Giuseppe LusignaniUniversity of Bologna and Prometeia
Bologna, 17 September 2016
The asset quality and industrial perspectives of
European banks
Lea ZicchinoPrometeia
The asset quality and industrial perspectives of European banks - 2
Agenda
Capital strengthening
Banks’ profitability
The issue of non-perfoming loans
The asset quality and industrial perspectives of European banks - 3
Agenda
Capital strengthening
Banks’ profitability
The issue of non-perfoming loans
The asset quality and industrial perspectives of European banks - 4
Banking sector’s capital adequacyInternational comparison between 2008-2015
Uem
BEDEIE GR
ESFR
IT
NL
ATPT
UK
DK
681012141618
6 8 10 12
strengthening
weakening
UemBEDE
IEGR
ESFR
IT
NL
ATPT
UKDK
2
4
6
8
10
12
2 4 6 8
UemBE
DE
IE
GR
ES
FR
ITNLAT
PT
UK
DK
40
50
60
70
80
40 50 60 70 80
2008
2015
Tier 1 ratio (%) Leverage (%)
RWA density (%) Loans / TA (%)
source: Prometeia calculations on ECB consolidated banking data – Full sample
Uem
BEDE
IE
GR
ES
FR
IT
NL
AT
PT
UKDK
20
30
40
50
60
70
20 40 60 80
+
-+
-
The asset quality and industrial perspectives of European banks - 5
Banking sector’s capital adequacyInternational comparison between 2008-2015
Italy Spain
France Germany
Index numbers(2008=100)
70
80
90
100
110
120
130
140
150
2008 2009 2011 2012 2013 2014 2015
Tier 1 RWA tot.asset loans
70
90
110
130
150
2008 2009 2011 2012 2013 2014 2015
70
90
110
130
150
2008 2009 2011 2012 2013 2014 2015
70
90
110
130
150
2008 2009 2011 2012 2013 2014 2015
70
90
110
130
150
2008 2009 2011 2012 2013 2014 2015source: Prometeia calculations on ECB consolidated banking data – Full sample
The asset quality and industrial perspectives of European banks - 6
CapitalState aid during the crisis
T1 ratio and impact of state aid (recapitalisation measures), % values
2008
source: Prometeia calculations on Eurostat and Ecb consolidated banking data – Full sample, Domestic banking groups, stand alone banks Foreign EU & non-EU and Foreign EA & non-EA controlled subsidiaries and branches
2015
11.710.3 10.0 9.7 9.0 8.4 8.1 8.1 7.2 6.9
BE IE NL DE FR ES EL AT IT PTstate aid impact T1 ratio without state aid
23.2
16.6 16.3 16.0 15.413.8 12.7 12.7 12.6 12.3
IE NL EL BE DE FR AT ES PT IT
state aid impact T1 ratio without state aid
The asset quality and industrial perspectives of European banks - 7
8.50
11.5
EU
Stress test 2016A more solid European banking sector
CET1 ratio: impact from the adverse scenario- december 2015 -
percentagevalue
* aggregate the results for the European banks
*
2013
source: Prometeia calculations on EBA data, Stress Test 2016
*
Post AQR: 11.1%
16.53
14.06
11.32
9.74
9.46
8.97
8.61
8.51
7.66
7.54
7.32 9.36
18.8616.89
15.4212.60
14.83 13.7712.46 12.50 11.75
14.64
11.5513.19
SE DK BE FR DE NL ES UK IT IE AT EU
CET1 adv. 2018 CET1 2015
The asset quality and industrial perspectives of European banks - 8
Impact of stress tests2016 vs 2014 stress test results
- EBA/ECB 2016 stress test -CET1 ratio: 2018 adverse vs 2015
basispoint
source: Prometeia calculations on EBA data, Stress Test 2016, Comprehensive assessment 2014
- EBA/ECB 2014 stress test -CET1 ratio: 2016 adverse vs 2013 (post AQR)
-710
-537
-480
-423
-411
-409
-400
-386
-286
-283
-234
IE
DE
NL
AT
BE
IT
UK
ES
FR
DK
SE
For TOP5:-337 bps
EU-383 -260 EU
The asset quality and industrial perspectives of European banks - 9
CapitalThe differences among European banks’ capital ratios…
CET1 ratio as of December 2015
% VALUE
source: Prometeia calculations on EBA data, Stress Test 2016
The asset quality and industrial perspectives of European banks - 10
49.746.1 45.6
43.3
36.2 36.0 34.2 33.027.7
25.022.2
IE ES AT IT UK BE FR DE NL DK SE
Capital… as well as by different business models
Rwa density (rwa/total leverage exposure)- December 2015 -
% VALUE
source: Prometeia calculations on EBA data, Stress Test 2016
The asset quality and industrial perspectives of European banks - 11
Credit risk still is the main source of risk of European banks
source: Prometeia calculations on EBA data, transparency exercise 2015
Rwa: risk composition
PERCENTAGE
Source of Risks
