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Banking

Bank funding: Europe’s loss is the US banks’ gain

Deposits flow to US banks; Syndicated loan market opens up

With concerns about European bank exposure to toxic sovereign debt intensifying, corporate clients are moving their business to US banks. According to research by Nomura, the market share of US deposits of foreign bank subsidiaries of European banks have fallen to about 11% from as high as 17% in 2008. Some $150 billion in deposits shifted out of the European banks to the US banks in the third quarter, says Brian Foran, regional bank analyst at Nomura.

The highest-rated US banks benefited in particular as large corporate depositors shifted custom to them. Tim Sloan, chief financial officer at Wells Fargo, says his bank’s triple-A rating has helped grow deposits. "In the third quarter our core deposits increased by $29 billion; $18 billion was from wholesale, which includes our corporate, commercial and international customers, which was a reflection of the perceived need for safety from that customer segment."

Sloan adds that domestic economic concerns, not just fears about Europe, have increased the flow of deposits. "Discussions and concerns around the debt ceiling and US downgrade boosted deposits," he says. "Plus the fact that the stock markets had dropped led customers to take their money out of that market and deposit it with the bank."

Chopping block

Foran says that in retail banking there is a chance that those US banks owned by European entities might find themselves on the chopping block. As dollar deposits shrink, European banks would normally have to fund loans through issuing bonds and commercial paper in dollars. In both markets investors are turning away. "They could choose to fund in euros and swap to dollars but it is a foreign exchange risk," says Foran. Inevitably European banks, including some that courted US corporates with the promise of credit availability as US banks struggled in 2008 and 2009, will have to start shrinking their corporate lending books.

"If corporates become uncomfortable with the counterparty creditworthiness of the European banks then they will choose other parties"

Brian Foran, Nomura
Brian Foran, regional bank analyst at Nomura

Analysts have been pondering whether BNP Paribas will be under pressure to sell its US bank subsidiary, Bank of the West. A report from SNL Financial in November pointed to rumours that the French bank might be forced to offload the California-based retail unit. SNL Financial analysts note: "Chief executive Baudouin Prot has downplayed such reports, saying BNP plans to hold the unit and could grow it through smaller acquisitions, even though it is facing revenue headwinds. However, some sources allege that those public statements mask ambivalence about the investment at the bank and that a sale could indeed be explored if BNP decides to focus its already-strained capital toward different business lines." At the end of October, the French central bank said that BNP would require an additional €2.1 billion in capital to meet European Banking Authority requirements. With European banks reluctant to tap the capital markets for dilutive new equity at distressed book multiples, the average price of M&A deals has been a healthier 86.2% of tangible book value for banks in the western US, according to SNL.

Foran says, however, that Bank of the West is large enough to be able to fund loans with its US dollar deposit base.

Rethink

The issue, he says, will be the attractiveness for corporates of doing business with European bank counterparties "If corporates become uncomfortable with the counterparty creditworthiness of the European banks then they will choose other parties. If that funding line dries up, then the banks will have to shrink their assets and rethink their capital markets and corporate loans businesses."

Foran says that in the syndicated loan market, US banks now have the opportunity to regain market share. European banks have a 22% market share of the US syndicated loan market, with UK, French and Swiss banks taking the largest chunk of that. "The French banks were very reliant on wholesale funding to pay for US subsidiary funding so most of them have had their funding constrained," he says. BNP Paribas and SG intend to shrink their syndicated loans businesses, as does Credit Suisse.

Foreign banks lose US market share 
Deposits of domestic versus subsidiaries of foreign banks (indexed to end 2010)
Source: Nomura

This creates a new opportunity for the medium-sized and large US banks to step in. Foran points to PNC and US Bancorp as potential candidates to fill the gap in the syndicated loans market. "Three to four years ago both those banks were just regional banks. But PNC bought National City and US Bancorp has grown its balance sheet by 80%. They are now more appealing to large corporates as partners in filling the gap that the European banks are leaving." Dick Bove, banking analyst at Rochdale Securities, says US banks are already benefiting, and more opportunities will be discovered as European banks are forced to sell assets. "While [US banking] stocks plummet on fears of a European contagion the underlying fundamentals of the American banks continue to improve," he says.

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