September 17, 2019

DealBook: Private Equity Seeks European Bank Assets, but Deals Are Slow to Come

BERLIN – Private equity is circling Europe’s banks.

Faced with bloated balance sheets and efforts to cut back on lending, the Continent’s largest financial institutions offer enticing opportunities for leading firms like Apollo Global Management and Kohlberg Kravis Roberts.

For some, the chance to pick up loan portfolios, particularly from nationalized firms like Royal Bank of Scotland, at a hefty discount is tantalizing. Other are enticed by the ability to provide financing for strapped companies that can’t get credit from traditional lenders.

There’s just one catch: European banks aren’t playing ball.

More than $1 trillion of cheap, short-term loans from the European Central Bank have given banks extra breathing room, allowing them to hold on to some troubled assets like defaulting real estate loans. Local politicians also have strong-armed industry giants to offer lending to companies in a bid to jump-start growth across Europe.

The limited deal flow, particularly for so-called distressed assets like consumer lending portfolios, contrasts with the high hopes that many private equity firms initially had about picking up assets on the cheap.

“The ratio of hype to substance about banks deleveraging their balance sheets has been exceptionally high,” Nathaniel M. Zilkha, the global co-head of special situations investing at K.K.R., told a packed conference room at the Super Return private equity conference in Berlin on Tuesday. “Sitting outside the offices of Royal Bank of Scotland waiting for the flood of assets is a difficult strategy.”

Still, some deals are getting done. Banks are pulling back from international markets where they have small operations, and European governments that bailed out local lenders are forcing asset sales to wind down bad investments.

Last year, Apollo Global Management, for example, picked up consumer lending businesses in Ireland and Spain from Bank of America, as the American bank pulled back from the struggling European economies. K.K.R. also pocketed an Australian loan portfolio from the Lloyds Banking Group of Britain, which is 42 percent owned by local taxpayers after being bailed out during the financial crisis.

“Some banks have to sell,” said David Abrams, the head of European nonperforming loan investments at Apollo. Others “want to sell to get out of noncore markets.”

Private equity firms, though, are still waiting for the long-awaited fire sale by European banks.

Mr. Abrams of Apollo said the combined balance sheet of the Continent’s financial institutions is still more than $60 trillion, compared with around $12 trillion for United States banks.

With limited economic growth projected for the foreseeable future in Europe, private equity firms are still hoping that banks will be forced to increase their asset sales, especially ahead of new capital requirements that will make it more costly to hold on to delinquent loans.

Firms also are looking to muscle in on European banks’ monopoly in the lending market.

Since the downturn, many institutions have pulled back from financing companies and buyouts as they look to reduce their exposure to risk. They also are changing their business models from holding large debt portfolios on their balance sheets to reducing the size of the financing and looking to shed the investments to other investors.

“Banks are massively changing their commitments” to new lending, said Robin Doumar, managing partner at Park Square Capital, one of the private equity firms looking to fill the financing void.

The strategy for private equity includes offering debt financing for buyouts, as well as complex financing options like so-called mezzanine loans.

While banks are expected to remain important lenders for European deals, analysts expect private equity lenders to increasingly take a larger share of the business.

“Banks are not out of business, they are just doing it in a smaller way,” said Blair Jacobson, a managing director in the private debt group of Ares Management, a firm that offers financing options to companies. “The market opportunity for what we are doing is immense.”

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DealBook: Citigroup to Cut 11,000 Jobs and Take $1 Billion Charge

A Citibank branch in Manhattan. The bank has been sharply reducing its expenses.Andrew Gombert/European Pressphoto AgencyA Citibank branch in Manhattan. The bank has been sharply reducing its expenses.

1:22 p.m. | Updated

Citigroup announced on Wednesday that it would cut 11,000 jobs, reducing its work force by roughly 4 percent in an effort to cut costs.

Under the reduction, 1,900 jobs will be eliminated in the institutional clients division. Another 6,200 positions will be removed from the bank’s consumer banking business, along with 2,600 jobs in the operations and technology group.

Since 2007, the bank has slashed its workforce by 33 percent, leaving it with about 250,000 employees today.

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The reductions at Citigroup come after the bank’s powerful chairman, Michael E. O’Neill, engineered the ouster of its former chief executive, Vikram S. Pandit, and named a handpicked successor, Michael L. Corbat, according to several people close to the bank.

Since the power change in October, which stunned Wall Street, there has been unease throughout the upper ranks of Citigroup, according to the people. Some within the executive ranks have been worried that Mr. O’Neill, acting through Mr. Corbat, would quickly pare down the bank.

Citigroup Michael Corbat, 52, the new chief executive of Citigroup, led Citigroup's bad bank, which sold off troubled assets.Jason Kempin/Getty ImagesMichael Corbat, 52, the new chief executive, led Citigroup’s “bad bank,” which sold off troubled assets.

“These actions are logical next steps in Citi’s transformation,” Mr. Corbat said in a statement. “While we are committed to – and our strategy continues to leverage – our unparalleled global network and footprint, we have identified areas and products where our scale does not provide for meaningful returns.”

The bank said it would take a pretax charge of roughly $1 billion in the fourth quarter and $100 million of related charges in the first half of 2013. In the third quarter, Citigroup reported a profit of $468 million, or 15 cents a share.

When Mr. Corbat took on the role of chief executive in October, he told analysts he intended to continue a strategy at Citigroup of focusing on the bank’s core businesses.

The cuts were made after exhaustive meetings in November involving virtually every head of the bank’s businesses at Citigroup’s headquarters in New York, according to several senior executives at the bank. The mandate was to find ways to reduce costs.

Earlier this week, Mr. Corbat briefed the board about the job cuts.

Citigroup has had a turbulent recent history, after teetering on the brink of collapse during the financial crisis and receiving a $45 billion lifeline from the federal government. After emerging from the financial crisis, it has been sharply reducing its expenses and trying to shed even more troubled assets in an effort to restore the bank to its past profitability.

But those efforts have been dogged by missteps and turmoil. In March, for example, the Federal Reserve dealt a stunning blow to Citigroup when it scuttled the bank’s plans to raise its dividend or increase share buybacks. Shortly afterward in April, the bank’s shareholders, in a rare move, voted against a $15 million pay package for Mr. Pandit.

Executives at Citigroup are still struggling to rein in the bank’s business and work through a mass of bad assets in its Citi Holdings unit.

When Mr. O’Neill joined the board in 2009, he was intent on reducing costs in the bank’s vast operations. Mr. O’Neill has had practice turning around an underperforming bank, having steered Bank of Hawaii to profitability earlier in his career.

His plans, according to several former colleagues, typically involve ruthless cost-cutting, often resulting in bank branches being closed. In its announcement on Wednesday, the bank said 84 branches worldwide would be closed.

The bank’s shares rose about 6 percent by afternoon.

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