dbrief may 3 european shake out final 050312 b real estate
TRANSCRIPT
The Great European
Shake Out
Guy Langford, Principal, Deloitte & Touche LLP
Thomas Kaylor, Principal, Deloitte Financial Advisory Services LLP
Vivian Pereira, Partner, Deloitte U.K.
Robert Young, Partner, Deloitte U.K.
May 3, 2012
The Dbriefs Real Estate series presents:
Copyright © 2012 Deloitte Development LLC. All rights reserved.
Financial sector deleveraging in Europe
How are banks responding on the asset side
Bank deleveraging-Structuring
U.S. background and market data
Debt portfolios and due diligence
Question and answer
Agenda
Financial sector deleveraging
in Europe
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What do you see as the single most pressing challenge
facing European banks today?
• Improvement in shareholder value and Return on Equity
(ROE)
• Increased capital adequacy requirements
• Liquidity and funding pressure
• Reduction in risk weighted assets (RWA)
• Balance sheet reduction
• Not sure
Poll question # 1
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• From U.S. sub-prime to global
financial crisis
• Euro zone sovereign crisis
coupled with financial crisis
• €2.2trn in non-core and non-
performing European banking
assets
• Governments and regulators
seeking solutions
Moving through the cycle, dealing with fallout from the crisis
Financial sector deleveraging in Europe
1,241
940
Non-core and non-performing assets (€'bn)
Non-core Non-performing
Note: Figures as at 31 December 2011Source: IMF, EIU & Deloitte Analysis; Prepared by: Deloitte UK
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Banks in the UK, Germany and Italy account for the majority of total non-
core and non-performing assets in Europe but clearly a pan-Europe issue
Non-core and non-performing assets across
Europe
Non-core and non-performing assets
2011 2010
Country (€'bn) NC NPL Total
UK 400 129 529
Germany 349 116 465
Italy 102 179 281
Ireland 132 78 210
France 71 93 164
Belgium 152 11 163
Spain 2 154 156
Netherlands 5 48 53
Central & Eastern Europe - 46 46
Austria 28 15 43
Greece - 25 25
Portugal - 21 21
Denmark - 9 9
Cyprus - 7 7
Sw eden - 5 5
Luxembourg - 3 3
Malta - 1 1
Finland - 1 1
1,241 940 2,181
Notes: (1) NC = Non-core; NPL = Non-performing loans; (2) Central & Eastern Europe includes
Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.
Source: IM F, EIU & Delo itte Analysis; Prepared by: Delo itte UK
400
349
152
132
209
Non-core assets by country (€'bn)
UK Germany Belgium Ireland Others
Note: Figures as at 31 December 2011Source: IMF, EIU & Deloitte Analysis; Prepared by: Deloitte UK
179
154
129 116
361
Non-performing assets by country (€'bn)
Italy Spain UK Germany Others
Note: Figures as at 31 December 2011Source: IMF, EIU & Deloitte Analysis; Prepared by: Deloitte UK
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• Aimed at addressing increased systemic risk posed by the sovereign
debt crisis in the Euro area
• Requirement for a 9% core tier 1 capital ratio taking into account the
summer 2011 macro stress tests plus the a capital buffer against
sovereign debt exposures to reflect market prices
• 70 European banks included in the sample
• An estimated €115bn in new capital is required to be raised
• Banks submitted capital plans to their national banking supervisor in
January 2012 and are required to achieve the capitalization target by
June 2012
• Bank actions to achieve the capital levels include capital raising, capital
restructuring, withholding dividends/bonuses and deleveraging
• The EBA warns against excessive deleveraging
European Banking Authority (EBA) pronouncements on capitalization
Measures to strengthen bank capitalization
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• Increased capital adequacy requirements
• The need to reduce capital consumption and specifically RWA’s
• Responding to a range of stakeholder commitments to reduce balance
sheet
• Improvement in shareholder value and ROE
• Liquidity and funding pressure due to the reduction in inter-bank funding
Regulatory reform & balance sheet optimization
Challenges facing European banks today
Deleveraging and asset divestment have a role to play
in responding to each of the above challenges
How are banks responding on
the asset side
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What is the single most common response by European
banks to the recapitalization and deleveraging issue?
