(Bloomberg) -- In the course of just one year, Greece has mostly sold its vast stakes in the banking sector, a microcosm of moves across Europe as governments seek to draw a line under the financial crisis which gripped the region over a decade ago.
A recent stake sale in National Bank of Greece added to a program that has earned the government €3.5 billion ($3.8 billion) in the last 12 months and effectively transferred an entire sector back to private ownership.
The pace of those sales makes Greece an exception, but it isn’t alone in returning banks to investors. From Ireland and Italy to the UK and Germany, European governments are selling stakes they have held since the financial crisis. They’re cashing in on soaring valuations to plug gaping budget holes, before falling interest rates start to weigh on bank profitability again.
On Tuesday, the Netherlands announced plans to sell more shares in ABN Amro Bank NV and signaled it will give the lender more freedom to buy or sell businesses.
The process has the potential to reignite banking consolidation and reshape an industry that has long trailed Wall Street. Lenders that were encouraged under government ownership to focus on domestic markets and cut risk will likely find it easier to pursue more aggressive growth. Others, such as Commerzbank AG, have been turned into potential takeover targets without the protection of the government.
“This may lead to the consolidation we need in Europe,” said Hans Degryse, a professor of finance at KU Leuven.
So far this year, European governments sold about €13 billion of shares in bailed out banks, the most since the end of the financial crisis, according to filings for 10 firms reviewed by Bloomberg. While governments are unlikely to fully recoup the money they spent on the bailouts, despite billions of euros in dividends collected, the window for disposals hasn’t been this open since the financial crisis.
A sudden jump in interest rates over the past two years has fueled record profits and ended an unprecedented period of zero and even negative borrowing costs. Balance sheets that had been weighed down by bad loans since the financial crisis have been cleaned up, particularly in countries such as Greece, Italy and Spain, where banks are now emerging stronger.
Greece’s “troubled banks of the past have been transformed into some of the most desirable assets” in Europe, said Ilias Xirouhakis, who runs the state agency HFSF that handles the country’s bank stakes. “We’re now looking at very competitive banks at a pan-European level.”
The UK government’s successive divestment from Natwest Group Plc accounted for the largest chunk of the total from disposals this year. The £45.5 billion ($59.4 billion) rescue, in 2008 and 2009, of the firm formerly known as Royal Bank of Scotland Plc was Europe’s biggest bank bailout and was followed by a deep retrenchment of its global presence.
As Natwest returns steadily to private ownership, it is making bolder moves such as acquiring the banking operations of supermarket chain J Sainsbury Plc.
Crucially, the retreat of governments can also turn banks into takeover targets. Germany for the first time put part of its holding in Commerzbank on the market in September, expecting that it could sell it to range of investors.
Instead, Italian rival UniCredit SpA swooped in and used the placement to build a major stake, with an all-out takeover one option. Berlin has since put further sales of Commerzbank shares on hold, comparing UniCredit’s approach to “unfriendly” attack.
“The German government held on to its stake in Commerzbank for too long,” said Monika Schnitzer, an economics professor at Munich’s LMU university who chairs the German Council of Economic Experts. Germany needs “a degree of consolidation in the banking sector.”
ABN Amro is another lender long considered a potential takeover target once the government gets out. The Dutch state on Tuesday announced that it plans to cut its stake to about 30%, from 40.5%, and agreed that once its holding falls below one third, its right to be informed of decisions regarding investments or divestments worth €50 million or more will end.
The government has been gradually paring its stake in the Amsterdam-based bank after it was relisted in 2015. Under government ownership, ABN Amro has been transformed into a lender focused on consumers and companies in the Netherlands and northwestern Europe. It hasn’t been able to pay bonuses to top management, which has emerged as a stumbling block in the current search for a new chief executive officer, Bloomberg has reported.
Greece has largely avoided such surprises, selling most of its bank holdings to banks and financial investors. The only exception was when UniCredit stepped in last year to take a stake of around 9% in Alpha Bank, in a deal that also saw the Italian lender acquire Alpha Bank’s Romanian unit to create a top lender in that country.
Key to that success in Greece and other southern European countries has been a painful process of cleaning up balance sheets that had suffered from high levels of non-performing loans. Greek lenders have reduced their bad loans from a 2016 peak, when more than 9 out of 10 borrowers were late on payments, to fewer than 1 in 10 last year.
Stronger balance sheets and higher profits meant the major Greek banks were allowed this year to pay dividends for the first time since 2008. An economic recovery has helped attract foreign investors, as Greece’s sovereign debt was lifted to investment grade last year. It had lost that distinction in 2010.
“The safety net of the state has been pulled back, but it happened at a time when the banks were already showing very strong signs of recovery,” said Xirouhakis. “It was the right time for us to leave.”
Italy, too, is benefiting after lenders including Banca Monte dei Paschi di Siena SpA got rid of bad loans, paving the way for it to return to full private ownership. The government now wants Monte Paschi to play a role in domestic consolidation once it’s fully released from state control, Finance Minister Giancarlo Giorgetti said in a recent Bloomberg interview.
That market has already seen deals in previous years. In 2020, Intesa Sanpaolo SpA acquired Unione di Banche Italiane SpA to create a national champion and keep a prized wealth manager out of the hands of competitors. The Italian unit of French lender Credit Agricole SA gained control of Credito Valtellinese SpA the following year.
Spain, too, has seen a series of mergers as the government pressed ahead with selling off banks and their assets that had fallen into state hands during a real estate crash. That’s allowed the country’s largest lenders to consolidate their position and even expand abroad.
The state still owns 18% in CaixaBank SA, after that firm four years ago agreed to buy Bankia SA, which was bailed out in 2012. Spain has said it wants CaixaBank’s share price to rise further before it starts selling its holding.
“We see countries which had a bankrupt banking system ten years ago now being very close to or even in investment grade territory again and placing debt very well in the market,” said Simon Outin, head of financials research at Allianz Global Investors.
“Banks in Greece, Cyprus, Spain, or Ireland are now among the risks we prefer as creditors,” he said. “French and German banks are now looking in envy at those banks with a positive momentum.”
--With assistance from Sonia Sirletti, Jorge Zuloaga, Sarah Jacob and Jennifer Duggan.
(Updates with Netherlands’ planned reduction of ABN Amro stake, starting in fourth paragraph)
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