The €5.5bn bailout of Franco-Belgian financial institution Dexia last week by its respective governments, alongside the 2,350 job losses at ING and 10,000 axed jobs at UBS as it exited the fixed income business, all point to further instability in the banking sector and a need for renewed vigilance by corporate treasurers to stay on top of their counterparties.
Those treasurers who steered their corporations through the great financial crash of 2008, as financial institutions such as Lehman Brothers, AIG and others fell around them, may have thought that the worst had passed, especially as advantageous credit facilities once more became available in the low-interest environment and global quantitative easing oiled the wheels of finance.
Some treasurers might be glad of those credit lines, however, or of the post-crash work they have done since 2008 to diversify bank and counterparty risk programmes, after the third bailout of Dexia in four years on 9 November. The French and Belgium governments put a further €5.5bn into the bank after it reported a Q312 net loss of €1.23bn, which will see France provide €2.59bn and Belgium €2.92bn in exchange for preference shares that give them first rights to any value the group might eventually yield. Any future return from Dexia is an extremely unlikely scenario though with propping up the institution as its ‘orderly’ dismantling continues the prime purpose behind the move.
Beware the Zombie Banks
The shattered European banking sector is once more creaking under the weight of the eurozone-crisis inspired markdown in property values, slow growth and slightly more realistic bank stress tests – not to mention worries about the future challenges the European banking sector will face in meeting increased post-crash capital adequacy requirements like Basel III. Dexia is just the latest instance of this renewed squeeze, although it is of course a so-called ‘zombie bank’ with almost 95% of it owned by the French and Belgian governments after this latest action and there appears to be no intention that it will return to the active lending market in any meaningful way.
As the 2008 crisis taught treasurers, such stresses tend to work their way through to other banks in other parts of the world. Europe’s problems could mean treasurers reactivating a bank risk assessment policy and guarding that low-interest credit facility. If, like many large multinational companies you are sitting on a large cash reserve, then making your own investments or issuing commercial paper may start to look even more attractive than it already is, as more and more banks make a hasty retreat from lending. Société Générale (SocGen) and Commerzbank, two of the eurozone’s biggest banks, reported disappointing financial results for Q312 themselves, with the former suffering a net fall in profits of 80% to just €85m, while the latter reported a similarly dismal net profit of €78m. With job cuts at ING and UBS the banking sector as a whole is looking less able to support the needs of corporations.
Dexia has an exposure of €89bn to France, with its latest losses stemming mainly from a write down on the value of its stake in the Dexia Credit Locale unit in the country and a loss it has recognised from the sale of its Turkish DenizBank subsidiary. It has a €24bn exposure in Spain, €38bn to Italy and €24bn to the US and Canada, according to The Times, with its core Belgian operations even more exposed. The bank was bailed out in 2008 with €6.5bn of state aid and Belgian taxpayers rescued its crucial retail banking operations in the country last October, when an orderly dismantling of its wider operations was agreed upon. Beware the third quarter reporting season at Dexia it seems, never mind the Ides of March. The bank’s continued exposure to the deteriorating Spanish market is particularly troubling as that country still faces a likely sovereign bailout itself if it cannot get its ravaged banking sector back from the brink of collapse caused by the Caja banks’ overvalued property assets.
The chief executive officer (CEO) of Dexia, Karel De Boeck, effectively its administrator, admitted the scale of the divestiture needed at the results announcement when, according to press reports, he said: “A total and immediate liquidation of Dexia is not possible. It would cost a mad amount of money.”
Treasurers should watch out for the unveiling of any more such ‘zombie banks’ in the eurozone ahead of time, if they have not already done so. Getting locked up in the mummified embrace of such an institution, or even exiting it if a treasury is unfortunate enough to have such an institution as a partner, will not be easy.
There is no suggestion that ING’s shedding of 2,350 jobs on 8 November as part of its agreed separation of its insurance and banking units post-crash or of UBS’ axing of 10,000 jobs after announcing its planned exit from fixed income trading, herald impending ‘zombie’ status for these august institutions; the action is merely a staunching of the bleeding from overseas and a pay-off for state aid received in 2008.
ING expects to achieve annual savings of €260m from 2015 onwards in its banking business and €200m by the end of 2014 in insurance. The bank has already sold its stake in US bank holding company Capital One, and agreed to sell its overseas ING Direct retail banking operations in Canada and the UK. Barclays said last month that it will buy the mortgage and deposit books of ING Direct UK, respectively worth £10.9bn and £5.6bn, for an undisclosed sum, subject to regulatory approval in the New Year. It will gain 1.5 million customers and around 750 members of staff. According to the CEO, Jan Hommen, the restructuring will “increase the agility” of ING in an uncertain environment, but in reality it will strengthen its position in its home Dutch market.
For UBS the three-year programme to axe 10,000 jobs and exit the fixed income trading business, centred in London, is aimed at achieving cost savings of Swiss francs (CHF) 3.4bn, on top of existing spending cuts of CHF2bn, which accrue from already announced job losses of 3,500 jobs in London.
The slimming down of UBS’ global investment banking operations will result in a 16% reduction from its current 64,000 payroll and compares with a peak of 83,500 employed back in 2007 before it required a US$50bn bailout from the Swiss government. The US$2.3bn hit in September last year from the activities of rogue trader Kweku Adoboli – who is now on trial in London on charges of fraud and false accounting for his allegedly unauthorised exchange-traded funds (ETF) positions – further damaged the reputation of the bank.
In future, the bank will concentrate on retail and commercial banking in its home and core markets, with an international private bank and a much smaller investment bank offering investor services, but no fixed income trading or ‘casino’ bank-type operations.
As UBS’ CEO Sergio Ermotti and chairman, Axel Weber, outlined in a letter to shareholders: “We will no longer operate to any significant extent in businesses where risk-adjusted returns cannot meet their cost of capital”.
All this is just a reminder for treasurers to look to themselves for the foreseeable future as the banking sector continues to struggle.
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