Major banks face non-core loss hangover

EUROPEAN banks could be vastly under-estimating the losses they will have to take on the sale of billions in non-core assets, City A.M. has learned.

In addition to being forced to take write-downs on their sovereign debt, lenders could be hit by worse-than-expected sale prices for many of the assets they are offloading in order to bring their capital ratios into line with regulations.

According to industry insiders, there are seven packaged portfolios predominantly of real estate assets on sale from major Spanish and Italian banks with a face value of €750m-€1.5bn.

But according to a source who has examined the portfolios, the owners are likely to receive less than they want and will get in the region of €300-€400m, a 60-73 per cent write-down – or else they will have to sit on the assets in the hope that values will rise.

Waiting would force banks to find other ways to meet any recapitalisation requirement from Brussels in order to avoid partial nationalisation.

“The ultimate reality is that it’s hard to see who will buy or finance this stuff,” said the source who has looked at the assets.

The estimate suggests that the latest round of bank stress tests by European regulators were right to factor in huge discounts on property values.

At the time, they were criticised for being too harsh on private assets and not harsh enough on sovereign debt – but banks could instead be facing a double-whammy of write-downs.

In response to market panics, many European banks have announced plans to raise their capital by stepping up their sell-off of non-core portfolios.

Ian Borman, a partner at law firm SJ Berwin who has worked on non-core deals, said: “There’s a big difference depending on where the property is. It wouldn’t surprise me if non-prime assets in some jurisdictions are seeing very low valuations.”

UKā€ˆbanks are likely to be less affected than their Spanish and Italian rivals.