Monday November 24, 2014 Search
Weather | Athens
14o C
10o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
European banks avoiding risky-loan disclosure brace for review

A dark corner of European finance is about to be illuminated by European Central Bank inspectors who are sifting through loans that banks restructure for clients and don’t fully disclose.

“What’s scaring investors is the question of whether banks are giving money to companies that deserve to go bankrupt and keeping them alive to avoid recording losses,” Mascia Bedendo, an assistant professor of finance at Bocconi University in Milan, said in a phone interview. “The amount of forborne and nonperforming loans is still very obscure.”

Four of the continent’s 10 biggest banks by assets don’t quantify loans they renegotiate, company filings show. Less than one-third of 39 major lenders disclose what the European Securities and Markets Authority calls “clear quantitative information.” None of the firms that publish figures, including Deutsche Bank AG and Intesa Sanpaolo SpA, reveal as much as U.S. counterparts such as JPMorgan Chase & Co.

The ECB has asked the euro area’s 128 largest banks to provide unprecedented detail about their lending as part of a review that will determine whether firms are giving borrowers easier payment terms to avoid showing loans as defaulted. Europe’s political leaders, seeking to avoid a repeat of taxpayer-funded bailouts during the 2008 financial crisis, asked the central bank to take responsibility for regulating the biggest lenders from national watchdogs.

ESMA, the European Union’s top markets regulator, said in November it expects banks’ 2013 financial reports to provide more granular data to allow investors to better assess the effect forbearance has on credit risk and financial positions. The restructuring of loans occurs when banks lengthen repayment periods, grant different interest rates, convert part of a loan to stock, or reduce the principle amount owed.

Forbearance also can “be used as a way to delay recognition of losses by reflecting too optimistic expectations of management,” ESMA said this month in an e-mail.

Concern that some European banks will need to bolster their balance sheets has been a drag on share prices. The Bloomberg Europe Banks & Financial Services Index climbed 13 percent over the past 12 months compared with a 27 percent gain for the Standard & Poor’s 500 Banks Index, the U.S. benchmark.

“Banks can be creative when it comes to valuing assets, so the ECB’s review is a welcome opportunity to see which ones need capital,” said Lutz Roehmeyer, who manages $1 billion including bank stocks and bonds at Landesbank Berlin Investment. “Spanish banks have been a bit optimistic on valuing real estate, while the Italians seem to have put off dealing with a few problems, so if you’re invested in those countries, you’ve got to keep that potential capital gap in mind.”

Roehmeyer said his firm is “underweight” on stocks and bonds of Spanish and Italian banks, which means its money managers hold less of the securities compared with benchmarks.

Peter Braendle, who manages about 500 million euros ($684 million) of securities at Swisscanto Asset Management in Zurich, said he’s not investing in some banks because they may need to raise capital to shore up their balance sheets to pass the ECB’s review and a subsequent stress test with the European Banking Authority. He declined to name the shares he’s avoiding.

“Forbearance can be a perfectly rational strategy for banks to adopt to avoid making a loss,” Osman Sattar, a credit analyst at Standard & Poor’s, said in a phone interview from London. “The problem is that it can also be used as to delay the recognition of impairments from problem loans to a time where the bank has more capital to absorb the loss. There is scope for losses to be hidden in forbearance strategy.”

Societe Generale SA, BNP Paribas SA and Credit Agricole SA, the three biggest French banks, and Germany’s Commerzbank AG, bailed out by the government in 2009, are the four lenders among the continent’s top 10 listed banks that don’t quantify restructured loans, company filings show. Banks including Deutsche Bank and ING Groep NV provide some annual figures, while Spain’s Banco Bilbao Vizcaya Argentaria SA and UniCredit SpA, Italy’s biggest bank, publish half-yearly data. Spokesmen for the banks declined to comment further.

U.S. lenders are required to report quarterly on how many loans were modified. They must break down the types and provide data on whether they went into default again. The Financial Accounting Standards Board found after the 2008 crisis that banks weren’t identifying all restructurings and toughened its reporting rule in 2011. There are still discrepancies and subjective selections in banks’ disclosures, making cross-border comparisons difficult, a 2012 Ernst & Young study found.

The ECB regulator, known as the Single Supervisory Mechanism, has collected data on restructured loans from banks and says it will complete work by November, when it takes over as the euro-area supervisor. It is requiring lenders to reveal the amount of such loans they classify as performing and which are in arrears by less than 90 days and not classified as in default, a document obtained by Bloomberg last month showed. The ECB also is scrutinizing assets such as derivatives and sovereign debt during the exercise.

