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PwC Bank Restructuring Conference 2018 Banking on the future www.pwc.com
PwC Bank Restructuring Conference 2018
Banking on the future
www.pwc.com
Welcome
Richard ThompsonGlobal LeaderFinancial Services DealsPwC (UK)
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Big themes
Richard ThompsonGlobal LeaderFinancial Services DealsPwC (UK)
Andrew KailHead of Financial ServicesPwC (UK)
Big themes
Richard ThompsonGlobal LeaderFinancial Services DealsPwC (UK)
Andrew KailHead of Financial ServicesPwC (UK)
Technological change
Dealing with legacy issues
Regulation
Reshaping distribution
Note: views of conference attendees
European bank loan portfolio transaction trends
140
118
100
94
64
46
36
12
-
20
40
60
80
100
120
140
160
2010 2011 2012 2013 2014 2015 2016 2017
€in
bil
lio
ns
Loan portfolio transactions by country
19
16
54
19 19
11
3
33
22 20
13 11 11
9
43
28
17
3
5 4
1
-
10
20
30
40
50
60
Italy Spain UK Ireland Other Germany Netherlands
€in
bil
lio
ns
2015 2016 2017
Loan portfolio transactions by asset class
16 17
49
2
56
31
24 24
20 20 19
32
20
4
26
-
10
20
30
40
50
60
Unsecured retail SME/Corporate CRE Specialised Secured retail
€in
bil
lio
ns
2015 2016 2017
Agenda - Morning
Macro-economic landscape
Open Banking... implications and opportunities
How to restore bank profitability -cost simplification
Lunch
Commercial implications of changes to the banking sector
Coffee break
Update on China
Agenda - Afternoon
Disintermediation of banks and the impact of direct investment from institutional investors
Banking M&A and loan portfolio transactions
Drinks
Spotlight on Greece
Conclusions
The macro-economic landscape
Dr Andrew SentanceDirector & Senior Economic AdvisorPwC (UK)
Outline
• The late-2010s global economic upswing
• Why the European economy is performing well
• The impact of Brexit – so far
• European and global economic outlook
Global growth picking up to above long-run trend
Source: IMF World Economic Outlook, October 2017
-1
0
1
2
3
4
5
6
7
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
GDP growth Inflation 1980-2010 GDP growth trend
% per annum change in world real GDP and consumer prices
2017: broad-based upswing across global economy
Latest National GDP Growth Estimates
Russia
Germany
UK
US
Brazil
India
Spain
Key
Canada
Mexico
South Africa
Australia
Japan
Italy
Greece
Ireland
France
3.1
2.3
2.1
1.0
1.9
7.3
1.7
2.5
1.5
0.9
6.4
1.3
2.3
6.8
1.7
1.7
x.x = GDP growth in 2017
China
3.1
… with strong growth also projected for 2018
PwC December 2017 Global Economy Watch
Russia
Germany
UK
US
Brazil
India
Spain
Key
Canada
Mexico
South Africa
Australia
Japan
Italy
Greece
Ireland
France
2.1
2.4
2.1
1.8
2.0
3.5
1.5
2.3
1.4
1.3
7.4
2.7
2.9
6.5
1.0
1.8
x.x = GDP growth in 2018
China
2.6
GDP growth in 10 largest EU economies
0,0% 1,0% 2,0% 3,0% 4,0% 5,0%
UK
Italy
Belgium
France
Germany
Austria
Netherlands
Spain
Sweden
Poland
Source: Eurostat and national sources
% p.a. increase in GDP in year to Q4 2017
European growth now outpacing US
Source: OECD and PwC forecasts
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
US EU
% per annum change in real GDP
Why is Europe now growing more strongly?
• Underpinning of continued healthy growth in more competitive Northern and Eastern European economies
• Structural reforms in a number of economies – especially Spain
• Process of repairing bank balance sheets is further advanced
• Confidence has recovered following euro crisis, with growth now returning to the worst affected economy – Greece
• Political systems have been resilient to shocks, and Macron government in France has restored centrist Franco-German leadership to EU
• Sustained fall in unemployment which has continued for five years
• Low inflation and relatively strong euro have boosted consumer purchasing power, supporting growth of domestic demand
UK consumer spending has slowed significantly
Source: Office for National Statistics
-2
-1
0
1
2
3
4
5
6
7Retail sales growth Average since 2011
% annual change in volume of retail sales, 3-month moving average
… while business investment has also weakened
Source: Office for National Statistics and PwC estimate for 2017 *total fixed capital spending pre-1997
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%Investment 1970-2016 average
% p.a. change in UK business investment in real terms*
Brexit – much work still needed on the key issues
• Payment: Future contributions to EU Budget
• People: Status of EU citizens in UK and vice versa, and impact of new controls on migration into UK
• Trade: How closely aligned will the UK be with the Single Market, the Customs Union and how will this impact key sectors, including financial services?
• Transition: How long before significant changes take effect?
