dbrief may 3 european shake out final 050312 b real estate

The Great European

Shake Out

Guy Langford, Principal, Deloitte & Touche LLP

Thomas Kaylor, Principal, Deloitte Financial Advisory Services LLP

Vivian Pereira, Partner, Deloitte U.K.

Robert Young, Partner, Deloitte U.K.

May 3, 2012

The Dbriefs Real Estate series presents:

Copyright © 2012 Deloitte Development LLC. All rights reserved.

Financial sector deleveraging in Europe

How are banks responding on the asset side

Bank deleveraging-Structuring

U.S. background and market data

Debt portfolios and due diligence

Question and answer

Agenda

Financial sector deleveraging

in Europe


What do you see as the single most pressing challenge

facing European banks today?

• Improvement in shareholder value and Return on Equity

(ROE)

• Increased capital adequacy requirements

• Liquidity and funding pressure

• Reduction in risk weighted assets (RWA)

• Balance sheet reduction

• Not sure

Poll question # 1


• From U.S. sub-prime to global

financial crisis

• Euro zone sovereign crisis

coupled with financial crisis

• €2.2trn in non-core and non-

performing European banking

assets

• Governments and regulators

seeking solutions

Moving through the cycle, dealing with fallout from the crisis

Financial sector deleveraging in Europe

1,241

940

Non-core and non-performing assets (€'bn)

Non-core Non-performing

Note: Figures as at 31 December 2011Source: IMF, EIU & Deloitte Analysis; Prepared by: Deloitte UK


Banks in the UK, Germany and Italy account for the majority of total non-

core and non-performing assets in Europe but clearly a pan-Europe issue

Non-core and non-performing assets across

Europe

Non-core and non-performing assets

2011 2010

Country (€'bn) NC NPL Total

UK 400 129 529

Germany 349 116 465

Italy 102 179 281

Ireland 132 78 210

France 71 93 164

Belgium 152 11 163

Spain 2 154 156

Netherlands 5 48 53

Central & Eastern Europe - 46 46

Austria 28 15 43

Greece - 25 25

Portugal - 21 21

Denmark - 9 9

Cyprus - 7 7

Sw eden - 5 5

Luxembourg - 3 3

Malta - 1 1

Finland - 1 1

1,241 940 2,181

Notes: (1) NC = Non-core; NPL = Non-performing loans; (2) Central & Eastern Europe includes

Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.

Source: IM F, EIU & Delo itte Analysis; Prepared by: Delo itte UK

400

349

152

132

209

Non-core assets by country (€'bn)

UK Germany Belgium Ireland Others


179

154

129 116

361

Non-performing assets by country (€'bn)

Italy Spain UK Germany Others



• Aimed at addressing increased systemic risk posed by the sovereign

debt crisis in the Euro area

• Requirement for a 9% core tier 1 capital ratio taking into account the

summer 2011 macro stress tests plus the a capital buffer against

sovereign debt exposures to reflect market prices

• 70 European banks included in the sample

• An estimated €115bn in new capital is required to be raised

• Banks submitted capital plans to their national banking supervisor in

January 2012 and are required to achieve the capitalization target by

June 2012

• Bank actions to achieve the capital levels include capital raising, capital

restructuring, withholding dividends/bonuses and deleveraging

• The EBA warns against excessive deleveraging

European Banking Authority (EBA) pronouncements on capitalization

Measures to strengthen bank capitalization


• Increased capital adequacy requirements

• The need to reduce capital consumption and specifically RWA’s

• Responding to a range of stakeholder commitments to reduce balance

sheet

• Improvement in shareholder value and ROE

• Liquidity and funding pressure due to the reduction in inter-bank funding

Regulatory reform & balance sheet optimization

Challenges facing European banks today

Deleveraging and asset divestment have a role to play

in responding to each of the above challenges

How are banks responding on

the asset side


What is the single most common response by European

banks to the recapitalization and deleveraging issue?

• Capital raising via rights issues, private raises, etc.

• Conversion of lower quality capital and debt instruments

to CT1 eligible capital

• Establishment of a non-core asset strategy

• Separation of core from non-core assets

• Design of a structured wind down plan

• Not sure

Poll question # 2


Effective use of a range of asset reduction approaches

How are banks responding on the asset

side?

