Pwc studie april 2011


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Pwc studie april 2011

  1. 1. Portfolio Advisory Group European outlook for non core and non performing loan portfolios ISSUE 3: Debating DeleverageApril 2011
  2. 2. Contents Executive Summary.................................................................. 3 European Overview. ................................................................. 4 . Highlights of issue 3.................................................................. 5 Germany.................................................................................. 6 UK............................................................................................ 8 Spain...................................................................................... 12 Italy....................................................................................... 15 Ireland................................................................................... 17 Greece.................................................................................... 19 Poland.................................................................................... 21 Ukraine.................................................................................. 23 Czech Republic........................................................................ 25 Romania................................................................................ 27 Hungary................................................................................. 29 Turkey.................................................................................... 30 Middle East............................................................................. 322 PwC • Debating Deleverage
  3. 3. Executive summary The task facing European banks as they seek to deleverage is enormous. Many banks around Europe have communicated that they have identified a whole raft of non core loan assets that they are seeking to aggressively run off or sell. We estimate that identified non core assets in the European banking sector exceed EUR 1.3 trn. Dealing with this massive issue will require a significant volume of transactions and, to put the scale required into context, the average annual European banking M&A market between 2003 and 2010 totalled just EUR 70 bn. The banks have been deploying a for a given portfolio of loans can be Banks also face the challenge of number of tactics to deleverage and, hugely time consuming and labour addressing a continued increase whilst some have been very open about intensive. Corporate loan books that in the volume of non performing their transactional activity, others have have been aggressively expanded over loans. PwC(i) estimate that the level of operated more discretely. Investors, a short number of years will probably reported NPLs across most of Europe expecting a flood of opportunities, contain a large mix of different types has increased by 15% between 2009 have, in the main, been disappointed. of loans – and in our experience many and 2010. While this rate of increase is The most talked about barrier to will need to be assessed on a case by significantly lower than previous years, transactions of loan portfolios is that case basis. Even after this assessment it is still an increase in value terms of of price – in many cases a significant has taken place and portfolios for around EUR 100 bn. We expect the difference exists between the potential sale identified, the task growth rate of NPLs to continue to expectations, or perhaps requirements, of collating all the information to slow as the economic recovery gains of sellers compared to the prices that provide to potential acquirers, dealing momentum; but the impact of rising investors have been willing to pay. with related hedging positions, sub interest rates and austerity measures From the vendor perspective, some of participations and other complex in many countries adds a layer of this difference is driven by the nature structures all takes time. It is no uncertainty as to the future ability of accounting policies and the impact wonder that, to date, it has been some of both corporates and consumers to this has on provisioning levels, whilst of the more homogeneous portfolios meet their debt obligations. on the investor side, relatively higher or more liquid assets that have so far costs of capital combined with higher come to market. Other barriers include levels of uncertainty in certain markets the huge levels of Government support has also played a part. This price gap that has allowed banks to avoid simply prevents many banks from divesting of assets under pressure, the selling due to the potential impact lack of funding that has been available on capital. to potential investors and finally, quite simply, the perceived stigma of being a As well as price gaps there are vendor of asset pools that many banks a number of other factors that have, in the past, proudly grown. are barriers to transactions. A key barrier is the band width that We therefore expect the many banks have to enter into sales deleveraging process to take, at processes. The whole process of least, another 10 years. assessing the value maximising options(i) ‘PwC’ refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual memberfirms of the PwC network. Issue 3 • 3
  4. 4. European Overview: Table 1: Estimated quantum of NPLs by country 2008-10 EUR bn 2008 2009 2010 (ii) % % Source increase increase FY09- FY08- FY10 FY09 Germany 142 210 225 7% 48% BaFin, Annual Reports, PwC analysis United Kingdom 107 155 175 13% 45% Broker reports, PwC analysis Spain 75 93 103 11% 24% Bank of Spain Italy 42 59 76 29% 40% Bank of Italy, ABI Ireland 15 88 109 24% 487% Financial statements, NAMA, PwC analysis Sub-total 381 605 688 14% 59%   Greece 12 20 24 20% 67% Bank of Greece Russia (iii) 1 17 19 12% 1,600% Central Bank of Russia Poland 6 12 16 33% 100% BRE Bank, Polish Financial Supervision Authority Ukraine 2 6 8 33% 200% National Bank of Ukraine Czech Republic 3 4 5 25% 33% Czech National Bank Romania 1 3 5 67% 200% National Bank of Romania Hungary 2 3 5 67% 50% Hungarian Financial Services Authority Turkey 8 11 11 0% 38% BRSA (Turkish Banking Regulation and Supervision Agency) Total 416 681 781 15% 64%   (ii) 2010 balances include, in most cases, NPL information as at Q2 or Q3 2010 when year end data was not available as at the time of writing. (iii) Balance relates to overdue loans since no direct information on NPLs is available.4 PwC • Debating Deleverage
