Eurozone banks to clean house ahead of ECB review

(Full story)

By Lionel Laurent and Helene Durand

PARIS/LONDON, Oct 24 (Reuters/IFR) - Euro zone banks are expected to issue more debt, increase loan provisions and speed up asset sales in the next couple of months as they knock their balance sheets into shape ahead of the European Central Bank's (ECB) sector health-check next year.

The ECB will take a snapshot of loans and other assets, including holdings of government debt, from the balance sheets of 128 banks at the end of this year and scrutinise their riskiness before it takes over as the bloc's banking supervisor late next year.

The starting point for the ECB's Asset Quality Review (AQR) gives the euro zone's banks less than 10 weeks to burnish their books, and small to mid-sized lenders in Italy, Spain and Portugal are considered most likely to take pre-emptive action.

"Banks will want to take corrective measures before the end of the year. It's far better not to be singled out by the AQR as having had a problem and fixed it in 2014; it's better to avoid that and do it now," said Mike Harrison, a banks analyst at Barclays.

The most straightforward way of reducing the perceived riskiness of their books would be for banks to set aside more money to cover potential future loan losses, which probably implies taking a hit to fourth-quarter earnings.

"The earnings risk element of the AQR means it could take longer for the earnings cycles at many banks to normalise," said Harrison.

Eurozone banks have already shrunk their balance sheets by 2.9 trillion euros ($4 trillion) since May 2012 - by renewing fewer loans, repurchase and derivatives contracts and selling non-core businesses - according to data from the ECB.

Lenders could bring forward asset sales, including loan books, equity stakes and subsidiaries, before year-end.

"Now that we have the wording and that we know the rules of the game, I believe that some banks will feel like they have some room for manoeuvre," said Khalid Krim, Managing Director, Head of European Capital Solutions at Morgan Stanley.

"Concerning deleveraging or asset sales, we can realistically expect to see an acceleration of the timing."
Bankers said they would be careful, however, not to sell at such a pace that they had to accept poor pricing.