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European banks have offloaded more than billions of euros worth of unwanted loans since 2010. Where does that leave the corporate borrower?
Andrew Sawers, CFO.com | US
August 17, 2012
The still-overleveraged European banking sector was sitting on noncore loan assets at the end of 2011 worth €2.5 trillion. These loans are considered by lenders to be nonstrategic and could potentially be sold to other banks or financial buyers such as insurance companies, hedge funds, or sovereign wealth funds.
Moreover, at least €1 trillion of those loans are considered to be nonperforming, a report from PricewaterhouseCoopers reveals. Driven by the need to improve their returns and comply with incoming capital-adequacy rules, banks disposed of loans worth €36 billion in 2011, up from just €10.8 billion in 2010. In the first six months of 2012, banks have offloaded loans worth €26.6 billion, with PwC expecting total disposals to reach €50 billion for the full year.
While this represents considerable growth in the market for noncore bank assets, it's still just a small slice of the potential disposals. "The deleveraging process is likely to be a very protracted one," the report says.
Some of these assets are consumer mortgages or credit-card debts. Corporate borrowing also features in the mix, however, raising an interesting question: how does the disposal of a loan disrupt the whole relationship between the corporate borrower and the bank if the bank offloads the funding side to a third party?
Along with the funding arrangements, corporations will likely have transaction banking, cash management, foreign exchange, working capital loans, revolvers, or swaps arrangements in place with their bank.
Richard Thompson, a partner at PwC and a co-author of the report, says the loan dump poses complex problems for banks. "One of the challenges for the banks as they seek to deleverage or reshape their balance sheet is, how do you disentangle this web of lending? How do you decide which relationships you want to retain and which relationships you do not want to retain?" he told CFO European Briefing.
Thompson says that when a bank tells a corporate it is no longer a "core" client, "that's an incentive for the company to go off and try and find other lending," he says. Indeed, it's another way for the banks to deleverage — by simply encouraging particular customers to go away.
He points out, however, that noncore borrowers are not necessarily undesirable: they may simply not suit their bank's strategy anymore. "It's actually a case of banks looking to reshape the balance sheet. They're saying, 'Look: I'm overweight lending to this sector; I'm underweight to this sector.' Or, 'I just don't want to be in this territory anymore.'" It may actually encourage noncore clients "to go off and find another bank that's going to be more committed with extra facilities," he adds.
For those loans that are packaged and sold, banks are in many cases taking some care with regard to the sale arrangements, Thompson says. They may refuse to deal with certain buyers or impose covenants that restrict what the buyers can do with the loans for the first six months, say, to prevent them being heavy-handed with the banks' soon-to-be ex-clients. "A lot of it is reputation management," he explains. "The banks want to take care because, in simple terms, you won't sell to someone who can use a great big baseball bat [to recover the debt]."
Some banks are even going so far as to transfer their own teams with the loans: that gives some continuity of management between borrowers and the new owners of the loans. It also gives the buyers of the loans extra comfort because of what the management team knows about the borrowers' industry and collateral. "That knowledge is very valuable to someone buying the loans in terms of thinking, How do I recover my money? How do I manage this credit?" Thompson says.
Andrew Sawers is editor of CFO European Briefing, a CFO online publication.