States & banks: heading for the door Premium

A long, and sometimes painful, process for investors

They’re doing it in Vienna. They’re doing it in Brussels. They’re doing it in Stockholm and Frankfurt. They’re even thinking about doing it in London. Getting rid of state support is becoming fashionable in European banking this summer. Austria’s Erste Bank is the latest, promising to repay €1.2bn of participation capital, a hybrid instrument, held by the state. In March, Commerzbank said it would repay €1.6bn of capital. Last week Sweden sold 6 per cent of Nordea, leaving it with 7 per cent. And the UK is agonising over how to sell its stakes in Lloyds Banking Group and Royal Bank of Scotland.

The process can be tortuously slow. The Swedish state has owned part of Nordea since it put money into Nordbanken, a predecessor, in 1991. Erste Bank’s repayment of its participation capital was postponed in 2011 because of trading problems. Commerzbank has taken five years to repay its hybrid capital and the German state still owns an equity stake of 17 per cent. Belgium’s KBC repaid €3.5bn to the federal authorities last December but is still paying a similar amount back to the Flemish authorities. What a contrast with the US, where the government completed its exit from Citigroup last month, at a $13bn profit, and has long since got out of Bank of America and AIG.

The process can be painful for existing investors. Erste and Commerzbank used rights issues to repay the hybrids, raising €660m and €2.5bn respectively. But there are benefits. Erste, for example, will save €150m of annual dividend payments.

In much of Europe there is still a long way to go. Wholly or partly nationalised banks such as RBS, Dexia, Allied Irish and the Greek banks are years away from fully private ownership. Still, as debates about capital and ethics continue, the unwinding of state support is a sign that in some ways the sector is returning to normality.

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