Canadian banks play waiting game for euro assets
Phones are ringing steadily in the offices of Canada’s big banks as capital-starved European lenders seek buyers for assets.
Facing a hole that has been pegged at about €100-billion ($140-billion) to insulate themselves from coming losses on sovereign debt, European banks have put on sale everything from loan portfolios to full businesses, say people familiar with the situation. They need to raise a lot of money to absorb the financial hit, and they need to do it soon.
Canada’s banks are in good shape and are among the few buyers of assets in the financial world, so they are among the first calls. For companies like Royal Bank of Canada and Canadian Imperial Bank of Commerce, which want to get bigger in the asset management business, there are plenty of tasty morsels on offer.
Yet so far, the six biggest Canadian banks are saying no, with a few exceptions, such as National Bank of Canada’s purchase of an investment management business from HSBC Holdings PLC for $206-million.
As a result of doubts about the economic picture, continued scrutiny from banking watchdogs and poor timing – Canadian institutions are about to do their year-end strategy reviews – the banks aren’t buying.
And there’s a belief in some of Bay Street’s bank towers that better deals will come to those who wait – that European banks have not cut their prices as much as they will be forced to do, by the time the euro zone mess is cleaned up.
The fact that the Canadian banks, among the best hopes for cash-strapped sellers, are turning away from deals highlights just how tough it’s going to be for Europe’s banks to raise the money they need in ways that don’t hammer shareholders.
It has taken months for European governments and regulators to accept that banks must be recapitalized, as major U.S. banks were in 2008-09, and to agree on a number for how much capital is required. That grind may well prove to be the easiest part of this whole exercise.
Sovereign wealth funds that were a big source of capital for banks in the first wave of the financial crisis are likely to be gun shy after it turned out that many bought far too early. Who wants to be the banker tasked to call Singapore’s Temasek Holdings, which took a loss estimated at $5-billion after buying stock of Merrill Lynch & Co. when it was seeking capital in 2007, to ask about helping another floundering institution?
The result is that no matter what European banks sell to raise the capital – whether it’s entire business units, loans or common stock – it’s going to come at a bigger discount than the banks are yet in the mood to give. That means a large dose of pain for current common shareholders. Investors will get a clearer picture Wednesday, when a bank-by-bank breakdown of the expected capital needs is slated for release. If the numbers for individual banks are worse than expected, expect a nasty fight: The banks will argue strenuously that they don’t need to raise as much new money as European Union finance ministers say they do.
The irony is that the scrap could be made doubly nasty by changes that regulators have insisted upon in recent years. Bank bosses are increasingly (and rightly) compensated in stock as part of an effort to tie pay to performance, so they are naturally going to want to avoid hurting the value of that stock with big share issues to raise capital. They would be much more likely to try to protect the value of the stock by instead cutting back on lending as a way to increase capital levels, something that would act as a brake on already-slowing European economies.
In that environment, governments in Europe are likely going to have to force capital on banks that say they don’t need it. For some of the euro zone’s biggest banks, that will make it more palatable to sell prime businesses on the cheap.
Canadian banks may yet get the assets they have their eyes on for a song.
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