By Thomas Clouse, Jonathan Gregson, Antonio Guerrero & Gordon Platt
TOUGH TIMES CONTINUE IN EUROPE
Europe remains mired in recession. Apart from Germany and the Nordics, major European economies are either flatlining or, as among the southern peripherals, contracting further as austerity bites. The prospect of deflation grows. The eurozone’s core gauge of inflation has dropped to 1.5%. And while the European Central Bank’s promise to do “whatever it takes” to save the euro staved off market worries, potential cures such as a single European Banking Union or the monetary financing of deficits remain distant.
The negative feedback loop between sovereign and bank continues in Southern Europe. Europe’s banks have therefore been reducing their assets and other liabilities, strengthening their capital base and cutting costs by shrinking branch networks in favor of digital conduits, in order to meet Basel III capital adequacy requirements. And they are hoarding more of their money at home, with bank cross-border flows shrinking by $3.7 trillion, of which intra-European flows account for $2.8 trillion. Those feeling the squeeze most are banks in Southern and southeastern Europe.
France’s biggest banks were undercapitalized and overexposed to Southern Europe when the financial crisis struck. Market leader BNP Paribas has gone farthest in righting that position, reducing its risk-weighted assets by a further €62 billion ($80 billion) in 2012. Its cost of risk fell dramatically while liquidity buffers improved more than twofold compared with the previous year-end. CEO Jean-Laurent Bonnafé observed that in a challenging environment for the entire banking industry, BNP Paribas succeeded in maintaining its client franchise, profitability and strong risk-management culture, while adapting the organization to changing market conditions and regulation. Operating revenues grew marginally in 2012, and there was a 4.7% increase in deposits. Net income rose from €6 billion to more than €6.5 billion. Looking ahead, BNP Paribas plans to expand its presence in Asia. The group’s capital base was strengthened; its Basel II Tier I capital ratio stands at 11%.
Jean-Laurent Bonnafé / www.bnpparibas.com
COUNTRY WINNERS—WESTERN EUROPE
With a history dating back to the 19th century, Bank Austria has been part of Italian-owned UniCredit Group since 2005. Total assets increased by 4.2% last year to €208 billion, while net interest income grew by 1.3%. Despite write-offs that dragged down pretax profits by 6.9%, return on equity nearly doubled to 2.4%. CEO Willibald Cernko said operating income in Austria was relatively stable and performance was supported by good asset quality and, consequently, a further decline in net write-downs of loans. The bank’s core Tier 1 ratio stood at 10.6% at year-end.
Willibald Cernko, CEO / www.bankaustria.at
Despite France’s flatlining economy, the bank’s domestic retail arm managed to grow deposits by 4.7%, fueled by a near 10% increase in funds held in savings accounts. And while loan demand slowed, BNP Paribas grew its overall loan book by 1.5% during 2012, with lending to SMEs up by 2.7%. CEO Jean-Laurent Bonnafé highlighted the bank’s solid performance and excellent quality of its employees in this key domestic market. In 2012, Bonnafé said the bank continued to support the needs of its diverse client base in France, including corporates, individuals and SMEs, and continued to finance the real economy. Amid a low-interest-rate environment and weaker demand for loans, net interest and operating income both fell by 0.9%. The bank achieved a 1.7% reduction in its operating costs. “Going forward,” says Bonnafé, “we will continue to invest in technological and digital innovations that address our customers’ changing behavior. These will lead to a better customer experience and further improvements in operating efficiency.”
Jean-Laurent Bonnafé, CEO / www.bnpparibas.com
Although most of its profits are generated outside Germany—and much of that comes from investment banking—Deutsche Bank remains close to its roots. “Our commitment to our home market, Germany, remains a cornerstone of our vision and strategy,” says Dirk Schmitz, co-head of corporate banking and securities, Germany.
According to preliminary results for 2012, group revenues were slightly up at €33.7 billion with improved performances from asset and wealth management, global transaction banking, and corporate banking and securities. The bank is introducing stricter centralized governance and controls for new spending, rationalizing its IT platform and accelerating capital demand reduction. Core bank provisions for credit losses were down by a third to just under €1.5 billion. Deutsche Bank strengthened its core Tier 1 capital ratio to 11.4%, which puts it ahead of schedule to reach the planned 8.5% ratio this summer. “In coming years,” says Schmitz, “we want to build an even stronger domestic bank, increase our client focus and improve client proximity.”