• Capital raising via rights issues, private raises, etc.
• Conversion of lower quality capital and debt instruments
to CT1 eligible capital
• Establishment of a non-core asset strategy
• Separation of core from non-core assets
• Design of a structured wind down plan
• Not sure
Poll question # 2
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Effective use of a range of asset reduction approaches
How are banks responding on the asset
side?
• Establishment of non-core
strategies
• Separation of non-core from core
• Design and implementation of
structured wind down programs
• Selective divestments that are not
capital destructive
-
50
100
150
200
250
300
350
400
450
Deleveraging approaches by selected European banks (€'bn)
Lending Legacy assets CIB / markets CEE Greece / Ireland
Source: Morgan Stanley; Prepared by: Deloitte UK
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Divestments of non-core US assets picked up in 2011 with further
opportunities expected as banks further reduce balance sheet and exit non-
core assets and markets
Selected divestments of US assets by European
banks
Deal Seller Buyer Reported
Deal size
April 2012:
Eurohypo sells US CRE loan portfolio
Eurohypo AG Wells Fargo & Blackstone $0.6bn
February 2012:
BNP sells North America energy loan portfolio
BNP Paribas Wells Fargo $9.5bn
November 2011:
Bank of Ireland sells project finance and energy loans
in North America and Europe
Bank of Ireland Sumitomo Mitsui Banking
Corp
$0.8bn
October 2011:
Santander sells a 25% stake in its U.S. auto loans
unit
Santander Confidential $1.2bn
August 2011:
HSBC sells US credit card business
HSBC Capital One Financial Corp $32.7bn
August 2011:
Anglo sells US CRE loan portfolio
Anglo Irish
Bank
Lone Star, J P Morgan &
Wells Fargo
$9.5bn
August 2011:
Bank of Ireland sells US CRE loan portfolio
Bank of Ireland Wells Fargo $1.4bn
May 2011:
Allied Irish sells US CRE loan portfolio
Allied Irish
Bank
Blackstone & Wells Fargo $1.0bn
Source: Press articles and other public information
Prepared By: Deloitte UK
Bank deleveraging-
Structuring
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What type of transaction activity do you expect to see
more of in the next 12 months?
• Private asset sales
• Public asset sales
• Structured transactions
• Capital raising
• All of the above
• Not sure
Poll question # 3
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• Structured transactions occur where a ‘clean’ sale has not been
possible
• Key driver is capital
• Implement a risk sharing arrangement – enable banks to reduce capital
usage
• A staging post for an eventual disposal – in the meantime, assets
managed by a private-equity fund to enhance recoveries
• Used to manage new risks – e.g. redenomination risk
Bank deleveraging – Structuring
U.S. background and market
data
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Of the following five (5) ways that the Eurozone debt crisis
could affect the U.S. – which one is the largest concern for
your organization?
• U.S. banks are 'tethered' to those in Europe
• A potential threat to U.S. exports
• U.S. companies' investments in Europe at stake
• The potential impact on individual investors
• A dramatic effect on the 2012 election
• Not sure or Not Applicable
Poll question # 4
• In U.S., not much happening in election year but look for lots of proposed
budget and regulatory changes in 2013
• Bank stress test results will require increased Tier 1 capital which will result in
additional asset sales
• Repayment of TARP funds needs to continue for 2nd tier banks
• Large banks need to add performing real estate and C & I loans to their balance
sheets quickly
• Potential external shocks to system include a blow-up in Europe and other
geopolitical issues
Activity in U.S. marketplace
• Wells Fargo has acquired loans from
Anglo Irish
Allied Irish
Bank of Ireland
• JP Morgan Chase has acquired loans from Anglo Irish
• US Bank, GE Capital, CIT, and others are actively seeking loans.
• Active purchasers of distressed debt: Blackstone, Lone Star, Starwood
• Looming maturities
United States debt background Moving through the cycle, dealing with fallout from the financial crisis
Copyright © 2012 Deloitte Development LLC. All rights reserved.
Copyright © 2012 Deloitte Development LLC. All rights reserved.
