Why European Banks Are Sacrificing Growth

Illustration by Topos Graphics

By Anne-Sylvaine Chassany, Kevin Crowley and Charles Penty

Under pressure from regulators to bolster capital, European banks are selling some of their fastest-growing businesses to competitors from outside the region. The sales may leave them better able to withstand financial stress—and less able to boost future profits. Spain’s Banco Santander, which said in October it needs an additional €5.2 billion ($6.9 billion) to meet capital requirements, sold its Colombian unit in December to Chile’s Corpbanca for $1.16 billion. Germany’s Deutsche Bank is weighing options including the sale of most of its asset management unit, while Belgium’s KBC Groep may dispose of businesses in Poland.

Such sales are an unintended consequence of the decision by European regulators to make banks increase capital—a buffer that protects against credit losses—to help them survive the worsening sovereign-debt crisis. The European Banking Authority on Dec. 8 ordered the region’s financial companies to raise €114.7 billion of additional capital by the middle of 2012.

To reduce their reliance on the markets for funding, banks across Europe have pledged to cut assets by more than €950 billion over the next two years, according to data compiled by Bloomberg. About two-thirds of that will come from sales of profitable units and performing loans, says Huw van Steenis, a Morgan Stanley analyst in London. While it may be hard to get premium prices for those businesses in a crisis, other options for raising money are even less appealing. Lenders don’t want to issue additional shares because their stock prices are too low: The Bloomberg Europe Banks and Financial Services Index is down 33.5 percent this year. Selling troubled loans is also problematic. If the banks accept the low prices investors are willing to pay, the lenders would have to record losses on the loans, and those losses would erode their capital. As a result, distressed assets and souring loans will account for just 4 percent of asset reductions over the next two years, according to van Steenis.

That leaves selling entire business units outside of their domestic markets. These are the most profitable parts of their business,” says Azad Zangana, European economist at London-based Schroders, citing Spanish and Portuguese banks selling assets in Latin America. “You begin to become a less profitable organization. Your business model stops working if you’re being forced to lend only to an economy that’s going through a very deep recession.”

By shedding some of their best assets, the sales may make banks less stable. “Lenders are selling more liquid assets so they can get a price that avoids additional capital losses,” says Joseph Swanson, co-head of restructuring at Houlihan Lokey in London. “Unfortunately, this strategy can result in lower asset quality and increased earnings volatility.”

Santander completed the sale of its Brazilian insurance operations to Zurich Financial Services for $1.7 billion in October. The Spanish bank also sold a $958 million stake in Banco Santander Chile, the South American country’s biggest bank by assets. The Chilean bank’s net profit grew 45 percent between 2008 and 2010 and may increase 15 percent this year, to about $970 million, according to analyst estimates compiled by Bloomberg. Santander said it will also sell a stake in its Brazilian banking unit. The Spanish lender’s planned sale of part of its U.S. consumer loan business to a group led by KKR may cut net profit for Santander’s shareholders by €150 million, according to an Oct. 28 estimate by Raoul Leonard, an analyst at Royal Bank of Scotland Group in London. “Assuming multiple asset sales may be in the pipeline, this could lead to a meaningful negative drag” on earnings, Leonard wrote. A spokeswoman for Santander declined to comment.

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You Deserve the Team You Get

By G. Michael Maddock and Raphael Louis Vitón

Whoa.

We have received thousands of comments, scores of e-mails, and a bunch of phone calls in response to our last two columns, Three Kinds of People to Fire Immediately and Three Types of People to Hire Today.

So, what are the takeaways?

The biggest one is this: Whether you are a happy or unhappy worker, a good or bad manager, an enlightened or naïve leader, you deserve the team you get. Said differently, we all play a role in what our teams and companies become. We must choose to take control of the results or risk making ourselves victims of the situation.

Either way, we must live with the results of our choices. For some, this means complaining more; for others, it means leaving for another opportunity, and for others still, it means creating a different reality.

Your authors aspire to be creators and prefer to hire and inspire creators as well. If you’ve built a culture of innovation, we presume you agree and act in kind.

The next biggest insight was this: People want to create new products and services because it is rewarding, but it is one of the hardest things for a culture to do.

And what follows from that insight is this one: You want to make your company a safe place for everyone, because fear is the enemy of invention. To do that requires the right kind of colleagues.

More specifically, you want to hire people who:
1. Challenge themselves and everyone around them to co-create the best ideas. “Good enough” never is.

2. Have an entrepreneurial mindset. No, they don’t need to have started a company in their past or even have had a lemonade stand as a kid. Entrepreneurs—and people who think like them—love solving challenges. The tougher the better. The entrepreneurial mind leads to creation. It reveals opportunities where others see problems. Show us someone with an entrepreneurial bent, and we’ll show you a person who feels completely in control of his or her choices and the outcome.

3. Complement one another. An organization filled with right-brained, divergent people will probably come up with an endless string of new ideas but lack the discipline to carry them to fruition. A left-brain-dominated, convergent culture will execute well, but the quality of the ideas could be lacking. In our experience, the most innovative companies and the most enlightened leaders have found a balance that allows the team to identify and focus on the most important insights, create differentiated ideas to meet them, and execute the ideas with precision. Is your team in balance? How about your leadership style? Does it create imbalance?

And as team captain, you want to make sure you do those three things yourself. We cannot stress that enough.

And now, at the risk of triggering hate mail again, let us underscore whom you simply have to fire if innovation is your charge. When faced with any of the following three types of destructive and consistent behavior—and you have found it impossible to change the chosen mindset that produces it—say goodbye. Quickly.

But first a disclaimer: We hate letting people go. We think you should, too. A termination often indicates that the company has failed the person. So we agree with the many angry readers who have suggested that you must strive to hire only people with the right DNA and then surround them with managers who make them even better. Then and only then, do you fire them if they don’t improve.

Now on with whom you should terminate:

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