Ever since the financial crisis began, many banks have been taking hits as the quality of their most vulnerable assets has eroded. With some assets still producing losses and others negatively impacting stress test performance, strategically selling assets is an ongoing process at some of the world's largest banks.
Compared to peripheral nations, the German economy has fared far better through the Eurozone recession. But with German banks expanding their holdings well beyond their nation's borders, these banks have found themselves in trouble.
Among the hardest hit is Commerzbank (NASDAQOTH:CRZBY), Germany's second largest bank and 18.2 billion euro bailout recipient. In February, the bank stated a goal of reducing non-core assets to 75 billion euros by the end of 2016 from 116 billion euros at the end of 2013. Investors welcomed the news with a modest bump in the stock price.
The latest example of assets sales from Commerzbank is a set of Spanish real estate loans. The portfolio, named Project Octopus, has a face value of over 4 billion euros and the bank has reportedly received bids of around 3 billion euros.
With Commerzbank still having a stain on it from the financial collapse, selling off bad assets, such as peripheral real estate loans and loans made to unstable shipping companies, should help to rebuild investor confidence. With shares trading well below book value, a boost to investor confidence could go a long way toward increasing the price of Commerzbank shares.
Greek banks have been hit by the perfect storm, one which destroyed the economy, tanked real estate values, and caused major reductions in the value of the Greek sovereign debt held. In 2013, the four largest Greek banks needed a 28 billion euro recapitalization, an amount they had no realistic hope of raising through the private sector. The vast majority of the capital was injected by the Greek government through the Hellenic Financial Stability Fund (HFSF) which today has majority stakes in all four major Greek banks.
In March, the results from another round of stress tests were released showing an additional need for 6.4 billion euros in additional bank capital. Although Greece' largest bank, National Bank of Greece (NYSE:NBG) requires 2.2 billion euros in additional capital, the bank noted that it will not have to issue any additional shares. Instead, the bank will utilize internal improvements and asset sales.
Last year, NBG reached a deal to sell a 66% stake in real estate unit, Pangea for a total consideration of 653 million euros. Among other real estate holdings, NBG has sold its 90% stake in the subsidiary that owns Astir Palace, a sprawling hotel and resort, to a foreign fund for 400 million euros.
Real estate sales will likely continue at NBG but the possibility of the sale of part of its Finansbank stake also exists. Although NBG denies its in talks to sell the Turkish lender, speculators are bidding up Finansbank bonds on the hopes its will be taken over by a non-Greek company.
A bank near you
Asset sales are not all done at U.S. based banks either. After the financial collapse, Citigroup (NYSE:C) split much of its non-core and toxic assets off into Citi Holdings. Since then, investors have been watching closely as Citigroup reduces the total assets of Citi Holdings.
The latest report from Citigroup shows Citi Holdings assets have declined 25% from the prior year period and stand at $117 billion as of the report. Like at Commerzbank, the assets of Citi Holding continue to keep alive the image of Citigroup as an unstable bank. As these assets are further reduced, investors confidence could return to Citigroup and push shares closer to book value.
Asset garage sale
As major banks work to rebuild investor confidence, sales of non-core assets are a major part of the strategy. Over the next few years, look for Commerzbank, National Bank of Greece, and Citigroup to further wind down non-core holdings and position themselves to attract more conservative investors.
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Alexander MacLennan owns shares of Commerzbank. He also has the following options: long January 2015 $7 calls on National Bank of Greece (ADR), long National Bank of Greece warrants (Athens listed), long January 2015 $40 calls on Citigroup, long January 2015 $45 calls on Citigroup, long January 2015 $50 calls on Citigroup. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.