Anshu Jain and Jürgen Fitschen, co-chairmen of the management board / www.db.com
National Bank of Greece
Against a background of deepening recession and technical insolvency, Greece’s banking sector is being propped up by a €16 billion bailout from the European Financial Stability Facility. After absorbing Eurobank, National Bank of Greece is the largest player, and so, by the criteria of being “too big to fail,” NBG wins this year’s award. Last year it took big hits from the haircut on Greek government bonds and massive restructuring. The bank is in workout mode, cutting costs, making heavy provisions for bad loans and trading losses, and, most recently, announcing a 15% reduction in staff levels. The latest third-quarter figures show nonperforming loans rose to 18% from 11% against the same period in 2011. This, however, is significantly better than the average 22% ratio across the Greek banks. As for profitability, NBG’s losses nearly doubled to €2.46 billion.
Alexandros Tourkolias, CEO / www.nbg.gr
Bank of Ireland
Ireland may be the poster boy of Europe’s struggling peripherals, but the combined impacts of austerity and a collapsed housing market make it a tough place to be a banker. Yet Bank of Ireland’s group chief executive, Richie Boucher, reports making good progress against its strategic objectives by enhancing core franchises and rebuilding profitability within a restructured, robust balance sheet.
The bank has a 40% market share of new mortgage lending and is restructuring those in arrears. Lending to SMEs grew by 16% in 2012. An operating profit of €242 million morphed into a €1.46 billion underlying loss after impairments and other charges. But the main task is rebuilding the balance sheet, and here Boucher points to further progress in deleveraging. “We completed €10.6 billion of asset divestments ahead of schedule,” he says, adding that good growth in deposits contributed to the strengthening of its loan-to-deposit ratio to 123%. “We have improved our funding position and reduced the group’s utilization of wholesale funding by €15 billion during 2012. We successfully re-accessed funding markets across the capital structure.”
Richie Boucher, CEO / www.boi.com
Intesa Sanpaolo, the country’s oldest and still leading banking group with nearly 11 million customers and 5,300 branches, increased its operating income by 6.5% thanks to a 17.3% improvement in operating margins and a 2.6% reduction in costs. Deposits from the baking business rose by 5.6%. The bank’s Tier 1 capital ratio strengthened from 10.1% to 11.2% at year-end. “In light of the difficult and highly volatile landscape,” observed CEO Enrico Tommaso Cucchiani, “we decided to pursue a prudent strategy and defined a set of clear management priorities privileging balance sheet and liquidity strength to achieve sustainable profitability.” He says the group is performing in line with or better than its main European peers on most indicators.
Enrico Tommaso Cucchiani, CEO / www.intesasanpaolo.com
Banque et Caisse d’Epargne de l’Etat
Even in such an overbanked country as Luxembourg (banking assets are 22 times GDP) state-owned BCEE has a large domestic presence, with half of all residents considering it as their principal bank. Founded in 1856, BCEE remains something of a national institution. Customer deposits increased by nearly 20% to the last year-end, although the bank acknowledged that a portion of this increase could be attributed to short-term deposits. Customer loans and advances grew by 7.4% on the back of strong mortgage demand, commission income rose by nearly 10%, overall banking income increased by 6% to nearly €300 million, and net earnings were up 13.2% to close at €127 million. The bank’s core Tier 1 capital ratio stood at 16.2%.
Jean-Claude Finck, president and CEO / www.bcee.lu
Bank of Valletta
The island’s largest bank lifted pretax profits by 72% to €110.7 million, largely on the back of increased lending activity and a 7.7% improvement in interest income. Amid fierce competition for deposits, Bank of Valletta grew these by 5.2% over the year to end with a record €5.8 billion. The bank’s operating profit rose by 44.7%, and impairment charges were raised by 42%. Nonperforming loans were reduced from 5.1% to 4.4% of the portfolio. Chairman Frederick Bonnici said the bank would remain cautious in its approach to provisioning and continue to give strategic priority to capital management. He noted that its core Tier 1 ratio had strengthened to 10.7%, and that, barring unforeseen circumstances and assuming current core profitability levels, the bank will achieve full compliance with Basel III capital requirements within the stipulated time frame through profit retention alone.
