Transcript Bank System Stabilisations - Corporate Restructuring Summit

BANK RESTRUCTURING DEVELOPMENTS
IN EUROPE
25TH SEPTEMBER 2013
Tom McAleese
AGENDA
Banking Trends in Europe
Case Study 1 – The Spanish Asset Management Co. (SAREB)
Case Study 2 – The banking crisis in Cyprus
The Single Supervisory Mechanism (SSM)
The Irish ‘model’ in Europe
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EUROPE CAN BE SPLIT INTO FOUR MAIN MARKET SEGMENTS
Sovereign Exposure to Banking Industry Index
Luxembourg*
9.00
Malta
Ireland
8.00
Countries with
financial hubs
Cyprus
7.00
Banking
Assets to
GDP Ratio
Large mature markets
6.00
Medium mature markets
UK
5.00
Denmark
4.00
EU Average
3.95
Portugal Austria
Belgium
Finland
3.00
France
Holland
Greece
Spain
Germany
Sweden
Italy
2.00 Lithuania
Bulgaria
Slovakia
Czech
Republic
Romania
Estonia
1.00
Latvia
Hungary
0.00
Slovenia
-
East European transition
economies
Poland
EU Average €
361 bn
500
1,000
1,500
2,000
2,500
3,000
GDP (in €bn)
* Luxembourg is an outlier with co-ordinates (43, 25)
Source: European Banking Federation Statistics
2
SYSTEMIC BANKS THAT ARE GREATER THAN 100% GAIN ATTENTION
250%
Individual Bank Assets as % of GDP
215%
200%
190%
150%
124%
116%
120%
114%
110%
100%
100%
95%
60%
50%
59%
41%
48%
34%
27%
0%
The asset base of the two largest banks in Cyprus was more than 4x GDP, in Ireland the corresponding number was 2.4x.
In countries such as UK, France and Italy this number varied between 2.3x to 1x. In Greece, it is the lowest amongst the
countries studied.
Source: 2011 data, Liikanen Report
3
BANKS IN EUROPE HAVE BEEN REBUILDING THEIR CAPITAL SINCE 2008
Average Core Tier 1 Capital % in European Banks 2008 to August 2013
14
12
10
8
6
4
2
0
2008Y
2009Y
2010Y
2011Y
2012Y
2013Y
Capital ratios at European banks have risen from 9.0% to 11.8% since 2008.
Banks have developed new, loss-absorbing, forms of debt – such as contingent convertibles
(known as CoCos) and wipeout bonds.
The European average of banking assets to GDP is 3.95x, while the US stands at 0.9x GDP.
Confidence is still an issue in Europe - US banks trade on 1.2x their book values, while
European banks trade on 0.8x book.
Source: SNL Financials - 2013 figure is to August 2013
4
WHAT SHOULD BANKS BE DOING?
Banks should take the following five steps:
Stay close to European regulators, to understand their plans and enhance
influence;
Understand the balance sheet’s strengths and weaknesses in rigorous detail;
Make risk management as robust as possible;
Solve legacy problems by separating non-core businesses either legally or
through management;
Uphold the highest standards of moral conduct in reportable ways.
5
CASE STUDY 2:
THE SPANISH ASSET MANAGEMENT CO. (SAREB)
SAREB – AN OVERVIEW
SAREB
History
June 2009: Spanish government establishes the Fund for Orderly Bank
Restructuring (FROB) to manage the recapitalisation and resolution processes of
the troubled Spanish banks.
December 2012: FROB sets-up SAREB, the asset management company (AMC),
with the objective to transfer real estate assets and related loans from troubled
banks into the vehicle. Group 1 banks transferred on December 27th.
February 2013: Group 2 banks transferred.
Ownership
55% privately owned, mainly Spanish non-participating banks and Spanish
insurance companies
45% stake remaining with FROB
Assets
transferred todate
~ 106,000 physical real estate assets with a gross book value of c. €32bn
Mission
SAREB is designed to efficiently segregate and manage the orderly divestment of
the acquired assets from the Spanish banks, with the objective of maximising
shareholder value.