Twenty-seven banks are in danger of failing this year’s stress test with a total capital shortfall of 17 billion euros, Keefe, Bruyette & Woods Inc. wrote in a report last month. Its calculations take into account increases in nonperforming loans, impairments on assets and risk provisions, according to the report. They don’t include the possible impact of forborne loans, the results of the ECB’s asset-quality review or actions banks have agreed to take to shrink or raise capital.

KBW, a unit of Stifel Financial Corp., offers investment- banking services and has about 60 analysts who cover more than 500 financial-services firms, according to its website.

Commerzbank and Norddeutsche Landesbank Girozentrale were among eight German banks that may fail, KBW said. National Bank of Greece SA, Italian lenders Banca Monte dei Paschi di Siena SpA, Credito Valtellinese Scarl and Banca Carige SpA, and Spain’s Liberbank SA were also at risk, it said.

Spokesmen for six of the companies declined to comment. A spokeswoman for Valtellinese couldn’t be reached.

Banks found to have failed the review and subsequent stress test will be required to recognize any losses the ECB identifies and raise capital should their reserves be insufficient.

Some firms may need to “disappear in an orderly fashion” rather than be recapitalized or merged with other banks, Daniele Nouy, hired as chief of the ECB’s regulator in December, said in a Financial Times interview published Feb. 10 and posted on the central bank’s website. She didn’t name any lenders.

“Forbearance is addressed in the comprehensive assessment,” Nouy said in a response to questions relayed by an ECB spokeswoman.

Banks needing capital can turn to investors and then to public money, “which is available,” Vitor Constancio, vice president of the central bank, told reporters in Frankfurt last week. He said the review will prove to be a very thorough inspection of lenders’ balance sheets.

“We will find whatever is there, and whatever is there will be fully disclosed,” Constancio said. “The objective is no more doubts about European banks.”

S&P’s Sattar said there could be surprises.

“There’s a lack of disclosure that makes it difficult for investors to compare asset quality across banks, and the banks will have to raise provisions if the ECB takes a stricter look at forbearance than they have.”

European banks had 979.2 billion euros of impaired or nonperforming loans at the end of June, or 6.7 percent of total loans, European Banking Authority data show. That compared with 929.1 billion euros, or 6 percent, of the total a year earlier.

While nine of Europe’s national regulators examined in an Austrian central bank study defined a loan that’s more than 90 days overdue as nonperforming, they differed on which other loans should be classified as such. Banks across Europe will be required to adopt common standards on nonperforming loans and forbearance by the end of the year, according to the EBA. A spokesman for the EBA declined to comment for this story.

The six of Europe’s top 10 banks that provide details of restructured loans reported a combined total of 115.6 billion euros at the end of 2012, or 3.9 percent of their 2.98 trillion euros in loans, filings show. The firms had 214.5 billion euros of loans classified as nonperforming on that date.

Alpine Holding GmbH, an Austrian builder, collapsed in June even as lenders including UniCredit reduced 520 million euros of loans by 30 percent. Outokumpu Oyj, a Finnish steelmaker that has lost money for the past six years, obtained consent from most of its creditors to extend the maturity of 600 million euros of loans to February 2017, it said in January.

Scholz AG, a German metals trader that owes as much as 1 billion euros, said in August creditors agreed to suspend repayments through 2014. The banks also provided a 40 million- euro credit line, it said in September. It didn’t name them.

Banco Santander SA, Spain’s biggest bank, reported the most restructured loans among Europe’s 10 largest banks. The loans equaled 7.7 percent of Santander’s total lending at the end of 2012, its annual report showed. Deutsche Bank, Europe’s biggest investment bank, reported the least with 2.5 billion euros, or 0.6 percent of its total loans.

Spain required banks to record more restructured loans as nonperforming last year after it took 41 billion euros in European assistance to shore up failing lenders. Bad loans in Santander’s Spanish loan book surged to 7.5 percent of the total in December from 3.8 percent a year earlier as it reclassified some restructured lending as nonperforming, the bank said.

Deutsche Bank is optimistic that it will pass the ECB inspection, co-Chief Executive Officer Juergen Fitschen said last month. UniCredit has enough capital, CEO Federico Ghizzoni said in an interview on Jan. 24.

ING provides the most country-specific information about its restructured loans and, along with Santander, publishes a more detailed methodology than Deutsche Bank. ING’s loans under forbearance increased to 5.5 billion euros at the end of 2013 from 3.36 billion euros a year earlier after the Amsterdam-based bank applied new definitions issued by regulators, Chief Risk Officer Wilfred Nagel told reporters on Feb. 12 after the firm released quarterly and year-end results.

