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Insulated from the Mayhem

Little Crisis for Europe's Banks

By Carol Matlack

While U.S. banks took on lucrative risks, European banks have played it safe. Now Old World institutions are more likely to be buying.

Suddenly, stodgy banks are looking smart. And with former Wall Street giants toppling almost daily, some European banks are starting to look especially wise.

European banks are holding up pretty well amid the turmoil sweeping the industry. None of the Old World's biggest banks appears likely to fail or put itself on the block, analysts say. Indeed, the Europeans are more likely to be buying: London-based Barclays on Sept. 17 inked a $1.75 billion cash deal to buy the investment banking and trading businesses of bankrupt Lehman Brothers.

Another London-based bank, HSBC Holdings, has been mentioned as a potential buyer for crisis-racked Morgan Stanley, though HSBC won't comment. And even as Spain sinks into recession, its two biggest banks are expanding internationally, with Madrid-based Banco Santander getting the green light from European Union regulators on Sept. 16 to acquire British bank Alliance & Leicester.

Not Immune

Certainly, Old World financial institutions aren't immune to the turmoil. On Sept. 17, struggling British mortgage lender HBOS fell victim to that country's real estate crisis and was scooped up by Lloyds TSB in a $21.6 billion deal.

Switzerland's UBS has been clobbered by exposure to the U.S. subprime crisis, with more than $20 billion in writedowns. In recent days, European banks have disclosed hundreds of millions in potential losses from the collapse of Lehman Brothers.

Still, European banks' generally more conservative banking practices have helped insulate them from the mayhem. Unlike their U.S. brethren, some big European players such as Germany's Deutsche Bank and France's BNP Paribas have continued to emphasize bread-and-butter retail services even as they expanded into more lucrative global investment banking. Just last week, Deutsche beefed up its retail business by acquiring rival Deutsche Postbank.

Banks on the Continent have steered clear of risky subprime-style mortgage lending, too. What's more, real estate markets across most of the Continent are holding up well. "We have an advantage that used to be a disadvantage: Real estate prices are quite stable," says Jörg Krämer, chief economist at Germany's Commerzbank.

Strategic Choices

Even in Britain and Spain, where real estate markets are tanking, most major banks have only limited exposure to the malaise. HSBC, for example, has pushed to expand into Asia and the Middle East, regions that have been largely unaffected by the recent turmoil.

Spain's regional savings banks have borne the brunt of that country's real estate crisis, while national banks Santander and BBVA are relatively strong.

Across the rest of Europe, "institutions that stayed away from investing in mortgage-backed securities and some of the complex [financial instruments] look pretty good," says Scott Bugie, a Paris-based banking analyst with Standard & Poor's. "They'll take their hits if the economy goes down, but they'll be O.K." (Standard & Poor's, like BusinessWeek, is a unit of The McGraw-Hill Companies.)

Not in the Clear

Plenty of risks lie ahead. Standard & Poor's warned on Sept. 17 that banks worldwide are likely to face a new wave of writedowns stemming from the U.S. mortgage crisis, as delinquency and default rates rise and the effects of the Lehman collapse ripple through the industry. S&P says total writedowns could exceed $500 billion, up from a total of about $300 billion taken so far.

Another worry relates to the U.S. government rescue of AIG. While the $85 billion bailout prevented the collapse of the world's biggest insurer, it's not clear whether billions of credit default swaps, which banks purchased from AIG to protect against potential losses, are still in force, says Sandy Chen, a London-based banking analyst at Panmure Gordon.

Facing such uncertainties, European banks are likely to try even harder to be stodgy. "I see a return to basics in banking. A lot of complicated structured products will disappear," says Alistair Milne, a banking and finance professor at London's Cass Business School.