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BNP Paribas SA
JPMorgan Chase & Co
Societe Generale SA
Carlyle Group LP/The
Royal Bank of Scotland Group PLC
European banks pledged last year to cut more than $1.2 trillion of assets—about 3 percent of their total—to help them weather the sovereign-debt crisis. Bank executives said they would sell divisions and loans and rein in lending to reduce short-term funding needs and increase capital. Instead, the banks have grown fatter.
Lenders in the euro area increased assets by 7 percent to €34.4 trillion ($45 trillion) in the year ended July 31, according to data compiled by the European Central Bank. BNP Paribas (BNP) and UniCredit (UCG), the biggest banks in France and Italy, expanded their balance sheets in the 12 months through the end of June.
They have ECB President Mario Draghi to thank. His decision nine months ago to provide more than €1 trillion in three-year loans to regional banks eased the pressure to sell assets at depressed prices. The infusion, designed to encourage banks to lend, succeeded in averting a short-term credit crunch by reducing their reliance on markets for funding. It also may be making European lenders dependent on more aid from the central bank. “Deleveraging isn’t taking place, especially in Spain and Italy,” says Simon Maughan, a bank analyst at Olivetree Securities in London. “The fact that we haven’t got on with it, or very slowly, suggests that when the time comes we’ll need another ECB injection to roll over the first one.”
Analysts had expected that European lenders would have to shrink as regulators requested higher capital, and investors, who became less convinced that governments would be able or willing to bail out their largest banks, demanded bigger returns for lending to those firms. The International Monetary Fund forecast in an April report that banks would shrink by as much as $3.8 trillion and curb lending. The IMF estimates such cutbacks could reduce euro-area gross domestic product by 1.4 percent.
Thanks to the ECB program, lending to households and companies in the euro area held steady this year. Total loans rose to €18.6 trillion as of July 31 from €18.5 trillion at the end of 2011, according to data from the ECB. The central bank said in its monthly report released Sept. 13 that the “supportive impact” of the longer-term refinancing operation, or LTRO, “prevented abrupt and disorderly deleveraging, which could have had severe consequences for the economy.”
Some lenders used the ECB’s loans to purchase sovereign bonds. Since they earn more on the bonds than they pay on the loans, banks can reap about €12 billion of profit a year, according to estimates by Nikolaos Panigirtzoglou, an analyst at JPMorgan Chase (JPM) in London. For lenders in southern European countries, that strategy could backfire. Prices of bonds sold by the governments of Spain and Portugal fell to record lows this year because of concern on the part of investors that those nations would require bailouts.
Banks have sought to sell performing loans, which carry higher prices, or some of their best businesses, to avoid taking too big a loss. Société Générale (GLE) sold its U.S. asset-management unit, TCW Group, last month to private equity firm Carlyle Group (CG) for less than the $880 million the bank paid for it in 2001, according to people familiar with the transaction. The Paris-based lender also is close to selling €800 million of mortgages to insurer Axa’s real estate unit at a discount of less than 10 percent of face value, people with knowledge of the deal said last month. “We have started the disposal program, and we’re going to carry on that in the next few quarters,” said Société Générale Chief Executive Officer Frederic Oudéa in a Sept. 12 interview.
Other banks are moving far more cautiously. The delays could lead to what Alberto Gallo, a London-based analyst at Royal Bank of Scotland (RBS), calls the “Japanification” of the banking system, a prolonged period during which lenders are slow to clean up their balance sheets. “We’ve gone from a risk of an accelerated deleveraging to the opposite,” he says. “It’s a better scenario for the economy, although it shouldn’t translate into complacency.”
The bottom line: After pledging to shrink their balance sheets by $1.2 trillion, European banks increased assets to $45 trillion in the year through July.