~ 90,000 real estate related loans with a gross book value of c. €75bn
Total transfer price approx. €51bn
Source: FROB website and investor presentation April 2013
7
SAREB – TRANSFERRED ASSETS
Real Estate Assets (EUR bn)
The Bank of Spain defined three groups of
banks:
– Group 0: banks with no capital shortfall
(Santander, BBVA, Sabbadell, etc.)
– Group 1: banks already controlled by
FROB (Bankia, Catalunya Caixa,
NovaGalicia, Banco Gallego, Banco de
Valencia)
GBV
Transfer Price
# Items
Group 1
24.5
8.4
76.8
Group 2
TOTAL
7.6
32.1
3.0
11.4
29.8
106.7
Real Estate Loans (EUR bn)
GBV
Transfer Price
# Items
Group 1
54.6
28.1
68.2
Group 2
TOTAL
20.1
74.7
11.1
39.2
22.5
90.6
TOTAL (EUR bn)
– Group 2: banks requiring public support
(CEISS, BMN, Caja 3, Liberbank)
– Group 3: banks to implement private
measures
GBV
Transfer Price
# Items
Group 1
79.0
36.5
145.0
Group 2
TOTAL
27.7
106.8
14.1
50.6
52.3
197.3
Group 1 banks’ assets were transferred first
into SAREB on 27th December 2012,
followed by Group 2 banks’ assets on 28th
February 2013
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SAREB VS. NAMA – A COMPARISON
SAREB
ELIGIBILITY
Single asset class: Non-performing,
substandard and normal real estate
developer loans & real estate owned
Total assets transferred: €107bn
Total number of loans: 90,000 loans
and c. 33,000 debtors
NAMA
Single asset class: Real estate (land &
development and commercial loans)
Total assets transferred: €77bn
Total number of loans: 12,000 loans to
775 debtor groups.
TRANSFER
PRICE
Final discount: 46% for RED loans and
63% for REOs
Final discount: Aggregate 57% of the
face value across the portfolio
FUNDING &
FINANCING
STRUCTURE
Equity model: 2%
Equity model: 0.1%
Subordinated debt: 6%
Subordinated debt: 5%
AMC bonds: 92%
AMC bonds: 95%
Equity investors: Multiple
Equity investors: Two
Transfer price based on portfolio basis
with limited review of portfolio post
acquisition.
Significant DD performed on an loan by
loan basis before loan acquisition (in 6
tranches) over c. 2 years.
DUE
DILIGENCE
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SAREB VS. NAMA – A COMPARISON – CONT’D
SAREB
NAMA
OPERATING
MODEL
Full outsource model with all cases
being serviced by the banks under an
SLA and delegated authority
Partially outsourced with large cases
managed in-house and the balance
managed by NAMA units in banks
LOCATION OF
ASSETS
All assets located in Spain and
therefore fully dependent on the local
economy for recovery
46% located outside Ireland therefore
large component of divestment plan
not dependent on local economy
NOTARIZATION
& LAND
REGISTRATION
PROCESS
Subject to formal notarisation and
registration in the local land registries
across Spain
Simpler registration process
Source: NAMA and SAREB websites
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CASE STUDY 2:
THE BANKING CRISIS IN CYPRUS
WHY DID CYPRUS GET INTO TROUBLE?
