Business, Emerging Markets, China, United Kingdom, Hong Kong, India - Thu October 11, 2012

BANK DELEVERAGING: Moving out

European banks are pulling back from emerging markets globally. The real surprise is not the pace of retreat but the speed at which the gaps are being plugged

Wherever you look around the world, Europe’s wheezing banks are in retreat, wrenching themselves away from emerging markets they worked so hard to enter, at an almost alarming rate. As they slink home to shore up capital and preserve their dwindling reserves of credibility, they leave yawning gaps that are in most (but not all) cases quickly and happily filled by non-European rivals.

More than a few observers, noting the alarming pace of retreat, are offering up a brace of thoughts. Is this, in terms of long-term global reach and relevance, curtains for Europe’s battered banks, and if it is, will anyone really miss them?

Lest anyone doubt the scale of this financial retrenchment, it’s worth considering a few salient statistics. In the first eight months of 2007, the last calendar year of growth before the financial crisis, the global syndicated loans market was dominated by European banks. Eleven filled the top 20 rankings, according to Dealogic, with five in the top 10 alone. Scroll forward five years and only two names, Barclays and Deutsche Bank, sneak into the global top 20.

Drill down and this retreat becomes yet more startling. In the first eight months of 2007, nine European lenders jostled for position at the sharp end of the pan-Asia Pacific syndicated loans markets. By 2012, just two names, HSBC and Standard Chartered, featured in the top 20, and both, it can be argued, are emerging markets specialists with their roots and futures fixed firmly in Asia.

The most notable national absence involves France’s leading standard bearers: the likes of BNP Paribas, Société Générale and Crédit Agricole, names that once bestrode Asia, particularly in areas like trade and project finance.

In just five years, all three have disappeared almost entirely from every conceivable bank ranking. Indeed, if there is any danger posed to Asia by Europe’s retreat, it’s probably here. “[The fall-off of] project and trade finance is a key problem [in Asia],” says Gerard Lyons, chief economist at Standard Chartered in London. “That was a problem at the time of the Lehman Brothers crisis [four years ago] and it remains an ongoing issue as European banks depart.”

That part of the story, it seems, is the same wherever you go. The only factor that changes involves the scale and speed of Europe’s retreat. In Africa, the pace of extraction is slower but just as systematic. In Latin America, some European names are selling off the silverware piece by piece; others simply cannot appear to get out fast enough.

Asia is perhaps the most dynamic chapter in this tale. What has surprised market watchers here isn’t so much the pace of the retreat, but the haste with which holes left by retreating European banks have been so easily plugged. Europe’s mass departure has been treated with a mixture of unrestrained glee and raw opportunism across Asia; whenever a European financial asset has been on the block, buyers – mostly Asian – have flocked to buy it. Rarely does a month go by without some European lender or other flogging a range of assets once proudly touted as a symbol of its global aspirations. Western lenders, reckons RBS Capital Markets, sold $12 billion worth of equity stakes in emerging markets in the 24 months to end-June 2012 – and over half of that sell-off has taken place in Asia.

In most cases, buyers have outnumbered sellers. In January 2012, HSBC sold its credit card business in Thailand to Bank of Ayudhya for $115 million. Five months later, Malaysia’s CIMB completed a deal to buy most of RBS’s Asia investment banking and cash equities business for $142 million. That added more than 260 staff to CIMB’s books in Hong Kong, mainland China, India, Australia, New York and London, giving the group instant global scale.

And still the deals roll in. The troubled Dutch financial group ING is seeking to shed assets as fast as it possibly can: it is currently trying to sell its €43 billion Asian funds business, it has already divested a majority stake in its Chinese life insurance joint venture, Pacific Antai, to China Construction Bank, and is now looking to exit its 26% stake in an insurance joint venture with Indian battery producer Exide Industries.

ANZ meanwhile is still absorbing its $550 million acquisition to buy the bulk of RBS’s Asia retail banking assets, though the Australian banking group under its acquisitive chief executive Mike Smith is hungry for more deals.

Richard Jerram, chief economist at Bank of Singapore, the private banking subsidiary of another Lion City lender, OCBC, says the impact of deleveraging across the region has been “much less serious” than was first feared. “Financial institutions across [Asia] are in good shape, and have been able to fill the gap left by European banks,” he says. Indeed, the experience has even been a net positive as “it has created business opportunities for Asian banks [and] reduced regional sensitivity to Europe. We have even seen pan-Asian lending from banks in the region increase as a result.”