• Ireland: Solving the North/South border issue
Global and European economic outlook
• Global growth should continue at a reasonably healthy rate through 2018 and into 2019, with all major regions (Asia, North America and Europe) contributing
• Within Europe, UK likely to continue to underperform due to Brexit uncertainty. Economic prospects are favourable for most other economies
• A successful programme of economic reform in France under Macron could deliver a further boost to the European economy
• Interest rates set to continue to rise in US, and BoE and ECB likely to follow with gradual and cautious upward moves, in the absence of major economic shocks
• Key threat to this benign global outlook is that rivalry and rising tension between major powers (US/China/Russia/EU) spills over into a new wave of global protectionism
Colin BreretonFS Market Solutions Leader in EMEAPwC (UK)
Commercial implications of major changes to the banking sector
Dr Andrew SentanceDirector & Senior Economic AdviserPwC (UK)
Andrew HarveyManaging DirectorAssociation for Financial Markets in Europe (AFME)
Moderator
David TeitelbaumHead of European Advisory Offices and Senior Managing DirectorCerberus
In response to market, regulatory and technological pressures, over the next 12 months banks will…?
A. Reform their strategies and operating models and become more profitable
B. Reform their strategies and operating models but lose money
C. Respond to ad hoc challenges in incoherent ways with limited or no commercial effect
D. Do nothing significant
Note: views of conference attendees
Open Banking… implications and opportunities
Isabelle JenkinsUK Banking LeaderPwC (UK)
Moderator
In association with the...
David BeardmoreCommercial Director Open Data Institute
Simon Vans-ColinaSenior EngineerMonzo Bank
Imran Gulamhuseinwala OBETrustee Open Banking Ltd
Jonathan TurnerPartnerPwC (UK)
Uttiyo DasguptaHead of Transaction Banking HSBC UK
How to restore bank profitability... operating cost simplification
Mike MageePartnerPwC (UK)
Moderators
Joerg ReutschiDirectorPwC Strategy&
Paolo FiorentinoChief Executive OfficerCarige Bank
Dominic WadeHead of Strategic Cost ReductionRBS
Jon HallManaging DirectorMasthaven Bank
Jan Schildbach Director and Head of BankingDeutsche Bank Research
How to restore bank profitability... operating cost simplification
Mike MageePartnerPwC (UK)
Moderators
Joerg ReutschiDirectorPwC Strategy&
Paolo FiorentinoChief Executive OfficerCarige Bank
Dominic WadeHead of Strategic Cost ReductionRBS
Jon HallManaging DirectorMasthaven Bank
Jan Schildbach Director and Head of BankingDeutsche Bank Research
Note: views of conference attendees
Research
Deutsche Bank Jan Schildbach
21 March 2018
ResearchDeutsche Bank
European bank performance10 years after the crisis
London, 21 March 2018
Jan Schildbach
Research
Deutsche Bank Jan Schildbach
21 March 2018
-80
-60
-40
-20
0
20
40
60
06 07 08 09 10 11 12 13 14 15 16 17
US banks Large European banks
Net income
Sources: FDIC, company reports, Deutsche Bank Research
USD / EUR bn, up to Q4 17
European banks have become more profitable, butrevenue gap to US peers widened further in last few years
30
70
80
90
100
110
120
130
140
06 07 08 09 10 11 12 13 14 15 16 17
US banks Large European banks
Total revenues
Sources: FDIC, company reports, Deutsche Bank Research
Q1 2006 = 100, up to Q4 17
→Tax
reform
Research
Deutsche Bank Jan Schildbach
21 March 2018
… as low rates have hurt banks’ interest income with only limited impact on lending
31
100
105
110
115
120
125
130
135
140
H1 0
9
H2
H1 1
0
H2
H1 1
1
H2
H1 1
2
H2
H1 1
3
H2
H1 1
4
H2
H1 1
5
H2
H1 1
6
H2
H1 1
7
H2
EUR bn, top 20 European banks
Net interest income
Sources: Company reports, Deutsche Bank Research
-9
-6
-3
0
3
6
9
12
08 09 10 11 12 13 14 15 16 17 18
US Euro area
Lending to the private sector
% yoy, up to Jan 18
Sources: ECB, FDIC, Deutsche Bank Research
Research
Deutsche Bank Jan Schildbach
21 March 2018
… yet low rates have massively helped asset quality
32
0
10
20
30
40
50
60
70
80
06 07 08 09 10 11 12 13 14 15 16 17
US banks Large European banks
Loan loss provisions
USD / EUR bn, up to Q4 17
Sources: FDIC, company reports, Deutsche Bank Research
0
8
16
24
32
40
48
56
0
4
8
12
16
20
24
28
Dec
09
Dec
10
Dec
11
Dec
12
Dec
13
Dec
14
Dec
15
Dec
16
Dec
17
France* Germany*
UK US
Italy* Spain
Portugal Ireland
Greece (right) Cyprus (right)
Non-performing loans as % of total loans
NPLs in selected countries
* No data available for Q1 and Q3, data for Germany only available for Q4.