External causes
•
•
Consequences of joining the EU (2004) & Euro (2008)
Global financial crisis
Internal causes
•
•
Insufficient supervision of banks at a national level (“spoiling the party”)
•
•
Weak bank governance (“culture of deference”)
•
•
Role of international financial centre (source of excess liquidity)
Aggressive growth strategies (aggressive lending and overseas expansion /
acquisitions)
Imprudent business methods (lending against collateral or PGs / strong
personal relationships)
Cosy culture
Source: Independent Commission on the Future of the Cyprus Banking Sector – Interim Report June 2013
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DEBT AND EQUITY MARKETS WERE IMMATURE RESULTING IN A HIGHER
RELIANCE ON BANKS
Market Capitalization of Top 12 Firms Listed on the CSE
1,000
900
898
800
700
600
€ million
500
427
400
300
200
102
100
75
66
50
39
35
34
31
29
29
0
The Cypriot Stock Exchange (CSE) has 111 listed companies with a total market capitalization of € 2.22 bn as of 7th
February 2013. The median market capitalization was €3.9 m and the average market capitalization was significantly higher
at €23.9 m.
The top 3 banks constituted 64% of the total market capitalization of the CSE.
Source: Bloomberg, Cyprus stock exchange website
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TIMELINE OF KEY EVENTS
Cyprus request
financial
assistance from
the IMF, after
Greek crisis
Eurogroup decision to
reduce Programme
envelope to €10bn, with
no funds for recap of
BoC or Laiki. Decision
to implement a deposits
levy, requiring banks to
be closed for
implementation
ECB decided no
further provision of
ELA to Laiki unless
an MoU is signed
Parliament urgently
passes resolution
law
Final BoC depositor
haircut set at 47.5%
and BoC officially out
of resolution
16 March
21 March
22 March
30 July
June 2012
December 2012
Preliminary MoU
agreed with €10bn
to recapitalise the
banking sector
(total €17bn)
January 2013
PIMCO results
announce extra
capital of €11bn
19 March
18-28 March
Parliament
rejects bank levy
Closure of
banks and
imposition of
capital controls
25 March
Resolution – Eurogroup
decision to resolve the
two biggest banks, sale
of Greek assets and bailin.
14 May
Agreement of the
Programme – first
tranche of €2bn on 14/5
14
RESOLUTION STEPS
1
Introduction of
Capital Controls
2
BoC and Laiki under
resolution
3
Greek Carve Out
Transaction
4
Carve-out Laiki CY
Bail-in BoC creditors
5
Merger Laiki CY with
BoC and wind down
Legacy Laiki
Country-wide capital controls introduced after Eurogroup meeting on
16 March 2013.
Bank of Cyprus and Laiki put under resolution on 25/3/2013 on the
basis of the new Resolution Law.
Greek operations of BoC, Laiki and Hellenic sold to Piraeus Bank.
The transaction included loans, fixed assets and deposits of the
Greek branches (i.e. assets of €16.4bn and liabilities of €15bn).
Issuance of the relevant decrees (29/3/2013):
a) Laiki transferred its Cypriot operations and certain other assets
and liabilities to BoC
b) depositors and other creditors of BoC are bailed-in in order
to recapitalise the bank
The final step is the merger of Laiki Cyprus operations with Bank of
Cyprus
Legacy Laiki will be wound down; main assets of the legacy entity
are the investments in subsidiaries and the shares in BoC post the
sale of its Cypriot operations to BoC
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DEPOSIT FREEZE AND RELEASE EXAMPLE – BOC CUSTOMER WITH A
€200,000 DEPOSIT
€100,000
insured
deposit
15 March 2013
2 April 2013
30 July 2013
€100,000
€110,000
€152,500
€100,000
€100,000
€100,000
€100,000
insured
Accessible
subject to
capital controls
Total
deposit of
€200,000
€10,000
€10,000
Released 10%
of €100,000
€5,000
€100,000
uninsured
€40,000
blocked
€100,000
blocked
deposit
€42,500
released
€37,500
€30,000
blocked
€22,500
blocked as
reserve for
share