Charles Borg, CEO / www.bov.com
Restructuring is in full swing at ING, the global banking and insurance group that needed a Dutch government bailout four years back. Divestments continued last year, including ING Direct franchises abroad and investment management units in Asia, prior to the complete separation of its banking and insurance arms. ING has repaid €7.8 billion of the €10 billion of capital injected by the state and booked more than €1 billion in restructuring costs (as against just €60 million in 2011) in order to gain annual savings of some €200 million by late 2015. Active de-risking and stronger provisioning—up by more than €500 million to €2.1 billion—meant net results were almost down by a third at €3.9 billion. But ING strengthened its Basel III core Tier 1 ratio from 9.6% to 11.9%. Chairman Jan Hommen commented that through challenging times ING had become financially stronger. “We are now a more agile bank with a sharper focus on our key markets, such as the Netherlands.”
Jan Hommen, chairman / www.ing.com
“We are now a more agile bank with a sharper focus on our key markets, such as the Netherlands.”
– Jan Hommen, ING
Banco Santander Totta
Last year Santander Totta was the only one of the top five Portuguese banks not to seek a public or private share capital injection. Improved profitability was reflected in a year-on-year jump in return on equity from 1.5% to 12.9%. CEO António Vieira Monteiro said in spite of the economic recession that conditioned the country in 2012, Santander Totta was able to strengthen the solidity of its accounts, attaining a 12.3% core capital ratio, and significantly increased its net income to just over €250 million. He attributes a significant part of this to an almost doubling of recurring income from domestic commercial banking to €115 million and strong growth in deposits. Meanwhile, operating expenses were reduced by almost 10%.
António Vieira Monteiro, CEO / www.santander.pt
Spain’s economy is in austerity-driven recession (the OECD expects it to shrink a further 1.4% this year), its government avoiding a formal bailout and its regional and savings banks suffering from the collapse of a real estate bubble. Add in the threat to uninsured depositors following the Cyprus debacle and it is understandable that there is a “flight to quality”—namely, the large banks like BBVA with overseas earnings and strong balance sheets. Chairman and CEO Francisco González believes this year is BBVA’s moment. He acknowledges that 2013 will be a difficult year for Spain as a whole but is of the opinion that this crisis could be a great opportunity to build a new European Union and a Spanish economy on more sound and competitive grounds. He also points out that throughout the crisis BBVA did not cost the taxpayer a dime. Last year the bank increased its assets by 6.7% to nearly €640 billion, customer deposits were up 3.7%, and lending rose by a restrained 1.7%. Net interest income rose by 12.3% in the third quarter. BBVA paid back €8 billion in loans from the European Central Bank. Its bad loans book in Spain increased, but not nearly so much as other Spanish banks. The bank’s Tier 1 capital adequacy ratio stood close to 11% at year-end.
Francisco González, chairman and CEO / www.bbva.com
Hans-Ulrich Meister, joint head of private banking and wealth management and CEO (region Switzerland), stressed Credit Suisse’s role as a trusted partner to clients in its home market. It achieved this in its business with private, corporate and institutional clients in Switzerland and in its asset management business—as well as in investment banking—by identifying clients’ diverse needs and providing them with appropriate financial solutions. He said the bank had also adapted its business model to the changing regulatory environment, focusing on less-capital-intensive, fee-earning activities like global wealth and asset management, and running a universal bank in Switzerland. Deleveraging continues, both in terms of total assets and risk-weighted assets, which were reduced by SFR55 billion ($59 billion) to SFR284 billion at the year-end, while operating costs were down 4% to SFR21.5 billion. Underlying pretax income was just over SFR5 billion—more than double the previous year. The bank’s core Tier 1 ratio strengthened from 10.7% to 15.5%.
Brady Dougan, CEO / www.credit-suisse.com
Under previous CEO, Bob Diamond, Barclays was known for its high-risk/high-bonus culture and involvement in the Libor rigging scandal. Enter new CEO, Antony Jenkins, with plans to reduce high-risk/capital-intensive operations, curb top pay and bonuses and drive down costs. “We are turning the organization around, with a clear purpose and common values,” says Jenkins. “We are reshaping the business to generate sustainable returns, making long-term changes to our culture, rewards, controls and costs to allow us to sustain that return in future.” Bonuses paid in 2012 were down 16% and overall cost/income ratio improved from 71% in 2011 to 62% last year. Impairment charges were down by 5%, net operating income was 3% better, and adjusted pretax profits (including disposals) were up 26%. The bank’s core Tier 1 ratio was steady at 10.9% at year-end.
