European banks are about to end a decidedly challenging year. The deterioration of the economic situation affected the economic balance. At the same time, the process of adjusting to the new market structure has become more intense and urgent.
There are three main factors pushing banks towards a profound transformation: the unfavorable evolution of the economic situation; the process of rewriting the international financial rules, a process which took further steps forward in 2012, in some cases entering the implementation phase; lastly, the negative outlook for some important sectors of activity is of significant importance, an evolution that appears to be structural in many respects.
The density of the problems and the scope for possible adjustments vary significantly from country to country, largely due to the uneven severity of the wounds caused by the financial crisis that began in mid-2007, a crisis which in some countries combined with the outbreak of a housing bubble. In many countries the separation between the companies forced to undergo a strong downsizing process and the rest of the system which, albeit with difficulty, seems able to start the necessary transformation processes is becoming increasingly clear. Similarities and differences emerge in the experience of the United Kingdom, Germany and the Netherlands.
European banks are about to end a decidedly challenging year. On the one hand, the deterioration of the economic situation has conditioned the economic balance, on the other hand, the process of adjustment to the new market structure has become more intense and urgent.
The final balance for the first nine months of 2012 is not brilliant
The final balance for the first nine months of the current year is complex to read. In a sample of 18 of the major banks of the Old Continent, only six groups appear to have recorded an increase in the net result compared to the corresponding period of 2011. Of the six improvements, one (Unicredit) is due to the absence of a one-off charge recorded the previous year while in another case (Lloyds Banking Group) the progress is in any case insufficient to avoid a new loss for the year. The decrease in net profit for the entire sample is equal to an average of 37% but if we exclude the six banking groups that recorded an improvement in the accounting result, the decrease is equal to 67%.
However, it is essential to underline that the final balance for this part of 2012 is strongly and negatively conditioned by the application of the fair value option3, an accounting procedure which in 2011 had instead allowed a substantial improvement in the final result. On the other hand, however, last year many banks in the sample had to write down Greek securities with a total cost of €9,1 billion.
Looking at the items of the income statement that more directly reflect the performance of the operating activity, it can be seen that the limited decrease in revenues (-1,8% y/y, equal to €6,1 bn) was partially offset by the decrease of credit losses (-4,5%, equal to €2,5 bn), an improvement that was ignored by Italian, Spanish and Dutch banks.
The factors that make change urgent
Three problems above all prompted a significant commitment from European banks in 2012. The first is represented by the evolution of the economic situation in the old continent: if at the end of 2011 the start of a moderate recovery (+1%) was assumed, the final balance that emerges for the current year is of a very different quality ( -0,5%). According to Eurostat, in the third quarter of 2012 the trend growth rate was negative in 15 of the 27 EU countries, 11 of which belong to the euro area.
Secondly, the process of rewriting the international rules took further steps forward in 2012, in some cases entering the implementation phase. Among the steps completed, we must mention the entry into force in January of the so-called Basel 2.55 regulation which increased the size of weighted assets in very different ways: to an important extent in countries where financial intermediation is a significant component of the activity of large banking groups (+18% in Switzerland, +11% in Germany); on the other hand, in a limited way, where banks are mainly engaged in lending (+3% in Italy).
In June 2012, the capital strengthening required by the European Banking Authority (EBA) was completed with the aim of positioning the Core Tier 1 of all the major European groups at a level of no less than 9%, assuming the portfolio situation of sovereign bonds outstanding as at 30 September 2011. At the end of the first phase (December 2011) 27 of the 71 groups considered were unable to reach the minimum threshold and consequently invited to adopt appropriate measures by June 2012 to fill the capital deficit. As of July 2012, all banks (except four) appear to have achieved the objective, overall exceeding even the initial request of the EBA (€115,7 bn compared to the €76 bn initially estimated as the minimum necessary). Almost three-quarters of this strengthening was achieved by directly increasing capital endowment6 and the rest (28%) through interventions more directly attributable to weighted assets.
The capital strengthening requested by the EBA largely anticipates the launch of the Basel 3 rules, for which, however, a postponement with respect to the date already set (early 2013) is assumed.
The third type of circumstance that requires a profound revision of the operating profile consists of the unfavorable evolution of some market sectors, an evolution to which the circumstances just mentioned are not extraneous (trend of the economic situation, rewriting of important parts of the financial regulations) . It is therefore, at least in part, a structural phenomenon. The most immediate example in this regard is the sharp decline in investment banking, an activity which in the recent past has contributed to determining around half (in some cases even more) of the total revenues of some major European groups (Crédit Suisse, Deutsche Bank, Barclays, etc.). In terms of employment, the downsizing process of this sector has come close to 10%, with the perception not only of a further possible worsening but also of its predominantly structural nature.
