model based on ever more debt invested in a wide range of industries that are already facing overcapacity.

Chinese households and businesses have also begun shunning the very low, regulated interest rates offered by the giant state banks in favor of more speculative financial products. The central bank has been helping commercial banks sustain extremely heavy lending this autumn by pumping record sums of money into the financial system.

Commercial banks have also shifted toward a heavy emphasis on one-year loans to corporate borrowers instead of multiyear loans, even for construction projects that may take years to complete. The one-year loans make bank loan portfolios appear less risky on paper, but their use in financing multiyear projects means that it might be almost impossible to actually collect the money after one year, because that would prevent the project from being completed.

Chinese banks have spread their loans across a wide range of sectors, like autos, steel and solar panels, to limit risk, Mr. Shang said. Nonperforming loans represent a smaller percentage of assets at Chinese banks than is typical for large banks around the world.

Foreign analysts have warned that borrowers in many industrial sectors have used bank loans to speculate in real estate, so that the banking sector may have an unintentionally large exposure to the country’s real estate market.

Foreign analysts have also been skeptical of the low proportion of nonperforming loans. They say that a torrent of loans issued in 2009 and 2010 to bail the country out of the global financial crisis has not had time to produce a lot of bad loans. They also suggest that a renewed burst of lending this autumn is helping troubled borrowers, at the risk of racking up even larger debt on which they may default later.

The rapid increase in corporate lending has helped pull the economy out of a downturn that occurred over the spring and summer, but it has also increased debt burdens considerably in the corporate sector.

“We need reform-inducing productivity growth, not more leverage, in 2013,” said a research note on Saturday from Stephen Green, the China economist in the Hong Kong office of Standard Chartered.

The joint news conference was not held because of any imminent concerns about the Chinese financial system, but was arranged by the spokesmen for the 18th Party Congress after domestic and foreign journalists submitted a flood of requests in the last week for interviews with the country’s banking sector leaders.

Zhou Xiaochuan, the governor of China’s central bank, the People’s Bank of China, briefly acknowledged on Sunday night that the rise of a less-regulated “shadow banking” system would result in risks being transferred from banks to other entities in China. But he said that most nonbanks engaged in lending were subject in various ways to government regulation.

Mr. Zhou made several comments about less-regulated financial activities in other countries that could be construed as criticisms of the United States and Europe after the global financial crisis, although he was careful not to identify specific countries.

In China, he said, “It is not like what is happening in some other countries, whose nonbank sectors are out of control.”

Mr. Shang said he wanted Chinese banks to offer a more diverse array of financial products, although such a move might lead to the need for greater risk controls and credit assessment procedures.

Wang Hongzhang, the chairman of the China Construction Bank, which is one of the Big Four, said at the joint news conference that his bank had too many of its assets in loans and that it was looking for ways to expand in trusts, insurance, leasing, precious metals and international operations.

The other Big Four institutions are the Bank of China, the Industrial and Commercial Bank of China and the Agricultural Bank of China. Charlene Chu, a China banks analyst at Fitch Ratings, said later in a telephone interview that the shift by Chinese banks toward one-year loans could have some advantages.

“That has to do with the banks becoming more conservative,” she said. “It allows them to reassess borrowers and decide if they want to cut them off.”

Patrick Zuo contributed research.

Article source: http://www.nytimes.com/2012/11/12/business/global/chinas-banking-leaders-seek-to-calm-concerns-over-revived-growth.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,