Commerzbank’s classification of loans under forbearance is probably similar to that of the EBA, Stephan Engels, the company’s chief financial officer, told reporters in Frankfurt after publishing fourth-quarter results on Feb. 13. The bank may disclose more data on those as long as there’s a “level playing field” with Commerzbank’s competitors, he said.

Some European banks have recognized more loans as nonperforming in preparation for the ECB review.

KBC Groep NV, Belgium’s biggest bank by market value, said in November it was preparing for the inspection by taking an impairment charge of as much as 775 million euros to reclassify 2 billion euros of restructured mortgage loans and to reflect the conditions of Irish corporate lending.

BBVA, Spain’s second-biggest bank, added 600 million euros to its provisions in October after determining 3.86 billion euros of refinanced credit, mostly mortgages and real estate loans, were nonperforming.

The ECB examination must be more stringent than previous stress tests held in 2010 and 2011, said Sattar of S&P.

“Investors will regard the review as a lot more credible than the EBA tests,” he said. “The ECB has greater statutory authority and independence than the EBA did.”

The now-defunct Committee of European Banking Supervisors said in 2010 that seven European banks needed 3.5 billion euros of extra capital, one-tenth of the lowest analyst estimate. Within months, Ireland’s two biggest banks, which both passed the examination, needed a bailout.

The EBA, an independent EU body that took over from CEBS, said in July 2011 that eight banks had failed a revamped stress test with a combined shortfall of 2.5 billion euros. Investors had expected as many as 15 banks to fail and need to raise 29 billion euros, according to a June 2011 survey by Goldman Sachs Group Inc.

“This is a good chance to restore confidence in the banks because the ECB is taking this very seriously,” said Bedendo, the Bocconi University professor. “It will take a long time, because as the ECB is pushing for higher standards, it is also pushing for the real economy to obtain funding from the banks.”

[Bloomberg]

ekathimerini.com , Friday February 14, 2014 (10:00)  
Lack of EU funding puts future of Panepistimiou, Faliro revamp projects in doubt
Euro near 2-yr low as investors bet on more ECB easing
EU said to plan 21 billion-euro risk-sharing fund for investment
Countdown to missed opportunity for EU economy
Prosecutor recommends 64 suspects should be tried over OTE´s Siemens contract
More than 60 people should be charged in connection to the Siemens cash-for-contracts scandal, a prosecutor has recommended to a council of judges who will make the final decision. Deputy pr...
Syrian refugees go on hunger strike in front of Greek Parliament
Some 200 Syrian refugees protesting in front of Greek Parliament for the last six days went on hunger strike on Monday. The protesters have taped shut their mouths as they demand asylum and ...
Inside News
BASKETBALL
Olympiakos ends PAOK´s unbeaten run in Basket League
Olympiakos put an end to PAOK’s unbeaten run in the Basket League with an emphatic win at the Peace and Friendship Stadium, leaving Panathinaikos as the only team with a perfect record so fa...
INTERVIEW
Tokyo hopes to change the world
The 2020 Summer Olympic and Paralympic Games in Tokyo will serve as a springboard for the rebuilding of Japan’s image and economy following the triple blow of the earthquake, tsunami and nuc...
Inside Sports
COMMENTARY
Extremism from a bygone era
There are times when we seem to be overcome by self-destructive madness. I hear various commentators and politicians speaking in extreme terms of a junta, of defections, gallows, collaborato...
EDITORIAL
No call for more games
Psychological warfare has been a part of the negotiations between the troika and Athens from the very start of the crisis. But the situation is much different now and troika decision-makers ...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Prosecutor recommends 64 suspects should be tried over OTE´s Siemens contract
2. Lack of EU funding puts future of Panepistimiou, Faliro revamp projects in doubt
3. Syrian refugees go on hunger strike in front of Greek Parliament
4. Euro near 2-yr low as investors bet on more ECB easing
5. Greek officials to meek troika chiefs in Paris to break review stalemate
6. Independent Greeks vote to oppose coalition´s presidential candidate
more news
Today
This Week
1. Scientists expand excavation of ancient Amphipolis
2. EU said to plan 21 billion-euro risk-sharing fund for investment
3. Countdown to missed opportunity for EU economy
4. Greek officials to meek troika chiefs in Paris to break review stalemate
5. Biden informs Anastasiades about content of talks with Erdogan
6. Police seek to name man who opened fire with AK47 at Piraeus bar
Today
This Week
1. Double quake on Atalanti fault line rattles Greek capital [Update]
2. Biden heads to Istanbul amid tension over Cyprus EEZ violation
3. Anti-junta uprising anniversary to be marked amid tight security
4. Every age has its collaborators
5. Carlsberg takes control of Greek brewer Olympic Brewery [Update]
6. Give Greece a chance
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.