The long period of stagnation is over, and European banks are increasingly undergoing restructuring.
European banks are ripe for restructuring—and a lot of it. After five years of relatively stagnant economic conditions, many of them continue to face pressure from difficult funding conditions, a transition to higher costs of capital, changing regulations, and tighter capital requirements. They need to shed capital-intensive operations and simplify businesses to compete more profitably in fewer market segments. All told, Europe’s banks are considering the sale of up to 725 business lines across various business segments and geographies (exhibit).
So far, activity remains subdued. Since 2007, when banks struck deals worth €207 billion, the only bump in deal activity came in 2008, as governments began injecting €322 billion of public capital1 to save vulnerable financial institutions. Deal volume hit €67 billion in 2012, a modest increase from the low levels of 2010 and 2011, and although 2013 so far has been slow, with around €28 billion in deal value, what activity there has been may offer a glimpse of what’s to come and who will be involved.
We expect such activity to continue given the following trends.
Forced restructuring of bailed-out banks. Aid from national governments often comes with restrictions and conditions. One key feature of the support extended by European and national authorities is the requirement of banks to divest assets to increase liquidity and pay back the aid. The result is that many CEOs of European banks now face restructuring programs to satisfy the terms of agreements signed with European or national regulators. In extreme cases, the asset base of some banks may be cut in half, and painful measures will be unavoidable.
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