The asset quality and industrial perspectives of European banks - 12
source: Prometeia calculations on EBA data, transparency exercise 2015
Rwa: model approach composition
PERCENTAGE
Strong differences in model approach of rwa calculationRWA: standard vs internal models
The asset quality and industrial perspectives of European banks - 13
Rwa revisionAlmost all proposed revisions will entail higher capital requirements
2018 2019 …
OBJECTIVESto harmonise global standardsto reduce national discretionsto increase granularity and risk sensitivity
20172016
EBA«future of IRB approach»
BASEL COMMITTEEnew std approach for
credit risk
BASEL COMMITTEEconstraints on the use of IRB approach
BASEL COMMITTEEoperational risk: new
approach
BASEL COMMITTEEregulatory treatmentof sovereign exposures
BASEL COMMITTEEIRB capital floor
BASEL COMMITTEEmkt risk
BASEL COMMITTEECVA revision
The asset quality and industrial perspectives of European banks - 14
Agenda
Capital strengthening
Banks’ profitability
The issue of non-perfoming loans
The asset quality and industrial perspectives of European banks - 15
Poor earnings outlook contributed to depress bank equity prices
Profitability
source: Thomson Reuters, Prometeia calculations;; historical data at 13/9/16* Datastream Markets equity indices. ° Fourth rolling futures contract.
priceindex(1/1/15=100)
equity markets and rate expectations
priceindex(1/1/15=100)
per cent
equity indices*
The asset quality and industrial perspectives of European banks - 16
Bail-inAffects the cost of capital
source: Thomson Reuters, Prometeia calculations;; data at 9/9/16* Banking corporate bonds spread over government bond index redemption yield (AAA rated for
Emu);; Barclays Euro Aggregate All Maturities index.° Average of main EMU banks CDS, senior 5years (ex. Greece).
corporate spreads* and main banks Credit Default Swap°, EMU
basispoint
excludedliabilities
covered deposits[>100k]
senior debt
equity
total liabilitiesand own funds
bail-inhierarchy
other subord. debt
ownfunds
additional tier1 and tier2 capital
The asset quality and industrial perspectives of European banks - 17
Banking sector’s profits since the start of the crisisSlightly recovering in the last three years
-30
-25
-20
-15
-10
-5
0
5
10
15
2008 2009 2010 2011 2012 2013 2014 2015
Uem Italia Spagna Francia Germania
ROE% values
source: Prometeia calculations on ECB consolidated banking data – Full sampleEMU Italy Spain France Germany
The asset quality and industrial perspectives of European banks - 18
Profitability and bank business modelsThree different BBMs in Europe….
radar plot: bank business models in 2014
source: Prometeia calculations on balance sheet datanote: we use consolidated bank-level data for 77 banking groups. The radar plots the median value of each balance sheet indicator across all banks belonging to that cluster (BBMs), standardised across different BBMs
Retail BanksBBVAUnicreditKBC
Investment BanksSociété Générale
BarclaysDeutsche Bank
Diversified BanksDexiaIccrea
La Banque Postale
Which banks are caractherised by the different bank business models identified: a few names
The asset quality and industrial perspectives of European banks - 19
Profitability and bank business modelsRetail banks have suffered the most…
return on assets
basispoints
per cent
diversified investment retail
per cent
cost of risk operating costs/total assets
E. De Meo, A. De Nicola, G. Lusignaniand L. Zicchino, EuropeanBanks in the XXI century: are theirBusiness Models sustainable? Rapporto Fondazione Rosselli 2016, forthcoming.
The asset quality and industrial perspectives of European banks - 20
Bank business models
dynamic panel regressions on business model’s ROA
source: Prometeia calculations on balance sheet dataNote: non retail banks includes diversified and investment banks.
retail banks non-retail banks
total assets (log)
gdp
euribor 3m
IRS 10y - euribor3m
10y gov.bond rate - IRS 10y
equity
….as their returns are more affected by low rates
E. De Meo, A. De Nicola, G. Lusignaniand L. Zicchino, EuropeanBanks in the XXI century: are theirBusiness Models sustainable? Rapporto Fondazione Rosselli 2016, forthcoming.
