To raise capital, European banks are selling the best assets in their holdings. This will not result in a "lean, mean" profit machine. Instead, Bank of America ( BAC , quote ) -- bloated and revenue-hungry -- will be the business model of the future for European banks, with the same stock price performance.
In "A Barren Future For European Banks" in Bloomberg Businessweek, by Anne Sylvaine-Chassany, Kevin Crowley and Charles Penty, it was detailed how financial institutions were having to sell the best assets to raise capital.
In this environment, one can safely assume the best price was not obtained given the sellers' relative distress. Most likely, a much better price could have been secured last spring, before the euro started to unravel.
Over the past year, Bank of America (BAC) has plunged from over $15 a share to around $5. When the most profitable assets are sold, earnings are reduced. This crimps the bottom line and repels shareholders, as dividends cannot be sustained, much less kept competitive.
In addition, future acquisitions to raise profits cannot be made. As Will James, a banking analyst warned about the future, "If they raise capital by selling crown jewels, the market will reward them in the short term because they'll meet the regulator's time frame. In a low-growth or no-growth environment, banks that have sold good assets will continue to struggle."
Examples offered in the Businessweek article include Banco Santander SA ( STD , quote ) selling its Colombian unit to Corpbanca Sociedad Anonima ( BCA , quote ). Deutsche Bank AG ( DB , quote ) is looking at selling its asset management unit.
This is exactly how Bank of America (BAC) had to sell its holdings in China Construction Bank earlier this year.