1.5 Trillion Euros of Non-Performing Loans Still Sitting on European Bank Balance Sheets, According to KPMG Report

1.5 Trillion Euros of Non-Performing Loans Still Sitting on European Bank Balance Sheets, According to KPMG Report

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.
  • 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.

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.

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.”

“Russia is also part of the global trend,” notes Eugene Makhotin, Transactions & Restructuring Director at KPMG in Russia and the CIS. “The Russian banking system has accumulated significant distressed debt, but the banks are selling, for the most part, unsecured consumer loans that are 360 days past due. The 6.5 trillion rubles in government support for the banking system since 2008 cannot be ignored. Another feature of the Russian market is that the banks prefer to work with collectors who preprocess the portfolios being sold. Hence, the sales value of the distressed debt portfolios is not high and their quality is relatively poor.”

KPMG in Russia and the CIS Financial Services Audit Partner Marina Malyutina comments: “Dealing with distressed assets accumulated as a result of the crisis is one of the most problematic issues for Russian banks. This applies both to past due loans and to property received as compensation for termination of contract or pledged, including real estate. Transactions involving the sale of such loans have so far been infrequent –a consequence of, on one hand, the high risks of the assets, and, on the other, the lack of risk capital. Asset restructuring is more likely to take place within a group of the bank’s related third parties than to involve an independent investor. Even so, this is a huge market with great prospects.”

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.”

Source: Russoft
CATEGORY: Outsourcing News

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