The asset quality and industrial perspectives of European banks - 21
ProfitabilityStrong differences among European countries on Roe and Roa…
ROE - December 2015 - ROA - December 2015 -
percentagevalue
percentagevalue
8.17.5
6.8 6.6 6.5 6.3
4.4
3.1 3.0
1.7
0.0
-1.6
IE NL FR ES DK AT Uem IT UK DE BE PT
0.77
0.490.46
0.42 0.41 0.40
0.280.24
0.21
0.09
0.00
-0.13
IE ES AT NL FR DK Uem IT UK DE BE PT
source: Prometeia calculations on ECB consolidated banking data – Full sample
The asset quality and industrial perspectives of European banks - 22
Profitability…driven by strong differences in income generation…
Net interest income / Net operating income- December 2015 -
Net fee and commission income / Net operatingincome - December 2015
percentagevalue
percentagevalue
36.632.9 31.6 28.9 28.3 27.7 26.1 25.7 23.5 22.5
16.2 13.4 11.0
IT FR BE PT AT Uem DE UK DK ES NL IE GR
86.277.0
71.4 70.5 67.3 65.4 63.6 60.2 57.6 57.2 54.146.9 46.6
GR IE NL DK ES AT BE UK DE Uem PT FR IT
2.9 2.9
2.6 2.6 2.5 2.52.3 2.3 2.2
2.1 2.0 1.91.6
IT ES PT AT GR IE UemUK FR BE DE NL DK
Net operating income / total assets- December 2015
percentagevalue
source: Prometeia calculations on ECB consolidated banking data – Full sample
The asset quality and industrial perspectives of European banks - 23
Efficiency…and operating costs…
operating cost on total assets% - 2015
1.90
1.61 1.57 1.52 1.50 1.49 1.48 1.48 1.47 1.44
1.211.08
0.90
IT AT PT FR UK IE GRUemES DE BE NL DK
Cost-income% - 2015
73
68
65 64 64 6361 61 60
5957 56
50
DE FR UK IT UemAT PT IE GR BE NL DK ES
source: Prometeia calculations on Ecb condolidated banking data – Full Sample
Emu Emu
The asset quality and industrial perspectives of European banks - 24
Efficiency…that have not changed much with respect to the pre-crisis period
operating cost on total assets% - 2015
1.9
1.3 1.3
0.9
1.2 1.2 1.2
1.9
1.5 1.51.4
1.1
1.5 1.5
IT ES FR DE NL UK Uem2008 2015
0.3
0
0.5-0.1
0.30.20.2
1.1
0.7 0.7
0.3
0.6 0.6 0.6
1.0
0.8 0.8 0.70.6
0.8 0.8
IT ES FR DE NL UK Uem2008 2015
0.10.4 0.2
0.20.1
-0.1
0
0.8
0.5 0.6
0.3
0.5 0.6 0.5
0.9
0.7 0.7 0.7
0.50.7 0.7
IT ES FR DE NL UK Uem2008 2015
0.10.4 0.2
0.20.20.1
0
staff cost on total assets% - 2015
other cost on total assets% - 2015
source: Prometeia calculations on Ecb condolidated banking data – Full Sample
Emu
Emu
Emu
The asset quality and industrial perspectives of European banks - 25
Branches…in a period of reshaping of the branch network…
Branchesthousands
34,2
46,1
26,7
39,5
3,4
12,3
30,5 31,1
24,8
34,0
1,8
10,8
IT ES FR DE NL UK2008 2015
-12.7
-10.8
-32.5-13.9
-7.1
-48.4
inhabitants for branchthousands
1,71,0
2,4 2,1
4,8 5,0
1,82,01,5
2,7 2,4
9,6
6,0
2,2
IT ES FR* DE NL UK Uem2008 2015
source: Prometeia calculations on Ecb data
Emu
The asset quality and industrial perspectives of European banks - 26
Employees…and the reduction of employees
Number of employeesthousands
338276
425
686
116
491
299
197
408
646
90
398
IT ES FR DE NL UK2008 2015
-18,9
-11.7
-28.9
-5.7
-4.0
-22.3
Total assets for employeesThousands of €
10,812,3
18,2
11,5
19,2 19,0
14,213,1
14,4
20,0
11,9
27,8
21,9
15,3
IT ES FR* DE NL UK Uem2008 2015
source: Prometeia calculations on Ecb data
Emu
The asset quality and industrial perspectives of European banks - 27
Return on equity gapWhat can be done to reduce the gap?
