11:45 a.m. | Updated
LONDON – At the start of 2013, European banks are cleaning out their closets.
The Continent’s largest financial institutions, including HSBC and Deutsche Bank, are expected to sell a combined 60 billion euros, or $ 78 billion, of so-called noncore loans this year, a 33 percent rise compared with 2012, according to estimates from the accounting firm PricewaterhouseCoopers released on Friday.
The renewed effort to offload unwanted assets comes as European banks are eager to reduce costs and shrink their balance sheets to comply with tougher capital requirements demanded by regulators. Europe’s persistent financial problems also have altered the industry’s economics, leaving many banks with bloated balance sheets and reduced profitability.
A string of recent scandals, including multibillion-dollar fines for the British bank Barclays and its Swiss counterpart UBS related to the manipulation of benchmark interest rates, have placed increased pressure of firms to pull back from underperforming and risky business units.
Many of Europe’s largest banks also have announced wholesale jobs cuts, particularly in their investment banking divisions, while the number of people working in financial services in London, Europe’s financial capital, has fallen to its lowest level since the mid-1990s, according to the British research organization Center for Economics and Business Research.
The fire sale has already included the Royal Bank of Scotland‘s sale of property loans to the private equity firm Blackstone Group and its aviation leasing business to the Sumitomo Mitsui Financial Group, the Japanese bank, for $ 7.3 billion. HSBC also is considering the sale of United States real estate and personal loans worth a combined $ 6 billion after it already offloaded a number of operations in emerging markets like Pakistan and Colombia to local competitors.
“Banks have been doing the right thing by selling off loan portfolios,” said Richard Thompson, a partner at PricewaterhouseCoopers in London. “Some of stronger firms also may now be looking to pick up assets on the cheap.”
PricewaterhouseCoopers said that it expected that European banks would focus on corporate and real estate loan disposals, particularly in countries like Spain where prices in the local housing market fell 15 percent annually in the third quarter of last year, according to the latest available government figures.
The creation in Spain of a so-called bad bank that will oversee the sale of up to 60 billion euros of unwanted assets like delinquent mortgages and unsold real estate on behalf of local banks is also expected to draw interest from potential buyers.
European banks are keen to sell, but bankers and lawyers say financial institutions continue to demand high prices for assets despite the glut of loan portfolios up for sale. So far, analysts add that differences over price have kept potential buyers, including private equity firms that specialize in distressed assets, from picking up more underperforming loan assets because the firms believe they remain overvalued.
Last year, the average discount on loans for a range of unwanted European bank assets was 20 percent to 50 percent, according to PricewaterhouseCoopers. That percentage is expected to rise this year, though analysts say the banks’ access to cheap short-term financing from the European Central Bank has given them some breathing room to demand higher prices for their unwanted assets.
“In 2012, we saw a large number of different banks bringing their portfolios to market,” Mr. Thompson said. “The issue of price will clearly remain a key challenge in future for sellers.”
European banks still have a lot of work to do.
PricewaterhouseCoopers estimates that firms still have more than 2.5 trillion euros of noncore loans that they are looking to sell. As the 60 billion euro estimate for loan portfolio sales in 2013 represents just 2.4 percent of that total, Europe’s banks are likely to remain eager sellers for many years to come.