January 13, 2014
Interviewed by: David Snow

European Banks and Non-Bank Lending in 2014

Henry McVey of KKR explains how the actions of European banks will be highly influential in 2014. See McVey’s full 2014 outlook report here.

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European Banks and Non-Bank Lending in 2014

With Henry McVey of KKR

Privcap: Henry, what do you expect to see from European banks in 2014?

McVey: Over the past couple of years, as part of my job at KKR, I’ve been going over to Europe just to assess the situation just continually.  When we first starting going over there a few years ago banks were hesitant to get anything off their books.  You had two stress tests that really weren’t that demanding and banks just hunkered down and said hold the portfolios and hope that things get better.  The ECB is now taking over control of the next stress test in 2014.  That’s the important catalyst, that’s what’s different.  And we think that’s forcing banks to say ‘we’re not going to renew the same lines of credit, we want to have higher capital ratios and we want to be better prepared before we go into the stress tests in the second half of next year.  So that’s created a change.

And so I think investors that are hoping there’s going to be massive sales of loan portfolios, they’re going to be disappointed.  There will be some of that, but it’s not going to be as much as people think.  But what we do see is that we see corporations saying ‘you know what, this bank’s not going to help me out as much – I need trade finance or I need to have more equity in my structure’ and that is really a growing business.  So lumpier- you really have to be on the ground but there’s some sizable opportunities that are going to merge over the next couple of years.

Privcap: What does this chart indicate about the differences between Euro-area banks and the rest of the world?

(see video for chart)

McVey: What this picture should tell you is there’s a lot more leverage, or a lot more assets relative to a dollar of GDP or a Euro of GDP or a Yen of GDP in Europe than there is relative to any part of the world.  Some of that is that the banks own a lot of government bonds, some of that is there’s not as much securitization market but what it tells you is that relative to other parts of the world, Europe has a massive banking system and if we do see deleveraging, it’s a big nugget because you will go from 300% of GDP to something substantially smaller maybe it won’t get to the US at 75 or 80% but any movement down represents trillions of dollars in assets.  And that’s really the catalyst, so I don’t think it’s going to be an overnight tidal wave, but I do think over the next couple of years you’re going to see leverage ratios go down and you’re going to see banks say ‘I want to do business with these clients and these other ones are going to have to go find capital providers.’  And that’s really, as a firm, where KKR is stepping in is to be the capital providers to these small-medium sized businesses that are now seeing their traditional banking relationships being altered and not in their favor.