Deloitte: Europe’s loan sales could top €200bn this year

Divestments of non-performing loans and non-core assets totalled €103bn in 2016 – including €36bn of deals in Italy alone, finds auditor

Sales of non-performing loans (NPLs) in Europe could continue to chalk up blockbuster figures in 2017 if last year is anything to go by, according to Deloitte.

In its analysis of loan-sale patterns in the region during 2016, the auditor identified “unprecedented” activity across every asset class, with €172.7bn of completed and ongoing deals announced.

Within that overall sum, divestments of NPLs and non-core assets (NCAs) totalled €103bn, including €36bn of deals in Italy alone – a significant rise on the €17.3bn of sales in those categories that the country registered in 2015.

A diverse range of market conditions emerged from the auditor’s examination of specific nations – for example:

• Germany Loan-sale activity has picked up, with completed and ongoing transactions reaching €10bn, compared with €5.3bn in 2015. However, current volumes seem low when compared with the scale of non-core assets and NPLs currently on the balance sheet of German institutions: in excess of €240bn.
• UK Sale activity during 2016 totalled €13bn: down a whopping €27bn on 2015, with the Leave vote in the Brexit referendum affecting both buyer and seller confidence. The second half of the year, though, was characterised by a “cautious return to normality”, as many investment firms reaffirmed the view that the UK remains a core market.
• Spain The country’s NPL ratio decreased to 9.3% in 2016 from a 2013 peak of around 14%. That said, the country lags behind the UK in what Deloitte calls its “deleveraging journey”, with around €120bn of NPLs still held by local banks – excluding real estate-owned loans, which comprise a significant chunk of Spain’s non-core burden. Further sale activity is expected this year.
• Portugal Anything between €30bn and €40bn of NPLs currently resides within the Portuguese financial system – equivalent to a 15% or higher loan ratio, which the auditor says is “potentially unsustainable”. Key issues in the market are seller commitment and price expectation. But regulatory and political pressures are likely to stimulate a high level of sale activity in 2017.
• Greece A significant regulatory development ought to make the acquisition and servicing of Greek NPLs easier. Introduced in 2015, the NPL Law took full effect at the end of Q1 2016, enabling the creation of special-purpose vehicles for NPL acquisition and creating a licensing system for outsourced NPL management. Several institutions have already applied for licences.

David Edmonds – head of Deloitte’s global Portfolio Lead Advisory Services practice – said: “I believe European loan sales could surpass €200bn this year. The European Central Bank [ECB] is sending very clear signals to the banking sector that it’s time to deal with the ‘hangover’ of NPLs left over from the last financial crisis, and start focusing on future lending.”

He explained: “Recent ECB guidance requires rigorous bank self-assessments and detailed NPL strategies which, by implication, will need to show significant reductions in NPL stocks.”

Edmonds pointed out that the ECB has also recently called for the establishment of a public sector-funded ‘bad bank’ that would absorb and sell on up to a quarter of Europe’s €1 trillion NPL burden. (For further details of that initiative, check out this previous news story from The Treasurer).

He added: “The buyer community continues to raise equity in pursuit of European distressed debt opportunities and demand remains very strong. For the past four to five years, the focus has been on strengthening bank capital, surviving stress scenarios and avoiding bank failure.

“We certainly aren’t out of the woods on that score, but there is now a shift towards lending growth, which is being held back by the presence of NPLs… Selling these types of assets not only improves capital positions, but allow banks to resume normalised lending levels, with a direct, positive effect on the wider economy.”

Click here to download the full Deloitte analysis.