Non-performing loans market on the rise even despite new regulations

09 August 2017 Consultancy.uk

The financial crisis of 2008 created a massive increase in non-performing loans (NPLs) across Europe. Many of those loans are now being sold, removing them from the balance sheets of banks, as part of the wider clean up of the sector following the crisis. A new report considers the current state of the European loan market, projected to hit a record €128 billion in deals this year.

A non-performing loan (NPL) is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days, but this can depend on the contract terms. NPLs were a major contributor to the global financial crisis of 2008, as record numbers of consumers borrowed money to compensate for stagnating wage packets. When they were unable to meet their repayment schedules, a growing number of arrangements became NPLs, leading to the credit crunch of Autumn 2007, and the subsequent world-wide recession a year later, as a number of lenders previously thought of as too big to fail either collapsed, or were salvaged by massive tax-payer-funded bail-out packages.

“Poor loans” were worth a total of €1000 billion in 2012, and subsequently in the years since the global recession, focus has been placed on shoring up the banking system to prevent a future crisis, including a range of conditions that banks in Europe have sufficient capital on hand to withstand considerable market stress. As part of this process, banks have turned to various investors to sell off poorly performing loanbooks, with Italian borrowers particularly hard hit. The latest edition of Deloitte’s analysis of non-performing loan sales (NPLs), titled 'Shifting momentum Regulation driving change in European loan portfolio markets', considers the changes in market dynamics as well as asset trends.

Headline facts and figures

The market has seen multiple dynamics change this year, with Deloitte UK head of portfolio Andrew Orr commenting, “The market is looking at another strong year, but Europe’s non-performing loan backlog is at an interesting junction. On the one hand the heavy regulatory focus on NPL sales has continued to drive up the pace of deals, yet there is still a way to go in terms of developing the market for this type of debt. Selling these assets allows banks to resume normalised lending levels, which would benefit the continent’s economies. All year the European Central Bank has been sending very clear signals that it’s time to deal with the ‘hangover’ of NPLs left over from the last financial crisis and start focusing on future lending.”

European activity

The European loan market is set to see a record breaking €128.5 billion in deals for 2017, with €42 billion in deals completed so far, while a further €86.5 billion in deals are in the pipeline. The deal activity outperforms two solid previous years, in which total activity hit €103.3 billion last year and €104.3 billion the year previous.

The largest number of completed deals for the year so far took place in Italy, at 18, followed by Spain and Portugal, where 12 deals were made apiece. Emerging markets in the region accounted for 15 deals combined. The UK accounted for a small three deals in total.

Considerable potential still exists within the market for NPLs across Europe, according to the authors, stating in the report, "Meanwhile the European Banking Authority estimated in its last eurozone ‘Transparency Exercise’ that there are just over €1 trillion of NPLs still on banks’ books in the eurozone; we estimate that when non-eurozone and non-core assets are included in the total there is around €2 trillion in European loans that could come to market.”

Top buyers and sellers

A large portion of total deal activity resulted from the major players in the space. Investment firm Ceberus was the biggest player – by a far – in 2015, accounting for a mammoth €32.4 billion in investments, the firm has this year been almost inactive, at €0.6 billion invested. Blackstone has been comparably active this year so far, investing €16.7 billion, following two years of relatively limited activity. Fortress was mainly active last year, when it invested €13.5 billion into the marketplace.

The top sellers, this year so far, were UKAR, with a total of €19.1 billion sold; UniCredit sold €1.1 billion; and RBS €0.5 billion in the latest half year. Overall UKAR has been the most active over the past three years, followed by UniCredit and Nama, with combined values at more than €85 billion.

Activity by country

In terms of activity by country, Italy has been by far the most intensive over the past three years, in terms of ongoing deals as well as completed deals. 2016 was the biggest year for the country thus far, with €36 billion in deals completed.

The UK took second spot, at €40.3 billion in deals in 2014, €13 billion in 2016 and €20.2 billion last year – ongoing deals remain low however. Spain, in contrast, has a relatively large number of ongoing deals – at €32.3 billion – although its more recent year activity has been relatively lacklustre. The rest of Europe had relatively low levels of deal activity, outside of Ireland, the Netherlands, Germany and Austria & CEE.

Activity by asset type

In terms of asset type, mixed was the most prominent – largely bolstered by ongoing deal activity which hit €69.9 billion, increasing from 2016, when €24.6 billion in deals were completed. Commercial real estate loans were the second most active category, largely due to big deals in 2015 and 2016, while residential deals took third spot.

The rest of the loan types were relatively smaller in terms of deal size, with corporate deals at around €20 billion over the period, while consumer and other loan types came in at slightly above €32 billion and just under €20 billion respectively.

UK and Irish activity

UK activity

Activity in the UK stood at €20.2 billion this year, with the deals for the distressed mortgage book of Bradford & Bingley building society and Northern Rock, sold by UK Asset Resolution (UKAR) to Prudential Capital and Blackstone seeing activity completely concentrated in the residential sector. Consumer investment was the biggest category last year, at €8.6 billion. More sales are expected in 2017, with the government-controlled UKAR holding a further €37.8 billion in mortgage loans.

In Ireland meanwhile, deal activity has ground to a halt, with just €0.5 billion and €0.3 billion in ongoing deals in 2017. Residential and CRE are the biggest recipients of deals thus far this year. The level of NPLs has decreased somewhat in recent years, standing at €32.5 billion according to the latest EBA data, a third of what it was in 2014, although the NPL ratio remains relatively high at just under 20%.

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