• Establishment of non-core

strategies

• Separation of non-core from core

• Design and implementation of

structured wind down programs

• Selective divestments that are not

capital destructive

-

50

100

150

200

250

300

350

400

450

Deleveraging approaches by selected European banks (€'bn)

Lending Legacy assets CIB / markets CEE Greece / Ireland

Source: Morgan Stanley; Prepared by: Deloitte UK


Divestments of non-core US assets picked up in 2011 with further

opportunities expected as banks further reduce balance sheet and exit non-

core assets and markets

Selected divestments of US assets by European

banks

Deal Seller Buyer Reported

Deal size

April 2012:

Eurohypo sells US CRE loan portfolio

Eurohypo AG Wells Fargo & Blackstone $0.6bn

February 2012:

BNP sells North America energy loan portfolio

BNP Paribas Wells Fargo $9.5bn

November 2011:

Bank of Ireland sells project finance and energy loans

in North America and Europe

Bank of Ireland Sumitomo Mitsui Banking

Corp

$0.8bn

October 2011:

Santander sells a 25% stake in its U.S. auto loans

unit

Santander Confidential $1.2bn

August 2011:

HSBC sells US credit card business

HSBC Capital One Financial Corp $32.7bn

August 2011:

Anglo sells US CRE loan portfolio

Anglo Irish

Bank

Lone Star, J P Morgan &

Wells Fargo

$9.5bn

August 2011:

Bank of Ireland sells US CRE loan portfolio

Bank of Ireland Wells Fargo $1.4bn

May 2011:

Allied Irish sells US CRE loan portfolio

Allied Irish

Bank

Blackstone & Wells Fargo $1.0bn

Source: Press articles and other public information

Prepared By: Deloitte UK

Bank deleveraging-

Structuring


What type of transaction activity do you expect to see

more of in the next 12 months?

• Private asset sales

• Public asset sales

• Structured transactions

• Capital raising

• All of the above

• Not sure

Poll question # 3


• Structured transactions occur where a ‘clean’ sale has not been

possible

• Key driver is capital

• Implement a risk sharing arrangement – enable banks to reduce capital

usage

• A staging post for an eventual disposal – in the meantime, assets

managed by a private-equity fund to enhance recoveries

• Used to manage new risks – e.g. redenomination risk

Bank deleveraging – Structuring

U.S. background and market

data


Of the following five (5) ways that the Eurozone debt crisis

could affect the U.S. – which one is the largest concern for

your organization?

• U.S. banks are 'tethered' to those in Europe

• A potential threat to U.S. exports

• U.S. companies' investments in Europe at stake

• The potential impact on individual investors

• A dramatic effect on the 2012 election

• Not sure or Not Applicable

Poll question # 4

• In U.S., not much happening in election year but look for lots of proposed

budget and regulatory changes in 2013

• Bank stress test results will require increased Tier 1 capital which will result in

additional asset sales

• Repayment of TARP funds needs to continue for 2nd tier banks

• Large banks need to add performing real estate and C & I loans to their balance

sheets quickly

• Potential external shocks to system include a blow-up in Europe and other

geopolitical issues

Activity in U.S. marketplace

• Wells Fargo has acquired loans from

Anglo Irish

Allied Irish

Bank of Ireland

• JP Morgan Chase has acquired loans from Anglo Irish

• US Bank, GE Capital, CIT, and others are actively seeking loans.

• Active purchasers of distressed debt: Blackstone, Lone Star, Starwood

• Looming maturities

United States debt background Moving through the cycle, dealing with fallout from the financial crisis


$213.1 $209.8

$182.3

$150.0

$112.3

$85.1 $66.3

$44.0 $32.2

$53.3 $62.4

$66.6

$101.1

$112.2

$133.0

$40.4

$25.7

$20.2

$23.4 $24.5

$23.6 $22.9

$24.1 $22.9

$20.0

$17.3

$15.8

$72.4 $74.3

$72.3 $65.5

$59.0 $51.8

$44.2

$34.9

$25.3

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Banks CMBS Life Cos Other

U.S. CRE debt maturities due to peak in FY13

Prepared by: Deloitte LLP

Source: Trepp LLC, 4Q11 Update

$1.4 Trillion $ Billion

CRE Debt Maturities by Lender Type

At least $1.4 trillion of CRE debt will mature between FY12 and FY15. Trepp LLC estimates

that nearly 63.0 percent of these loans are underwater, which raises concerns on the timing

of a CRE recovery.


