ANZ's silver lining in Europe

Circumstances might finally be conspiring to create the opportunity ANZ's Mike Smith has been waiting for.

Smith has made it very clear that despite the intensifying pressure on the global banking sector as a result of the crisis in Europe – in fact, because of it – ANZ is hopeful of finally making the substantial acquisition in Asia that would add substance to its super regional bank strategy.

Since acquiring some of RBS's Asian assets last year, ANZ has kicked the tyres on a number of prospective Asian acquisitions without identifying something that it wanted to acquire at a price it was prepared to pay.

The small ($130 million) acquisition of Bank of Cyprus Australia by Bendigo and Adelaide Bank last week, and the much larger (€2 billion or so) proposed sale by Deutsche Bank of its global asset management business are, however, straws in the wind. The Deutsche Bank businesses have about €400 billion of assets under management.

It has been obvious for some time that the European banks would need to ditch non-core assets to shrink their balance sheets and improve their capital ratios but there has been surprisingly little activity on that front. That may be about to change.

Earlier this month, the European Banking Authority published its recommendations of the recapitalisation needs of the European banks. It said they needed to raise €114.7 billion by June next year to strengthen their balance sheets and build up a capital buffer against their sovereign debt exposures.

That amount of new capital would produce a core tier one ratio of 9 per cent for the European banks. The German banks would, it estimated, need to raise more than €13 billion to meet that target.

There are two ways to improve capital adequacy. One is to simply raise new capital, which is not a particularly easy or attractive option given the depressed state of the European banking and equity markets.

The other is to sell assets. All the European banking groups will be re-considering what constitutes their core portfolios, not only because of the EBA recommendations but because the Basel III timetable is now ticking.

With the UK government saying yesterday that it would implement the recommendations of the Vickers Commission in full, the UK banks, too, are going to be looking at wholesale restructuring of their balance sheets.

The commission recommended ring-fencing of the banks' personal and small business activities – about a third of the UK banking system's assets – within separate subsidiaries with minimum tier one equity ratios of 10 per cent of risk-weighted assets. Their other assets – their global wholesale and investment banking activities – would be "outside the fence." They would also be required to have primary "loss absorbing" capital of at least 17 per cent.

The concept involves separating the assets that taxpayers would support in a crisis from those that explicitly wouldn't be supported, which create incentives for leave shareholders, creditors and markets to monitor and discipline those operations outside the fence. The banks would have to raise more capital to meet the more stringent requirements for their core banking activities while facing an increased cost of capital for their other activities.

At face value that will encourage them to shrink their operations outside the fence. The UK banks, of course, also have to meet the Basel III requirements, which will phase in over the rest of this decade, or roughly over the same period as the Vickers Commission recommendations.

The impact of the eurozone crisis on the ability of even the Australian banks – among the world's highest-rated banks – to raise wholesale term funding will add to the pressure on the eurozone banks to shed assets soon as a means of both improving their capital ratios and reducing their funding requirements. Eurozone term funding markets are effectively closed.

For Europe's banks, the crisis has darkened the cloud that will hang over their system for the rest of this decade. For ANZ, however, it appears likely to contain a silver lining that may materialise – indeed, ought to materialise – in 2012.