Europe’s woes are well documented and often self-inflicted. This round of deleveraging – lasting from mid-2009 to the present day – has been led not by Asian officials seeking to crimp European expansion, but by what critics called short-sighted regulators in Brussels, Paris, Frankfurt and London desperate to boost liquidity to avoid a repeat of the financial crisis.

European lenders, indeed, are facing a double whammy. The first is regulatory: Basel III rules insist on tier-one capital levels of at least 9%. The second is political: pressure brought to bear on, say, French banks by French politicians to ensure that French banks, first and foremost, lend French money to French clients.

The same reverse-protectionism move is being played out by lenders in the UK, Belgium, Spain and the Netherlands. Pressures were put by the UK government on nationalized RBS and Lloyds to lend more to British companies, while Belgium’s KBC, which has received state aid, has sold non-core assets to focus more on its home market. Spanish Santander and other big banks are buying Spanish government bonds, according to dealers, while ING’s biggest exposure is the Netherlands, some analysts say.

SAME OLD STORY

It’s worth noting two other quirks to this story. First, that Europe’s struggling banks have been here before – 15 years ago, many were forced to dispatch bankers to Jakarta, Hong Kong and Kuala Lumpur at the height of the 1997–98 Asian financial crisis.

Most of these sorties – to repatriate capital lent to corporates from south-east Asia’s then fast-growing ‘tiger’ economies – were in vain.

Philip Lynch, the outgoing head of Asia investment banking at Nomura, and a regional banking veteran, remembers clearly the sense of panic felt at the time by many European lenders. “I was working on all these [corporate] restructurings, and you would see bankers coming out from Frankfurt or Paris, scratching their heads and asking how they got exposure on a consumer loan facility with an Indonesian consumer goods firm. It never ceased to amaze me how many European banks you’d see in areas where they have no competitive edge at all.”

European banks broadly retreated from Asia after 1997, seeking opportunities elsewhere, though they returned in the new millennium, looking for growth in countries such as China and India. Now they are on the retreat again. The second quirk is that this process of deleveraging has been led almost exclusively by European financial institutions, even though the great recession damaged, financially and economically, all developed-world nations. “It is hard,” says Bank of Singapore’s Jerram, “to find much evidence of US bank deleveraging.”

Citi, notably, remains a top 10 player in the syndicated loans market in the first eight months of 2012 in both Latin America and Asia Pacific, just as it was in the same time period five years ago, while retaining its number one position in Africa syndicated loans.

JPMorgan, Citi and Bank of America Merrill Lynch filled out the top three spots in global syndicated loans for the first eight months of 2007; fast forward five years and those same players now rank first, second and fourth, separated only by Japan’s Mizuho.

Non-US developed-world banks are also boosting their presence in key markets at Europe’s expense. Japanese lenders, notably Mitsubishi UFJ, Mizuho and Sumitomo Mitsui, are consolidating their grip in non-Japan Asia and gaining market share in Latin America.

Nomura meanwhile is boosting headcount at the group’s corporate solutions and financing group (CSFG), where its roster of origination and execution bankers, vested with providing financing to Asian corporates feeling abandoned by departing European banks, has doubled over the past 12 months, to 30. Analysts also expect Canadian institutions, which – from banks to pension funds – have been largely spared the problems that hit European banks during the crisis, to expand their presence quietly in several markets in the coming years, notably in the steadier, more developed parts of Asia, Latin America and Australasia.

Not all markets have welcomed Europe’s global retreat. Deleveraging is not a level playing field, and whereas one bank’s loss in Asia is another’s immediate gain, the picture is somewhat different in central and eastern Europe, a region that broadly remains over-dependent on lenders from western Europe. In some eastern European countries, such as Romania, western European banks make up more than 80% of the banking sector.

A few non-European lenders are pushing into the eastern half of Europe in search of bargains as the likes of Italy’s UniCredit pare back their regional operations. Sberbank, the giant Russian state giant, snapped up Volksbank International, the CEE and central Asia division of Austria-based Oesterreichische Volksbanken, for €505 million ($710 million). Others are profiting from the scraps: in 2011, SocGen sold its booming consumer finance, ProstoKredit, to Eurasian Bank, owned by three Kazakh and Russia oligarchs, with the terms of the deal never made public.