exchange
€22,500
blocked as
reserve for
share
exchange
€37,500
blocked for
exchange
into BoC
shares
€37,500
blocked for
exchange
into BoC
shares
Released and
placed into
term deposits
of 6/9/12
months
(€12,500 each)
€47,500
exchanged
for BoC
shares
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TROIKA WANT DOMESTIC BANKS TO DELEVERAGE TO 3.5X GDP (BELOW
THE EU AVERAGE)
Banking Assets
(EUR bn)
Assets in Cyprus*
Assets in Greece
Other foreign assets
Total
Banking Assets / GDP
GDP Actual and Forecast
Thereof
Domestic
Current
Cypriot Banking
Domestic Banks Deleveraging in Domestic Banks
System Dec '12
+ Co-ops Dec '12
2013
and Co-ops
102.9
23.0
7.8
133.7
7.47x
17.9
61.4
20.0
6.9
88.3
4.93x
17.9
-5.9
-20.0
-2.1
-28.0
55.5
0.0
4.8
60.3
3.66x
16.5
Source: Central Bank of Cyprus
*Assets in Cyprus includes domestic and international operations
Deleveraging of the domestic banking system
Domestic banking system with high banking assets to GDP ratio of 4.93x in 2012
Troika set deleveraging target of 3.5x banking assets to GDP by 2018
Significant deleveraging achieved to-date through sale of Greek operations in the amount of
c. €20bn, resulting in a current banking assets to GDP ratio of 3.66x
Based on 2018 GDP forecast Troika target of €18.3bn, the total size of the domestic
banking market could even increase from today’s size to €64bn
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MOU TASKS - A LOT TO BE DONE WITHIN A SHORT TIME FRAME
2013
Mar
MAINTAINING
LIQUIDITY
Funding and
capital plans
Apr
May
Jun
Jul
2014
Aug
Sept
Oct
Nov
Dec
Mar
Jun
2015
Sep
Dec
Jan
Dec
Submission of quaterly funding and
capital plans (1.3)
Liquidity ratio
end-Dec 14: Central Bank update s liquidity regulations. (1.4)
Rrestrictions
REGULATION
AND
SUPERVISION
OF BANKS AND
COOPERATIVE
CREDIT
INSTITUTIONS
Seizure of loan
collateral
Non performing
loans and credit
register
mid-2014: legislation for seizure of
loan collatral (1.5)
31 May 13: legislation
for NPL > 90 days (1.6)
Supervision
end Sept 13: review of loan origination, asset
impairment, priovisioning (1.8)
Core Tier 1 ratio
RESTORING
ADEQUATE
CAPITAL
BUFFERS
BoC and CPB
end-Jun 14: annual stress test integrated in off-site
supervision for pillar 2 (1.12)
end-April 13: grace period for borrowers (1.16)
end-Ju n 13: financial mediation service (1.16)
COOPERATIVE
CREDIT
INSTITUTIONS
end-Dec 2013: increase minimum of Core Tier 1 capital ratio from 8 % to 9 % (1.19)
end-Sep 13: Board defines business activities
and credit policies (1.28)
26/3/13:signature of
Greek carve-out (1.24)
Other commercial
banks
Supervisory
framework
Mergers,
restructuring and
resolution
end-Sep 13: legislation on lending to board members (1.9)
end-Mar 14: mandatory structured intervention (1.10)
30 Apr 13: legislation for personal finance adoption (1.16)
end-Apr 13: ToR valuation (1.27)
Cooperative credit
institutions
end-Mar 14: implementation (1.8)
end-June 13: unified data
reporting system (1.11)
Stress tests
Troubled
borrowers
end-Sep 14: credit register operational (1.7)
end-Sep 13: legislation for
credit register (1.7)
Governance
end-2014: implementation of
legislation (1.5)
end-Jun 13: institutional arrangement (1.28)
end-Jun 13: independent valuation exercise (1.27)
end-Nov 13: authorities submit
restructuring plans (1.29)
end-Sep 13: raise private capital (1.22 and 1.30 )
end-July 13: raise private capital (1.22 and 1.31 )
end-May 13: legislation that coop supervisor is integrated in CBC and
legislation that CBC can instruct coop supervisor (1.13)
end-Apr 13: ToR
assessment (1.33)
end-Jun 13: assessment
finished (1.33)
Source: Memorandum of Understanding - Cyprus, April 2013
end-Jul 13: submission
of strategy (1.33)
restructuring of BoC and CPB (1.26)
end-Sep 13: authorities submit restructuring
plans (1.33)
end-Jul 13: coop supervisor integrated into CBC ( 1.13)
end-Sep 13: authorities submit