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

Total Outstanding Distress

Troubled REO Restructured Resolved

Prepared by: Deloitte LLP Source: Real Capital Analytics (RCA), January 2012

Net inflows to distressed properties declined 33.2 percent YoY to $12.8 billion in 4Q11, due to stabilizing

commercial property fundamentals and relatively favorable refinancing conditions. $ Billion

Distress by Property Type Distress by Region

Western U.S. continues to lead the volume of distress assets, with Las Vegas recording the highest distress.

By property type, Office accounts for the highest distress ($41.0 billion).

As of December FY11, outstanding distressed assets in the U.S., including loans and REO, decreased 2.9 percent YoY to $171.9 billion. Total distress was $350.8 billion.

25.3%

20.7%

12.5%

17.6%

16.6%

7.3%

Office

Apartment

Hotel

Development & Other Retail

Industrial

28.3%

22.1% 16.0%

14.0%

13.1%

6.6%

West

Southeast

Southwest

Northeast

Midwest

Mid-Atlantic


U.S. distress slows amid stabilizing property fundamentals

Debt portfolios and due

diligence


Where do you believe may hold the best risk-return

opportunity with either performing or non-performing loan

portfolios from lending institutions?

• U.S. banking institutions with European assets

• U.S. banking institutions with domestic assets

• European banking institutions with European assets

• European banking institutions with domestic assets

• Not sure

Poll question # 5


Debt portfolios: Sellers, buyers and type

Sellers

• Bank & non-bank financial institutions

• Savings institutions

• Insurance companies

• Governments and regulators

Buyers

• Strategic buyers (i.e. banks, pension funds, life companies)

• Financial buyers (i.e. Private Equity/Hedge Funds)

• Real estate funds

• Debt purchasers

Debt Portfolios

• Corporate loans

• Commercial property debt

• Residential mortgages

• Unsecured consumer debt

• Asset finance loans

Non-core and underperforming debt portfolios


Loan portfolio considerations Non-core and underperforming debt portfolios

Data Analytics &

Due Diligence

Closing

& Post Deal

Investment

Decision

Data Analysis/Stratifications &

Portfolio Level Reports

Assessment of Information

Content & Quality

Review of Credit Origination

and Underwriting Quality

Property Diligence, Strategy

and Valuation

Confirmatory

Due Diligence

Investment Committee

Presentation

Data Aggregation and Cash

Flow Modeling

Historical Portfolio

Performance Analysis

Key Asset Summary Reports

Portfolio Management & Exit

Strategies

Loan Transfer Coordination

and Take-on Setup

Loan Workouts and

Restructuring

Sellers and Buyers of Debt Portfolios

Monetizing U.S. and European Assets.

Question and answer

Join us May 8 at 2 PM ET as our Banking & Securities series presents:

Securitization: A Regulatory Update for Financial Institutions


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for immediate download.

Click the Request CPE link in the

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Thomas Kaylor Vivian Pereira

Principal Partner

Deloitte Financial Advisory Services LLP Deloitte U.K.

+ 1 415 783 4242 +44 20 7007 0558

[email protected] [email protected] [email protected]

Guy Langford Robert Young

Principal Partner

Deloitte & Touche LLP Deloitte U.K.

+ 1 212 436 3020 +44 20 7007 2571

[email protected] [email protected]

Contact information

mailto:[email protected]


This presentation contains general information only and Deloitte is not, by means of this presentation,

rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.

This presentation is not a substitute for such professional advice or services, nor should it be used as a

basis for any decision or action that may affect your business. Before making any decision or taking any

action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not

be responsible for any loss sustained by any person who relies on this presentation.

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2012 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited

dbrief may 3 european shake out final 050312 b real estate

Documents

deloitte uk copyright

deloitte development

noncore nonperforming

separation of noncore

noncore assets design

eiu deloitte analysis

nonperforming assets

capital buffer