Europe’s banks slog to exit bailouts

September 20, 2013 10:44 pm

Europe’s banks slog to exit bailouts

By FT Reporters

In all the euphoria around the UK government’s first move this week to reprivatise Lloyds Banking Group, it is easy to forget just how long – and painful – the turnround in Britain’s banks has been, following the multiple collapses of 2007-8 and the subsequent bailouts, write Sharlene Goff and Patrick Jenkins.

The process of returning Lloyds and Royal Bank of Scotland to private ownership has been severely hampered by a deeper and more prolonged economic downturn than many envisaged five years ago. So it was unsurprising that George Osborne, chancellor, grasped the opportunity to hail the sale of £3.2bn of Lloyds shares as a clear sign that the UK banks – and with them the broader economy – were finally healing.But while he claimed the start of the Lloyds reprivatisation was a validation of the government’s policies, he still faces a bitter slog to recoup more than £100bn the UK still has tied up in the banks.

The contrast with the US is striking. There, vast “Tarp” bailouts were reversed within less than a year, as the banks acted fast to prevent the government becoming embroiled in their day-to-day operations.

But in Europe, at least, the UK is not out of kilter. Few of the big bailouts in Belgium, the Netherlands, Germany and Spain have yet been unwound. Still, there is a long way to go to match the record of Sweden, where the government is still a minority investor in Nordea more than 20 years after the local crisis that prompted its nationalisation.

UK

This week’s sale of the first tranche of government-owned Lloyds shares came five years to the day after the bank made the disastrous acquisition of HBOS, which set it hurtling towards a £21bn government rescue.

The reality is that it could take another decade for the UK government to claw back the £130bn it spent bailing out Lloyds, Royal Bank of Scotland, Northern Rock and Bradford & Bingley during the financial crisis.

The timetable for Lloyds is expected to be faster. The success of this week’s transaction – the £3.2bn share sale delivered a £61m paper profit and was well oversubscribed – means the Treasury is likely to offload a second larger tranche of Lloyds shares in the first half of 2014. Bankers say the government could potentially exit its now 33 per cent stake in Lloyds altogether, at a decent profit for taxpayers, by the end of next year.

That is in stark contrast to RBS, which is still trading 30 per cent below the price at which the government paid for its 81 per cent stake. RBS benefited from £45bn of state aid – the world’s biggest bailout. Given the uncertainties hanging over the bank – the government is mulling whether to split it into “good” and “bad” units – it is unlikely that any money will be recouped until after the 2015 election.

The government could also be waiting several years to reclaim in full the £37bn and £27bn it pumped into Northern Rock and Bradford & Bingley. These rescues were structured differently to Lloyds and RBS, largely through loans rather than equity injections.

British taxpayers received £820m from the sale of the “good” part of Northern Rock to Virgin Money in 2011. But the vast majority of the funds used to prop up the lender will only be returned once its £36bn mortgage book is repaid. Northern Rock’s mortgage book was merged with that of B&B and is now managed by UK Asset Resolution. UKAR still owes the government £42.1bn, which is expects to take a decade to repay.

Sharlene Goff

US

US government investments in the country’s biggest banks were repaid in 2009, only months after the emergency capital infusions were first made.

Anxious to escape restrictions, including caps on pay, that came with the money, banks raised capital privately as soon as markets had stabilised to repay the government’s investment.

The Treasury invested $245bn from the Troubled asset repurchase program (Tarp) in more than 700 banks and has so far recovered more than $270bn. The bulk of the money – most of it invested in the form of preferred stock with a fixed dividend of 5 per cent and additional warrants allowing the government to buy common stock – was returned within months.

In 2009 banks perceived as healthy – such as JPMorgan Chase, which took $25bn in government capital in 2008 – and even those still seen as potentially troubled – such as Bank of America and Citigroup, which each took $45bn – repaid the government with interest.

For Citi the exercise was particularly humbling as it saw the US government become its biggest shareholder with a 27 per cent stake.

There are more than 100 much smaller institutions in which the government still had some exposure as of June this year, according to the special inspector general for Tarp.

Overall the Tarp investments are now expected to make a profit. A more recent feature is a projected profit on the largest, most troublesome bailouts. AIG, the insurer bailed out with more than $180bn of loans and guarantees, is now estimated to have returned a profit of $23bn.

The mortgage guarantors Fannie Mae and Freddie Mac, which together also received more than $180bn, made more than $10bn in net income last quarter and may now end up producing a profit too.

Tom Braithwaite

Eurozone

Across Europe, the German and Spanish bank bailouts have been mostly costly.

The highest-profile German bank failure was Commerzbank, the country’s second largest private sector lender, which received €18.2bn. The government’s 25 per cent stake decreased to 17 per cent earlier this year, when Commerzbank embarked on a €2.5bn capital raising but analysts estimate the government has made a loss of about 80 per cent to date.

Germany’s second biggest property lender, Hypo Real Estate was another casualty – requiring €9.95bn of capital, €145bn of state guarantees and a further €20bn of protection against bad loans. Meanwhile, Germany’s regional, state-backed Landesbanks received €21bn of capital, of which only a small fraction has been repaid.

The Spanish government has been forced to inject €61.37bn into its ailing financial sector – and few believe it will ever see much of a return.

Most of the banks that had to be nationalised after 2009 were unlisted local savings banks, or cajas. All but three have since been sold on to other Spanish lenders, always for significantly less than the state injected.

Caja de Ahorros del Mediterráneo (CAM), for example, required a €5.25bn bailout in 2011. It was sold to Banco Sabadell only a few months later for a symbolic €1.

In the Netherlands, ABN Amro, the Netherlands’ third-largest bank, remains 100 per cent state-owned, while ING, the second largest, owes €3.375bn in principal and interest on its €10bn rescue in 2009. In February the government spent €3.7bn nationalising the country’s fourth-largest bank, SNS Reaal.

In Belgium, KBC has repaid more than half the €7bn of fresh capital it received and the government raised €6.7bn from sale of bad assets of Fortis to Lone Star, the distressed asset fund, this year.