restructuring plans (1.33)
until 30/6/15 : implementation
of the strategy (1.33)
18
CURRENT BANK DEVELOPMENTS
Bank of Cyprus
– Recapitalised at a CET 1 ratio of 12% after bail-in of uninsured BoC depositors of 47.5%
– First AGM conducted as a new group held on 10th September 2013 and new BoD elected
– Developing a restructuring plan to be approved by the European Commission
Hellenic Bank
– Planned recapitalised through a €300m debt-to-equity conversion
Cooperative Banking Sector
– Developing a restructuring plan for the entire cooperative banking sector
– Strategy includes multiple mergers to decrease number of individual cooperative banking
institutions from 93 to 18
– Planned recapitalisation with €1.5bn of programme money upon approval of the
restructuring plan by the European Commission
Cyprus Banking Sector Deleveraging
– Significant deleveraging of Cyprus domestic banking market from c. €90bn in 2012 to
currently c. €60bn, mainly due to sale of Greek banking operations
19
CYPRUS – LESSONS LEARNT
2 systemic banks under resolution at the same time
– Disruption of the whole banking system
– Significant hit on the real economy
– Financial and social instability
Cross border resolution – how do you deal with international operations and regulators
Thousands of court actions against BOC and CBC
Operational issues: Identifying insured depositors, client a/cs, trustee a/cs, minor a/cs, set –
off of deposits to loans, etc.
The term ‘resolution’ is incorrectly considered by different stakeholders as an event of default
Resolution cost more than re-capitalisation (with strict restructuring measures implemented
over time).
Most severe bail-out yet – GGBs haircut, immediate deleverage, capital controls, bank
merger and bail-in of depositors.
20
THE SSM IS COMING…
The Single Supervisory Mechanism (SSM) under the authority of the ECB shall have direct responsibility
for the supervision and the financial stability of the biggest and systemic banks in the Eurozone.
Scope and Structure
Common bank supervision in the EU composed of the ECB and national authorities.
The ECB is endowed with final supervisory authority while national supervisors playing a supporting
role.
Participation is mandatory for 17 Eurozone countries and optional for the other EU member states.
Banks deemed “significant” will be supervised directly by the ECB and will comprise more than 80%
(more than €25 trillion) of the Eurozone’s banking assets.
The Supervisory Board will consist of 23 representatives including: 17 national supervisors, a
chairperson, vice-chairperson and 4 ECB representatives.
SSM represents an entirely new architecture, unprecedented in its scope and scale. The successful
implementation of the SSM therefore poses significant challenges for the ECB.
Balance-Sheet Assessment (BSA) Exercise (“Entry test” condition)
The draft SSM Regulation requires the ECB to conduct a “comprehensive assessment”, including a
balance-sheet assessment (BSA), of the qualifying credit institutions of the participating Member
States” as pre-condition for entry.
The BSA exercise is envisaged to include a targeted risk-based balance sheet review, which will include
an asset quality review (AQR), data integrity validation (DIV), risk weighted asset (RWA) assessment and
capital adequacy assessment.
21
THE ‘IRISH MODEL’ IN EUROPE
Certain Irish bank restructuring measures are now being applied in Europe
1. NAMA
Concept used by Spain Government with SAREB.
2. 2011 stress tests
Similar type PCAR stress tests performed in Greece in Q4 ’11.
3. Policy
Arrears management & impairment guidelines applied in Cyprus.
4. Measurements
Mortgage and SME targets will be applied in other countries.
5. AQR / BSA
Currently in progress with European SSM wide tests in 2014.
6. Loan Servicing
Ireland becoming a ‘hub’ for loan book servicing.
22