$213.1 $209.8
$182.3
$150.0
$112.3
$85.1 $66.3
$44.0 $32.2
$53.3 $62.4
$66.6
$101.1
$112.2
$133.0
$40.4
$25.7
$20.2
$23.4 $24.5
$23.6 $22.9
$24.1 $22.9
$20.0
$17.3
$15.8
$72.4 $74.3
$72.3 $65.5
$59.0 $51.8
$44.2
$34.9
$25.3
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Banks CMBS Life Cos Other
U.S. CRE debt maturities due to peak in FY13
Prepared by: Deloitte LLP
Source: Trepp LLC, 4Q11 Update
$1.4 Trillion $ Billion
CRE Debt Maturities by Lender Type
At least $1.4 trillion of CRE debt will mature between FY12 and FY15. Trepp LLC estimates
that nearly 63.0 percent of these loans are underwater, which raises concerns on the timing
of a CRE recovery.
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0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
Total Outstanding Distress
Troubled REO Restructured Resolved
Prepared by: Deloitte LLP Source: Real Capital Analytics (RCA), January 2012
Net inflows to distressed properties declined 33.2 percent YoY to $12.8 billion in 4Q11, due to stabilizing
commercial property fundamentals and relatively favorable refinancing conditions. $ Billion
Distress by Property Type Distress by Region
Western U.S. continues to lead the volume of distress assets, with Las Vegas recording the highest distress.
By property type, Office accounts for the highest distress ($41.0 billion).
As of December FY11, outstanding distressed assets in the U.S., including loans and REO, decreased 2.9 percent YoY to $171.9 billion. Total distress was $350.8 billion.
25.3%
20.7%
12.5%
17.6%
16.6%
7.3%
Office
Apartment
Hotel
Development & Other Retail
Industrial
28.3%
22.1% 16.0%
14.0%
13.1%
6.6%
West
Southeast
Southwest
Northeast
Midwest
Mid-Atlantic
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U.S. distress slows amid stabilizing property fundamentals
Debt portfolios and due
diligence
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Where do you believe may hold the best risk-return
opportunity with either performing or non-performing loan
portfolios from lending institutions?
• U.S. banking institutions with European assets
• U.S. banking institutions with domestic assets
• European banking institutions with European assets
• European banking institutions with domestic assets
• Not sure
Poll question # 5
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Debt portfolios: Sellers, buyers and type
Sellers
• Bank & non-bank financial institutions
• Savings institutions
• Insurance companies
• Governments and regulators
Buyers
• Strategic buyers (i.e. banks, pension funds, life companies)
• Financial buyers (i.e. Private Equity/Hedge Funds)
• Real estate funds
• Debt purchasers
Debt Portfolios
• Corporate loans
• Commercial property debt
• Residential mortgages
• Unsecured consumer debt
• Asset finance loans
Non-core and underperforming debt portfolios
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Loan portfolio considerations Non-core and underperforming debt portfolios
Data Analytics &
Due Diligence
Closing
& Post Deal
Investment
Decision
Data Analysis/Stratifications &
Portfolio Level Reports
Assessment of Information
Content & Quality
Review of Credit Origination
and Underwriting Quality
Property Diligence, Strategy
and Valuation
Confirmatory
Due Diligence
Investment Committee
Presentation
Data Aggregation and Cash
Flow Modeling
Historical Portfolio
Performance Analysis
Key Asset Summary Reports
Portfolio Management & Exit
Strategies
Loan Transfer Coordination
and Take-on Setup
Loan Workouts and
Restructuring
Sellers and Buyers of Debt Portfolios
Monetizing U.S. and European Assets.
Question and answer
Join us May 8 at 2 PM ET as our Banking & Securities series presents:
Securitization: A Regulatory Update for Financial Institutions
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Click the Request CPE link in the
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Thomas Kaylor Vivian Pereira
Principal Partner
Deloitte Financial Advisory Services LLP Deloitte U.K.
+ 1 415 783 4242 +44 20 7007 0558
[email protected] [email protected] [email protected]
Guy Langford Robert Young
Principal Partner
Deloitte & Touche LLP Deloitte U.K.
+ 1 212 436 3020 +44 20 7007 2571
[email protected] [email protected]
Contact information
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