Sources: IMF, Banco de España, Banco de Portugal, Bancad'Italia, Deutsche Bank Research
Research
Deutsche Bank Jan Schildbach
21 March 2018
Cost pressure remains high, but capital issues have been resolved
33
40
45
50
55
60
65
70
2010 2017
Cost-income ratio of Europe's20 major banks
Sources: Company reports, Deutsche Bank Research
%, unweighted average
4
6
8
10
12
14
16
Dec
08
Dec
09
Dec
10
Dec
11
Dec
12
Dec
13
Dec
14
Dec
15
Dec
16
Dec
17
Fully loaded Current/transitional rules
Core Tier 1/Common Equity Tier 1ratio* of Europe's 20 largest banks
%, unweighted average
Sources: Company reports, Deutsche Bank Research
* Basel II; Basel 2.5 applied from Q4 11 on, Basel III from Q1 14 on
Research
Deutsche Bank Jan Schildbach
21 March 2018
2017: second-best annual result since financial crisis
Revenues still depressed
Banks cut costs and benefit from improving asset quality – driven by low interest rates and
economic recovery→ what happens in the next recession?
Capital levels have more than doubled since 2008→ massive de-risking and shrinking
US competitors are far ahead
Revenues on a stable upward trend
Loan growth and loan losses have suffered somewhat from rising interest rates, but overall
remain resilient
Profitability moving from one record to the next
European outlook:
Rising rates likely to strengthen interest margins, but also slow down
volume growth (again)
European banks shrink to (pro)fit
34
Research
Deutsche Bank Jan Schildbach
21 March 2018
Contact
Jan Schildbach
Deutsche Bank Research
Head of Banking, Financial Markets and Regulation
Mainzer Landstr. 11-17
60329 Frankfurt/Main
Germany
Phone: +49 69 910-31717
E-mail: [email protected]
Internet: www.dbresearch.com
Research
Deutsche Bank Jan Schildbach
21 March 2018
© Copyright 2018. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of
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Disclaimer
Update on China
Richard ThompsonGlobal LeaderFinancial Services DealsPwC (UK)
Ted OsbornBusiness Recovery Services LeaderPwC (China & Hong Kong)
China’s NPL levels keep rising – but worries that China will have a credit crunch have dissipated…
700 800
500
700
Dec 2016 Dec 2017Banks AMCs
~$1.2 trillion
~$1.5 trillion
+25%
A typical China NPL portfolio…
• Loans to private enterprises – generally small to medium enterprises
• Typically between 50 – 100 individual debtors
• One province portfolios
• Pledged real estate drives value
• Maybe a handful of unsecured assets
US$ 100m -250m
~$120m to ~$150m
Estimatedcash recoveries
Typical portfolio pricing
1.2x – 1.5xgross
collection multiple
More and more foreign funds have closed deals over the last 18-24 months…
Investor Number of China deals closed
Shoreline Several portfolios
Oaktree 4 portfolios
Lone Star 3 portfolios
Goldman Sachs 4 portfolios
PAG 2 portfolios
Bain Capital Credit 1 portfolio
Blackstone 1 portfolio
Six things to keep in mind if you are considering investing…
1. Real estate drives recovery value and collateral is sold via court auctions – likely no negotiation with debtor
2. PRC legal process is predictable – 24 months from lawsuit to enforcement to recovery
3. Foreign investors can only own loans. Real estate collateral must be sold and cannot be taken over by investors
4. No nationwide servicers – rely on boutique law firms for recovery. Servicers need constant managing
5. Portfolios are all sold via ‘managed’ auctions – investors in pole position usually win
6. Domestic investors are the sleeping giant – get in now
Agenda - Afternoon
Disintermediation of banks and the impact of direct investment from institutional investors
Banking M&A and loan portfolio transactions
Drinks
Spotlight on Greece
Conclusions
Disintermediation of banks and the impact of direct investment from institutional investors
Rob BouldingPartnerPwC (UK)
Moderator
Sinead LeahyPartner, Pensions Investment ConsultingPwC (UK)
Munawar ShafiHead of Structured FinanceAviva Investors
Vaibhav PiplapureDirectorM&G Investments
Jeroen Van Hessen CEODMFCO
Note: views of conference attendees
Spotlight on Greece
Richard ThompsonGlobal LeaderFinancial Services DealsPwC (UK)
Christos StefanidisDirectorPwC (Greece)
Banking M&A and loan portfolio transactions
Ben MayDirectorPwC (UK)
Damian ThompsonMD and Head of UK FI Origination & Solutions Natwest Markets
Steve McElwainPartnerApollo
Ian HaresChief Executive OfficerUKAR
Moderators
Jaime BergazPartnerPwC (Spain)
Mirko BriozzoVice General ManagerCredito Fondiario
Conclusions
Richard ThompsonGlobal LeaderFinancial Services DealsPwC (UK)
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining
specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC LLP,
its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in
this publication or for any decision based on it.
This content includes some of the themes discussed during the European Bank Restructuring Conference and hence the views expressed here are not necessarily those of PwC.
© 2018 PwC LLP. All rights reserved. In this document, “PwC” refers to PwC LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