Antony Jenkins, CEO / www.barclays.com
“We are reshaping the business to generate sustainable returns, making long-term changes to our culture, rewards, controls and costs to allow us to sustain that return in future.”
– Antony Jenkins, Barclays
The Nordic region’s largest financial group, with 11 million customers and total assets of some €677 billion, Nordea broke all previous records in 2012 in terms of the number of customers, the group’s capital base and profitability. Certainly, the health of most Scandinavian economies and their status as safe havens (particularly those outside the eurozone) helped. Nordea’s ability to grow its operating income by 8% and profits by 11%, to just short of €1.1 billion, is impressive. Return on assets increased to 11.6% and the capital base strengthened. The group’s core Tier 1 ratio stood at 13.1% at year-end. Group CEO Christian Clausen says the bank will further develop its customer relations, and will continue to improve cost and capital efficiency in the years to come. “Our plan is to improve capital and liquidity buffers and achieve a return on equity well above the cost of capital, creating a sustainable bank that continues to attract competitive funding, promote new technology and drive efficiency.”
Christian Clausen, CEO / www.nordea.com
“Our plan is to improve capital and liquidity buffers and achieve a return on equity well above the cost of capital.”
– Christian Clausen, Nordea
COUNTRY WINNERS —NORDIC REGION
The bursting of Denmark’s real estate bubble wrought havoc with some local banks. Danske Bank weathered the storm better than most and last year grew its total income by 10% to DKr47.7 billion ($8 billion). Pretax profit more than doubled to DKr8.6 billion, the best results the bank has posted since 2007. Cost cutting and internal efficiencies brought the bank’s cost/income ratio down to below 56% from 60% the previous year. Loan impairment charges were down 5%. CEO and chairman Eivind Kolding says: “The earnings and cost initiatives, together with improved conditions in the capital markets, have brought about improvements in 2012. We are in full swing with the implementation that will ensure we achieve our targets in 2015.” The bank’s core Tier 1 capital ratio stood at 14.5%.
Eivind Kolding, chairman and CEO / www.danskebank.com
Although the Finnish economy dipped slightly in 2012, Nordea grew its operating income from €2.6 billion to €2.8 billion. Profit before loan losses grew by €108 million to €1.8 billion. Write-offs doubled to €144 million, and interest margins were squeezed, but Nordea reduced its cost/income ratio to 38%. “We started to build the bank of the future early,” says Ari Kaperi, senior country executive, “and we are on the right track, but a lot remains to be done.” The bank’s Tier 1 capital ratio rose from just short of 13% to 18%, while return on equity was boosted from 9.6% to 11.4%.
Ari Kaperi, senior country executive / www.nordea.com
Nordea Bank Norge
Norway continues to have the strongest economy among the Nordics, and NBN put in a sparkling performance last year. Net profit rose by 32% to NKr4.4 billion ($769 million) thanks to higher income, flat costs and a 33% reduction in loan losses. The bank reduced its operating expenses by 5%, while net interest income grew 7%. Country senior executive Gunn Waersted, believes that the bank’s strong customer focus and high operational efficiency is the right strategy for shaping the future relationship bank. The bank’s core Tier 1 capital improved to 14.1% from 10.1% in 2011.
Gunn Waersted, country senior executive / www.nordea.com
Nordea’s Swedish operations turned in good figures for 2012. Net interest income rose by nearly a third to SKr4.2 billion ($652 million), fee and commission income was marginally down because of a charge for payment to the state stabilization fund, and costs held steady at SKr487 million. Operating income rose by a billion to almost SKr4.1 billion, while profits jumped by 32.7% to SKr3.6 billion. “Our determination to stand by our customers through the financial crisis,” says country senior executive Lennart Jacobsen, “and our focus on cost efficiency, is a solid foundation for our stability and reliability.”
Lennart Jacobsen, senior country executive / www.nordea.com
CENTRAL & EASTERN EUROPE
Raiffeisen Bank International