The Wall Street Journal-20080116-European Banks Tread a Rocky Road
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European Banks Tread a Rocky Road
Most European banks have appeared to do relatively well as their U.S. counterparts have reported tens of billions of dollars in losses on mortgage investments. In recent weeks, though, their outlooks have taken turns for the worse.
Already facing concerns that more write-downs are possible in the wake of moves taken by Citigroup Inc., European banks have changed their views for 2008. As the global credit crunch begins to take a bite out of economic growth, they now expect many months of financial pain as they struggle to keep ahead of mortgage losses and rising defaults on loans to various types of clients, according to bankers and analysts.
"The time frame that people are assuming for a return to more normal, if not normal market conditions, is way out there in the future," said London banker Adrian Docherty, head of BNP Paribas SA's financial-institutions advisory practice. "People are now assuming that for most of this calendar year, the markets will be difficult. They'll be volatile. They'll be expensive. They'll be characterized by fear."
The magnitude of additional write-downs tied to U.S. mortgages, together with provisions against bad loans and a slowdown in investment-banking revenue, should come into focus next month, when Europe's biggest banks report 2007 results. Switzerland's UBS AG has already warned that it could face about $10 billion in write-downs for the fourth quarter -- by far the largest of any European bank so far. Dividend cuts also are likely as some banks shore up capital.
In all, major European banks -- including Barclays PLC and Royal Bank of Scotland Group PLC in the United Kingdom -- have reported or projected write-downs totaling about $19 billion tied to subprime- mortgage securities.
In one sign of how European banks are still coming to grips with losses on complex securities, Germany's Hypo Real Estate Group AG, a Munich commercial-property lender, yesterday saw a third of its market value wiped out after it recorded a 390 million euros ($580 million) write-down that largely erased fourth-quarter profits. The write-down stemmed from losses on 1.5 billion euros worth of debt pools known as collateralized debt obligations, or CDOs. In a note, Citigroup said further Hypo Real Estate write-downs are possible.
For now, bankers and analysts expect isolated write-downs in moves that could mirror yesterday's action taken by Citigroup. Merrill Lynch & Co. tomorrow also is expected to report billions of dollars in write-downs.
Those two banks, along with UBS, were among the most aggressive in selling CDOs backed by subprime mortgages -- a business that left them with large exposures to certain parts of the CDOs. That has resulted in the three recording among the highest markdowns in securities tied to subprime mortgages. UBS, which recorded a $4.4 billion write-down for the third-quarter, reports results Feb. 14.
Beyond the write-downs, banks face increasing signs that an economic slowdown looms. One emerging concern: The U.K., where falling home prices and high energy prices could be triggering a retrenchment among consumers, and could ultimately contribute to higher defaults on mortgage loans.
In a report this month, Morgan Stanley U.K. banks analyst Michael Helsby significantly cut his earnings forecasts and stock price targets for a raft of U.K. banks. Mr. Helsby, for example, reduced his 2008 price target for Royal Bank of Scotland by 7% to 390 pence per share. The analyst cut his Barclays forecast by 12% to 550 pence a share.
Barclays reports its 2007 results on Feb. 19. The bank already has recorded GBP 1.3 billion ($2.54 billion) in charges and write-downs on securities tied to U.S. subprime mortgages. RBS reports its 2007 results on Feb. 28. In December, the bank recorded a total GBP 1.25 billion write-down to cover its exposure to mortgage securities as well as that of ABN Amro Holding NV.
"The banks are in a bear market," Mr. Helsby wrote, citing an acceleration in U.K. housing and commercial-property price declines. "We have increased our bad debt forecasts across the board in U.K. corporate, unsecured and mortgage lending." Mr. Helsby said he had not factored in any further losses because of exposure to CDOs and leveraged loans "though we appreciate that this may be generous."
As the outlook for banks deteriorates, investors are demanding greater compensation to insure against defaults on the banks' debts. According to the ITraxx index, which tracks the cost of such insurance, the cost to insure against 10 million euros of financial- firm debt for five years has risen to 57,000 euros annually. That compares with about 8,000 euros a year ago.
"You could think of this as a 'bank fear' index," said Jon Peace, banking analyst at Lehman Brothers Holdings Inc.