  5. 5. Highlights of issue 3:• In Germany, NPL volumes have used to bridge the price gap. We local banks. The rise has been continued to increase in 2010, expect to see an increasing number mainly fuelled by impairments in albeit at a much slower rate than of such transactions in 2011. retail portfolios. We expect to see the previous year. This is despite similar rises in the next 12 months, the German economy being one of • Italy has experienced the largest as this trend spreads to corporate the best performers in Europe and percentage increase in NPLs of the loan portfolios. We consider experiencing growth of 3.6% in the major Western European economies that transactions will be mainly first nine months of 2010. There in 2010. Transaction levels have, driven by local investors, as major were however a limited number however, remained subdued international players are focusing of transactions, mainly as a result due to pricing considerations their attention on the UK, Germany, of the bid ask price gap. Secured along with uncertainty over the Spain and Ireland. corporate and retail residential legal foreclosure process, which loans are expected to come to the has adversely affected the price • Turkey was one of the few countries market in the next twelve months. investors are willing to pay for such that experienced significant GDP assets. growth in 2010. A high level of• 2010 is expected to be the peak year activity in their non core and for NPLs in the UK even though • Ireland is currently the focus of NPL market has attracted the the economic recovery remains many investors, mainly as a result of attention of many international fragile and there is uncertainty the high level of distress of the local investors since Turkish banks are arising from the significant banking sector. However, we expect relatively well capitalised and have budgetary cuts implemented by the investment in Irish assets to be maintained high provisioning ratios, UK Government and the current limited in 2011 due to the high risk mainly as a result of regulatory softening in the UK property premium that investors will require requirements implemented during market. Non core asset activity in pricing these assets (see PwC the banking crisis of 2000-2001. has experienced a pick up, mainly Investor Confidence Survey-Ireland around commercial lending Q1 2011). • The Middle East in general has also portfolios. More assets (mainly experienced an increase in NPLs commercial lending portfolios) are • Greece, as expected, has seen NPL with some parts (such as Bahrain expected to come to the market in levels increase significantly as the and Dubai) impacted more than 2011 from both overseas and Government has sought to cut others (Qatar and Saudi Arabia). local banks. the budget deficit with measures Transactions remain limited, taking their toll on the ability of although recent high profile• In Spain, regulatory changes consumers and corporates to repay restructurings are beginning to implemented by the Bank of Spain their debt. We expect a very low attract the attention of international have resulted in banks increasing level of transactions in 2011, mainly investors. their provisioning for bad debts due to the lack of transparency significantly, which has been over collateral values and timing to a positive factor to the overall recover security. non core and NPL market. The high country risk premium may • All of the CEE countries covered discourage certain investors from in our publication (Poland, investing in residential mortgages Ukraine, Czech Republic, Romania, (which make up the majority of Hungary) reported significant delinquent assets), although we increases in overall NPL volumes, have seen instances where vendor which implies that 2010 was financing and structuring has been another very difficult year for the Issue 3 • 5
  6. 6. Germany: NPLs remain at high levels despite strong economic growth, however transactions remain limited Market trends in NPLs of 2010 corporate and consumer insolvencies remained at a high level. Based on our estimates, NPLs in However, to counterbalance this, we Germany could be as high as EUR 225 note that corporates and consumers bn as of 30 June 2010. NPLs in the showed improved payment behaviour1 German market grew significantly aligned with a robust recovery of the between 2008 and 2009, reaching EUR German economy2. Banks’ most recent 210 bn as at the end of 2009. financial statements suggest that NPLs have stabilised towards the end of According to the Statistisches the year. Bundesamt, during the first half Graph 1: NPL development in the German market NPLs in Germany 250 6% could be as high as 200 5% 4% EUR 225bn as at 30 EUR bn June 2010. 150 3% 100 2% 50 1% 0 0% Gross NPLs (Euro bn) Gross NPLs / Total loans (%) Source: BaFin, Published Financial Statements, Bankscope, Deutsche Bundesbank, PwC analysis 1 Bundesverband Deutscher Inkasso- Unternehmer e.V. – Autumn Survey 2010 2 ZEW – Konjunkturerwartung, October 20106 PwC • Debating Deleverage
