The widespread effect of deleveraging in Europe is far more evident in SNL Financial’s compilation of the largest 50 European banks this year than in our previous ranking.
SNL’s annual ranking reveals that Europe’s 50 largest banks by assets shrunk by more than €3 trillion in 2013. The top 15 banks by assets alone shed more than €2.3 trillion in assets, an amount roughly the size of Germany’s 2013 GDP, according to the Economist Intelligence Unit.
Our pro forma ranking — adjusted for recent and pending deals — shows that none of the banks in the sample crossed the €2 trillion mark, compared to three such banks in our previous ranking.
HSBC Holdings Plc tops the list for the second consecutive year with €1.939 trillion in assets, a 5.02% drop from the €2.041 trillion recorded in 2012. Earlier this year, the bank was also crowned the largest European bank by market capitalization in SNL’s 2013 ranking as of Jan. 22.
BNP Paribas SA climbed two notches to become the second-largest bank in Europe with €1.819 trillion in pro forma assets. Meanwhile, Crédit Agricole Group retained its position as the third-largest bank in Europe.
Deutsche Bank AG was the most aggressive bank on our list in terms of reducing the size of its balance sheet. The bank slashed its assets by €410.88 billion in 2013 and landed in fifth place in the overall ranking, with €1.611 trillion in assets, slightly behind Barclays Plc‘s €1.617 trillion of assets.
The problems faced by Deutsche Bank are manifold; the most significant are related to the costs of legacy issues including reducing legacy assets, litigation and impairments. The weak performance of its investment bank, specifically in the fixed-income, currencies and commodities business, continues to add further pressure on the bank’s profitability. Furthermore, the bank is likely to restructure its operations in the U.S., owing to the increased Federal Reserve regulatory requirements.
Nevertheless, CFO Stefan Krause seemed optimistic about the future during the bank’s fourth-quarter 2013 earnings conference call, saying: “We are forecasting that 2014 will represent the turning point where the bulk of our legacy losses, litigation, de-risking costs, which have been the three things which have contributed the most rigorously, will be behind us.”
Other large banks that reduced assets by more than €200 billion included Royal Bank of Scotland Group Plc, which cut €381.02 billion in 2013; Crédit Agricole Group (€320.75 billion); Barclays (€215.96 billion); and UBS AG (€212.66 billion).
Overall, among the banks that also appeared in the previous ranking, 40 of the 50 showed year-over-year declines in assets in 2013. Only eight showed an increase over the same period. The decline is a clear indicator that increased regulatory pressure and looming uncertainty over the upcoming ECB’s asset quality review and stress test have accelerated the quest to exit nonstrategic divisions and shed legacy or noncore assets.
A higher required leverage ratio could put significant demands on the capital of leading European banks, according to a recent analysis conducted by SNL. A call for further deleveraging could mean that the banks have to raise more capital or reduce the size of their balance sheets, or do both. All in all, this could have further spillover effects on banks’ willingness to extend credit, affecting Europe’s already weak macroeconomic environment.
As for the ECB’s stress test later in the year, there may be a few surprises, forcing banks to further review strategies and move toward leaner business models.
Recent research from PricewaterhouseCoopers estimated that European banks still have $2.4 trillion of noncore assets to sell.
The asset-shedding spree observed in 2013 is unlikely to abate anytime soon.
SNL Financial’s data is pro forma, taking into account pending deals and transactions that have closed on or before May 7, 2014, and that involve a European bank as either the buyer or seller.