by Jason Jenkins, Investment U Research
Thursday, January 5, 2012
The feeling in the markets is that European companies are selling at a discount. As I wrote a few weeks back, Bloomberg data shows that takeovers in Europe by foreign companies rose nearly 60% in 2011.
Since the sovereign debt crisis reared its ugly head with Greece a few years back, the euro has fallen by about 13% against the dollar. A cheaper European currency makes a more favorable environment for U.S. buyers.
U.S. and Asian companies aren’t looking to acquire European companies to gain access to Europe. However, they want the technology many of these companies possess and access to emerging markets many European companies have established
Well, this environment has created another buying opportunity in the Eurozone. Now businesses and financial firms are entering the market, facilitating loans and buying up assets formerly owned by European banks.
Forcing European Banks to Get Their House in Order
BASEL III is a global regulatory standard on bank capital requirements, stress testing and liquidity. As the name states, this is the third of the Basel Accords – a conference of the world’s central bankers which meet to set global banking regulations.
The package aims to make banks more resilient by forcing them to hold more quality capital against unexpected losses and require banks to hold core Tier 1 capital equal to 7% of their assets adjusted for risk or face restrictions on paying bonuses and dividends.
A new study by The Boston Consulting Group found that European banks will have to raise about $260 billion in new capital or cut their balance sheets by nearly 20% to achieve the tougher new Basel III banking reform rules that start in 2013.
Banks in Europe have a harder way to go than those in the United States and Asia, which each faced a collective shortfall of a little less than $90 billion.
A Fire Sale to Boost Balance Sheets
European banks are desperate to raise capital and shrink their balance sheets, often under orders from regulators. European financial institutions need to get rid of $3 trillion in assets over the next year and a half, according to an estimate from Huw van Steenis, an analyst with Morgan Stanley.
The New York Times recently reported that experts expect these kinds of sales to jump as European banks race to meet the June deadline imposed by the European Banking Authority to raise more than 114 billion euros in fresh capital. Financial institutions also have to increase their Tier 1 capital ratio – the strictest yardstick of a bank’s ability to absorb financial blows – to 9% of assets.
Besides buying cheap assets from Europe, analysts predict that firms like JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C) and Goldman Sachs (NYSE: GS) will capture more trading business on Wall Street as European institutions reduce trading activity.
However, research shows two firms that may highly benefit as potential buyers of European bank assets at distressed levels. Stay tuned as this story unravels…