Deloitte Expects European Bank Deleveraging to Continue to 2017 or Beyond

European banks continue to face huge challenges in deleveraging to improve their capital position, according to Deloitte.

The business advisory firm, which has issued a new banking report, said that five years after the start of the banking crisis, nearly three-quarters (71%) of financial institutions surveyed  expect European bank deleveraging to take at least five more years to complete.

The report, titled ‘Capital Gain, Asset Loss, European Bank Deleveraging’, also reveals:

  • More than half of banks (56%) expect to resize through run-offs – greater than the proportion (46%) that expect divestments to play an important role in deleveraging. Asset sales, which played a bigger part in past crisis, are proving difficult in Europe.
  • More than two-thirds of respondents rated price disagreements between buyers and sellers as a major barrier to sales of loans, while 59% cited finding a buyer as the biggest problem.
  • Two-thirds of banks say that deleveraging plans represent less than 7.5% of their total assets.

“Deleveraging is the single biggest challenge facing banks across Europe,” said Zahir Bokhari, lead UK banking partner at Deloitte. “In normal circumstances, banks have a range of options for improving capital ratios including, for example, equity raising, generating and retaining earnings and selling assets.

“However, a stagnant economy and eurozone volatility is making it extremely difficult for banks to raise capital by issuing new equity or through increased profitability. Instead, they are relying on defensive strategies, including deleveraging their balance sheets, to improve capital ratios. The survey shows respondents believe natural run-off will play the most important role in asset reductions, particularly in countries affected by the eurozone debt crisis where there are fewer potential buyers.

“Disagreements over valuations are the biggest barrier to sales. Buyers of European assets are demanding higher risk premiums, while banks are reluctant to sell assets at a loss. Instead, many prefer to run-off assets, hold them until either valuations improve or their capital position is healthier providing greater leeway in price negotiations.  These factors explain why the period of deleveraging for European banks is likely to be much longer than the experience of previous banking crises.”

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