EMU - ROE and Cost of equity% values
-5
0
5
10
15
20
2008 2009 2010 2011 2012 2013 2014 2015Roe Coe
source: Prometeia calculations on Thomson Reuters and Banca d’Italia data
The asset quality and industrial perspectives of European banks - 28
Agenda
Capital strengthening
Banks’ profitability
The issue of non-perfoming loans
The asset quality and industrial perspectives of European banks - 29
Asset qualityNPL is a critical issue in Italy and Ireland
gross NPE ratio and coverage ratio- December 2015 -
source: Prometeia calculations on EBA data, transparency exercise 2015
gross NPE ratio and texas ratio- December 2015 -
IE
ITES
AT
BE
DK
DE
FR
UK
NLSE
media
20
30
40
50
60
70
0 5 10 15 20
npe coverage ratio (%)
npe ratio (%)
IEIT
ESAT
BEDK
DE
FRUKNL
SE
media
0
20
40
60
80
100
120
0 5 10 15 20
texas ratio (%)
npe ratio (%)
The asset quality and industrial perspectives of European banks - 30
Asset quality: the Italian caseIn Italy NPLs have increased markedly during the crisis…
4.9
18.017.3
2.4
10.5 10.2
0
2
4
6
8
10
12
14
16
18
20
Dec-08
Sep-09
Jun-10
Mar-11
Dec-11
Sep-12
Jun-13
Mar-14
Dec-14
Sep-15
deteriorati sofferenze
Mar-16
bad debtsbillions of €
NPL in % of total loans% values
0
30
60
90
120
150
180
210
Jun-09 Oct-11 Feb-14 Jun-16
sofferenze lorde sofferenze nette
198
84
49
19
114
30
bad debts net bad debtsbad debtsNPLsource: Prometeia calculations on Bank of Italy datanote: on January 2014 bad debts were influenced by discontinuities due to some corporate transactions made by certain financial groups. The net bad debt exclude adjustment reserves of cash bad debt exposures
The asset quality and industrial perspectives of European banks - 31
Asset quality: the Italian case…also because of long recovery times
bad debts - Italybillions of €
41
202
185
173
163
153
20
50
80
110
140
170
200
2008 2009 2010 2011 2012 2013 2014 2015
source: Prometeia calculations on Bank of Italy data
6 years5 years4 years
recovery times:
3 years
The asset quality and industrial perspectives of European banks - 32
Asset quality: securitization of bad loansTwo examples of the liability side of bad loans SPV…
SENIOR67%
JUNIOR15%
MEZZANINE 18%
cost of funding
Euribor + 230 bp
Euribor + 760 bp
IRR = 15.55%
maturity10Y
amortizing
duration 5.5Y
maturity
maturity10Y bullet
maturity10Y
- SPV A-liabilities
SENIOR67%
JUNIOR33%
- SPV B-liabilities
WACC(t0) 10.2%
WACC(t0) 7.8%
The asset quality and industrial perspectives of European banks - 33
…and the effects on bad loans transfer price
Asset quality: a solution to the Italian case
SPV A (67/__ /33) SPV B (67/18/15)
42.3
17.3
9.1 5.70.9 7.5
20.0
Valore di carico
Riserva attualiz.
Servicing
Interessi debito
Imposte
IRR JT
Prezzo Cessione
VALORI %
42.3
23.6
9.1 5.75.0
4.712.4
Valore di carico
Riserva attualiz.
Servicing
Interessi debito
Imposte
IRR JT
Prezzo Cessione
VALORI %
Bal. Sheetvalue
Servicing
Debtinterests
Taxes
IRR junior t.
Transfer price
Bal. Sheetvalue
Servicing
Debtinterests
Taxes
IRR junior t.
Transfer price
Discount. Reserve
Discount. Reserve
Transfer Price: IRR=15.55% - average time to recovery = 7Y
The asset quality and industrial perspectives of European banks - 34
Prices and losses from transferThe positive effects of GACS
source: Prometeia estimate on Bank of Italy data
WITHOUT GACS WITH GACS & REPAYMENT ACC.
37.2 32.9 28.1
23.3 18.8
26.9 23.8 20.4 16.9 13.7
23.525.7
28.130.5
32.8
7 6 5 4 3
tempo di recupero medio (anni)
perdita da cessione (€/mld)
al netto effetto fiscale
prezzo di cessione (%)
37.1 33.0 28.5
24.2 19.7
26.9 23.9 20.7 17.5 14.3
23.625.6
27.930.1
32.3
7 6 5 4 3
tempo di recupero medio (anni)
perdita da cessione (€/mld)
al netto effetto fiscale
prezzo di cessione (%)
Loss from transfer (€/mld) Loss, net of taxesTransfer price (%)
Loss from transfer (€/mld) Loss, net of taxesTransfer price
average time to recovery (Y) average time to recovery (Y)
Shorter average time to recovery implies higher transfer prices and lower losses for banks
The asset quality and industrial perspectives of European banks - 35
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