Perhaps the most nuanced picture of deleveraging has emerged in Latin America. This is a region crammed with outperforming economies as well as banking groups transformed, in less than a decade, from lepers to would-be global leaders, notably the likes of Itaú Unibanco and BTG Pactual, both Brazilian, and Davivienda and Grupo de Inversiones Suramericana (Grupo Sura), both Colombian.

All are ramping up their presence around Latin America, mostly at the expense of retrenching European names. Marcos Brujis, chief investment officer at IFC Asset Management in Washington, a division of the private-sector arm of the World Bank, describes the “steady and serious” process of deleveraging underway by European banks across the region.

RBS was the first to cut and run, exiting Brazil last year, followed in short order by its withdrawal from Chile, Venezuela, Colombia and Argentina. Grupo Sura later completed a deal to buy the entire Latin American operations of ING, in another blanket deal.

But these fire sales remain the exception to the rule. Most European names have been circumspect about shedding their most valuable assets, despite the obvious temptation to do just that: Brujis notes that the value of Latin American banking assets is “on average higher than in many other parts of the world”, allowing European banks to “maximize the benefits of deleveraging [in the short term] by selling these assets.”

Yet while a quick sale would give European banks a quick boost, a short-term capital fix would come at the expense of future revenues and profits. Most European banks, RBS aside, recognize this quandary; most seem resigned, for now at least, to sell non-core assets deemed less vital to a bank’s future growth.

Thus, HSBC sold its operations in Costa Rica, El Salvador and Honduras in September last year to Davivienda for a shade over $800 million. Spain’s Santander, one of Latin America’s biggest banking groups, boasting a genuine cultural and linguistic link to the region, shed its operations in Colombia, where it was a peripheral player, pocketing $1.225 billion.

And in early September, Mexico’s Grupo Financiero Banorte (GFB) announced it was formally running the rule over pension fund assets owned by Spanish lender BBVA in Chile, Colombia, Mexico and Peru. BBVA is open, even eager, for a sale; in a statement to the Mexican Stock Exchange,

GFB announced its intention to explore “opportunities to generate greater scale in the pension and retirement fund business”. BBVA manages $70 billion-worth of assets in the four countries, generating a combined profit of $300 million.

Not all ‘western’ lenders are in retreat mode. Again, deleveraging in Latin America appears to be the sole purview of twitchy European lenders. Scotiabank is quietly gaining strength in Latin America: the Canadian lender shelled out $1 billion last year to buy a majority stake in Colombia’s Banco Colpatria, its 20th acquisition across the region in the past six years. Citi remains solid across the region, while UBS, an investment bank more global than Swiss by nature, pumped $500 million into Grupo Sura before its ING raid.

THE NEXT DISAPPEARING ACT

The big question now is whether Europe’s withdrawal from Latin America is winding down, or just getting started. If it’s the latter, says IFC Asset Management’s Brujis, there won’t be a lack of potential buyers, even as many Latin American economies, from Brazil to Peru to Chile, show distinct signs of slowing.

“I wouldn’t be surprised if you start to see similar [buying] trends coming from local groups in Brazil, Chile, Peru, Mexico and Central America,” Brujis says.

GFB’s very public expression of interest in regional BBVA suggests that European retrenchment is just getting started: sooner or later, reckons one regional banker, “another European bank will get an offer from a Latin American bank [for its entire regional asset portfolio] that it simply won’t be able to refuse.”

Perhaps the final word should go to Africa, another continent rising as Europe falls. Pan-Africa syndicated loan bookrunner rankings from the first eight months of 2007 show European names dominating the show, tallying eight of the top 10 names that year.

Wind forward again to the same period of time this year and an entirely different picture emerges. Just three European names sneak in, while the top-20 table is a cultural sprawl of names and geographies.

Four African banks – against none in 2007 – make the rankings, along with lenders from Japan (three of them), Russia (one), and the Middle East (three). Perhaps the most compelling two names, however, squeeze quietly into the table at eighth and 15th: China Construction Bank and Industrial and Commercial Bank, Beijing’s third-largest and largest lenders by market cap respectively.

This is the first time over the past five years that any Chinese lender has made it into the top 20 in the pan-African syndicated loan table, but given Beijing’s apparently unstoppable rise and the seemingly inexorable waning of Europe’s financial star, surely not the last.

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