Banks' profitability to be hit by Brexit fears over risky assets

Jake Cordell
Follow Jake
Canary Wharf skyscrapers
Barclays and RBS still have more than $700bn in non-core assets (Source: Getty)

Market volatility will sap the efforts of Europe's biggest banks to offload their riskiest assets, and continue to drag on their profitability, a new study has warned.

Moody's said this morning that the five largest investment banks - Barclays, Credit Suisse, Deutsche Bank, RBS and UBS - will have to accept discount prices for so-called non-core assets if they want to sell them to increasingly risk-averse investors over the next 12-18 months.

The world's largest banks have been trying to shed bits of their business deemed non-essential as they have been told to slim down by regulators in the wake of the financial crisis. Non-core assets includes some of the dodgy loan books and securities products built up during the pre-crisis era, such as mortgage-backed securities and credit default swaps, along with other portfolios in areas such as corporate lending and commercial real estate which are no longer wanted on the balance sheet.

In total, the five banks dubbed "global investment banks" own around $1 trillion (£820bn) of non-core assets, down from more than $1.5 trillion in 2013. Barclays accounts for around half the total, while RBS is holding on to nearly one-third of Europe's total non-core assets.

However, the pace of sales and disposals is set to slow as those buying up the assets, such as private equity firms, will start to demand steeper discounts or stay away all together.

Non-core assets accounted for a whopping $7.5bn of pre-tax losses at the institutions in the first six months of 2016, taking the total losses sustained from legacy positions since the financial crisis to $72bn.

Andrea Usai, senior vice president at Moody's, said: "We expect higher economic uncertainty in the UK and still slower economic growth in the rest of Europe to continue to reduce investor's appetite for high-yielding assets, despite prolonged historically low interest rates.

"As a result, we believe that asset disposals are likely to occur more slowly than was the case over the last few years."

Moody's said whatever approach banks took they would be looking at weaker earnings as a result of the uncertainty. If they choose to sell at "higher price discounts [it] would crystallise higher-than-budgeted credit losses and further depress the banks' profitability". Meanwhile, keeping non-core assets on the balance sheet can restrict the ability of banks to lend and invest and also lead to further losses.

Concerns over the health of the global financial system were compounded by Standard and Poor's (S&P) raising fresh concerns about the state of Chinese banks today. The ratings agency said Chinese banks could lose $1.7 trillion if the country's debt pile continued to swell, with junk loans set to triple to 17 per cent of the total stock.

Related articles