Alvarez & Marsal
Challenges facing the European Banking Sector
L E A D E R S H I P  P R O B L E M SO L V I N G  V A L U E C R E A T I O N
© Copyright 2011. Alvarez & Marsal Holdings, LLC. All Rights Reserved.
September 2011
Banking Crisis is back in Europe
iTraxx Financials Senior 5 year CDS
Financials index
120
S&P500 financials
Indexjan2010=100
110
100
90
80
70
60
Euro STOXX financials
50
40
jan
maj
sep
09
jan
maj
sep
10
jan
maj
sep
11
Source: Reuters EcoWin
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January 16th; The US government provides
the Bank of America another 20 billion dollars
from its 700 billion dollar financial rescue fund
to help it with the losses incurred when bought
Merrill Lynch
September 30th;The Irish
government guarantees
deposits in the country’s main
banks for two years
2008
February 11th; Ireland says it
will inject €7 billion into Bank of
Ireland and Allied Irish in return
for guarantees on lending,
executive pay and mortgage
arrears.
2009
January 15th; The Irish
Government says it is to
nationalise the Anglo Irish Bank
September 15th; Wall Street
Bank Lehman Brothers files for
Chapter 11 Bankruptcy
protection and Merrill Lynch is
taken over by Bank of America
2010
June 22nd ; Greek PM tries to
persuade MPs to approve €28
billion of cuts, tax rises, fiscal
reforms and privatisation plans.
Euro zone ministers say the
legislation must be passed to
receive a 12billion Euro loan
Greece needs to pay its debts
2011
May 2nd; Greece gets a
€110billion bail out from other
countries using the euro, and
the IMF
November 21st; Irish Finance
minister says he will recommend to
the Government that the country
formally request a bailout package
from the EU, ECB and IMF
Total Debt outstanding as % of GDP €bn
0
200
Portugal
Spain
600
800
1000
1200
1400
1600
1800
2000
143%
Greece
Ireland
400
96%
93%
60%
Italy
119%
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Ireland
Greece
Credit bubble
Inflated property market
Poor lending practices
Over reliance on property taxes
Property crash
Govt. Guarantee transferred bank
risk to the sovereign
 Series of bank recapitalisations
which stretched the sovereign
 Troika support package
 Independent stress tests to
establish capital needs for banks
 Sovereign issued too much debt,
a significant part of which was
purchased by Greek banks
 Lower rates of tax collection
 Insufficient public sector reform
 Market confidence in sovereign
dropped
 First and second Troika support
package
 Risk of haircuts on sovereign
debts weakened bank balance
sheets
 Delays in implementation of
agreed package
 Stress tests being conducted to
bring transparency on bank
balance sheets






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Portugal
 Sovereign issued too much debt
 Insufficient reform to increase
flexibility
 Market confidence in sovereign
dropped
 Troika support package
 Reform package agreed
 Stress tests being conducted to
bring transparency on bank
balance sheets
4
Sovereign downgrades have an extremely negative effect on domestic banks funding
options
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5
Debt Exposure Breakdown
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6
The outlook for Ireland Inc
 Bonds prices have stabilised. Ireland currently delinked from
Greece
 Exports are increasing
 Banks are attracting new investors – Bank of Ireland
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7
Non-Performing Loans in Europe
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8
Outlook for Europe
 Ireland, UK, Eastern and Northern Europe in relatively good shape
 Majority of sovereign debt is held by domestic and German banks
 Therefore debt restructuring will adversely affect already weakened
domestic banks
 In the event of a debt restructuring of 30-50%; the worst hit will be
domestic and state-owned German banks*
 French banks already experiencing liquidity problems
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* Measured impact of a haircut that is greater than
5% of Tier 1 Capital
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The next 12-18 months
 Banks can only mitigate the effects; unable to eliminate them.
 Greater reliance on central bank liquidity & ECB/IMF funding options
 Liquidity / Sovereign risk trade-off
 The continent will have to become more transparent before we can
hope for stability
 Government administration needs to be restructured
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