EUR1.5 Trillion of Non-Performing Loans Still Sitting on European Bank Balance Sheets
The predicted wave of non-performing loan portfolio disposals by European banks has not materialized, according to a report by KPMG.
‘Global Debt Sales Survey 2012′ shows that the combination of cheap European Central Bank money, difficulties in accessing debt to fund transactions, suppressed appetite from acquisitive banks and an, albeit narrowing, price expectation gap has meant that more than 1.5 trillion Euros of non-performing loans are still sitting on European bank balance sheets.
Global Debt Sales is a series of publications in which KPMG’s Portfolio Solutions Group examines recent debt portfolio activity in a number of key banking markets across Europe, the Americas and Asia Pacific. The series seeks to cover all types of debt sales, including performing and non-performing loans, and offers high-level insights into trends and new opportunities.
Graham Martin, Global Head of the Portfolio Solutions Group and corporate finance partner at KPMG, commented: “A confluence of factors has restricted the much anticipated flow of transactions in the loan portfolio market. Perhaps the most powerful factor in delaying much-needed deleveraging by European banks has been the European Central Bank’s (ECB) injection of more than EUR1 trillion of long-term refinancing operations (LTROs) in December 2011 and February 2012.
The International Monetary Fund says that European banks need to shrink their balance sheets by US$2.6 trillion, 75 percent of which is likely to come from asset sales. However the ECB’s three-year money has largely been used by banks to strengthen their balance sheets through profitable carry trades, reducing the pressure on them to sell non-core assets at non desirous prices.”
Nick Colman, Director in the Portfolio Solutions Group at KPMG in Germany added: “There is a general view that cheap ECB money has reduced the urgency of asset sales in the short term. In terms of which types of loans are being affected, we are seeing delays in disposals of very large portfolios of long dated residential mortgages and project finance loans which are not necessarily heavily loss-making for the banks. However, we are still seeing a lot of activity in stressed and non-performing portfolios which are expensive from a capital perspective, such as commercial real estate, where value leakage for the bank is a key concern.”
The research also surveyed buyers and sellers in the global debt sales market on their planned activity over the next year: 56 percent expect consumer non-performing loans to be the most actively traded debt class over the next 12 months.
Jonathan Hunt, Associate Director in the Portfolio Solutions Group at KPMG, added: “Banks selling much larger, multi-billion Euro consumer non-performing loan portfolios packaged with servicing platforms and sweetened with forward flow contracts will become increasingly common. While consumer debt has traditionally been the easiest asset to sell, banks are increasingly seeking to sell different asset classes.
In the UK and Europe for example, over the past six months many vendors have focused on the disposal of commercial real estate, leveraged and residential mortgage loans through both clean and structured trades. Further, increasingly more challenging and longer dated assets, such as infrastructure finance, shipping and transport loans are also coming to market.”
KPMG’s report found seven key factors driving the global debt sales market:
LTROs – Cheap ECB money has strengthened banks’ balance sheets in the short to medium term, allowing some to delay asset sales and prolong restructuring negotiations.
Price expectations – For varying reasons, a bid-ask spread remains in most markets and across most asset classes, however these spreads are narrowing.
Leverage – Third party banks are increasingly willing to provide funding to buyers, often through financing packages, though vendor finance remains the exception rather than the rule.
New entrants – A number of new players have entered the debt purchasing markets, most notably key US funds and banks seeking acquisition opportunities in Europe, particularly in the CRE and consumer NPL space.
Tenor, yield and credit quality – alongside the availability of funding, are driving interest and pricing for performing loan portfolio sales, which has led to longer term investors such as pension funds and insurers becoming buyers of bank loans.
Basel III – In order to improve capital ratios and rightsize their balance sheets, European banks could shrink their balance sheets by USD2.6 trillion through to the end of 2013, which is likely to be a key driver of deleveraging.
Over EUR1.5 trillion of NPLs sitting on European banks balance sheets with over EUR600 billion in the UK, Spain and Ireland alone.