  7. 7. assets, rather than NPLs. We believeGraph 2: Gross NPLs for key German banks this is due to a combination of factors such as: 25 20 • the Government support that allowed banks to avoid fire sales of assets (at least at the early stages ofEUR bn 15 support); 10 • the pricing gap between sellers and 5 buyers, driven by book values being significantly higher than market 0 values; 2008 2009 H1 2010 LBBW DZ Bank BayernLB HSH Deutsche Bank Commerzbank HRE Postbank • reluctance by bank senior management to be seen asSource: Published Financial Statements / PwC analysis distressed asset sellers; and • high debt funding costs for localBank trends in NPLs adjustments3) in the first nine months and international investors. of 2010.The major factors increasing thevolume in the German NPL market In our opinion, the potential for future NPL portfolio transactionsin 2009 were company insolvencies Drivers for future transactionsand consumer defaults in a sharp in Germany is considerable, given The historical peak of NPL transactions the higher capital requirements thateconomic downturn (GDP decline in Germany was during the years will be imposed by Basel III and theof 4.7%). Although in 2010 the NPL 2004 to 2006. Since then, there has need for many banks who receivedvolumes increased marginally for not been comparable activity. In 2010, Government support to repay thesome banks (such as LBBW and DZ only a few transactions have been financial assistance provided.Webank), others (such as Deutsche Bank, completed and the expected increase believe when those portfolios come toCommerzbank and Postbank) reported in transactions did not materialise. the market, the main focus will be onno increase. This potentially is linked Furthermore, similar to other the residential mortgages and securedto an economy in recovery, as Germany European markets, the transactions corporate loans.was experiencing sharp economic that have happened (some of whichgrowth (GDP growth of 3.6% after are listed below) were mainly non coreTable 2: Selection of recent transactions in the German marketSeller Buyer Asset type Face value Completion dateWestLB4 Erste High risk and non-strategic EUR 77bn April 2010 with retrospective Abwicklungsanstalt assets including non-performing effect to 1 January 2010 loansHypo Real Estate FMS Securities and non-strategic EUR 173bn October 2010AG5 Wertmanagement assets including real estate loansCredit Suisse7 Apollo Commercial real estate USD 2.8bn December 2010Unknown6 Colony Capital LLC Mainly German commercial and EUR 100m December 2010 residential real estate loans3 Statistisches Bundesamt4 n-tv ‘West LB vor Aufspaltung’ , 11 April 20105 Tagesschau ‘Hypo Real Estate befreit sich von faulen Krediten’, 3 October 20106 Börsen-Zeitung ‘Immobilien: Non-Performing Loans haben Hautgout’, 5 August 20107 Wall Street Journal, ‘Apollo swoops in on bank’s fire sale’, 24 December 2010 Issue 3 • 7
  8. 8. UK: 2010 was characterised by a continued focus on deleveraging non core assets and signs that NPL transaction activity is returning Graph 3: NPL development in the UK market 200 7% 180 6% 160 140 5% EUR bn 120 4% 100 80 3% 60 2% 40 20 1% 0 0% Gross NPLs (GBP bn) Gross NPLs / Total loans (%) Source: Deutsche Bank, European Banks, 29 September 2010 Market trends in NPLs Drivers for future transactions profitability of the UK banks, both by suppressing potential growth and by In 2010 NPLs in the UK are expected Austerity measures: Government partially offsetting any significant drop to exceed EUR 170 bn, representing an budget cuts are estimated at more than in NPLs. increase of around 13% compared to GBP 80 bn by 20158. The announced the previous year. 2010 is expected to cost cutting measures are estimated be the peak NPL year for the UK banks, to lead to a decrease of up to 300,0009 UK housing market: Prices for with both volumes and amounts jobs in the UK public sector. GDP residential properties in the UK have expected to gradually decrease from decreased by 0.6% in the fourth recently experienced a softening, with 2011 onwards as the economy recovers quarter of 2010 (compared with certain leading indicators10 showing from recession. an increase of 0.7% in the previous a 2.4% decrease in annual prices quarter). PwC expects modest GDP (three month average against the NPLs as a % of total loans are expected growth of 1.4% in 2011 and just over same period last year). Many market to reach their highest point at 6.1% as 2% in 2012, but this is not expected to analysts see the above as the start at the end of 2010. There is no doubt be enough to decrease unemployment of a longer downward trend in UK that significant deleveraging in the UK significantly. property. PwC has recently estimated a balance sheets still needs to happen. 70% chance that real house prices will The above is likely to put additional see negative growth compared to 2007 pressure on the UK consumer’s peak levels in the next five years and a appetite for new lending and the 50% chance that real house prices will gradual effort to deleverage which be below 2007 peak levels in 202011. will have an adverse impact in the The above is expected to be partly the 8, 3 March 2010 9, 23 May 2010 10 Halifax House Price Index, January 2011 11 PwC UK Economic Outlook, July 20108 PwC • Debating Deleverage
  9. 9. Graph 4: UK seasonally adjusted house price indicies UK is currently experiencing a 700 600 declining property 500 market with London 400 300 proving more 200 100 resilient than the 0 rest of the UK Nationwide Halifax* Nationwide Base Year: 1991; Halifax Base Year: 1983Source: Nationwide Building Society / Halifax, January 2011result of tighter lending conditions Given that the SLS will expire at the The recent Basel III announcements:implemented by the UK banks along end of January 2012, UK banks will The recent Basel committee proposalswith consumer fears over the wider have to refinance approximately, as at (with some parts to be finalised inUK economy. This is demonstrated November 2010, GBP 110 bn before 2011) have set new criteria for thethrough subdued demand for then12. The Bank of England has calculation of the risk weighted assetsmortgage lending which still remains extended the criteria of its Discount (RWAs) and imposed stricter criteriawell below pre-crisis levels. Window Facility (“DWF”) in order on what can be defined as capital to allow for loan portfolios to be along with a possible additional capitalPoor quality properties in areas used as collateral (previously the buffer for systemically importantof oversupply are expected to be main collateral has been residential institutions. This will require banksparticularly affected. mortgage backed securities). to maintain higher capital cushions Institutions will also look to mitigate (Core Tier 1 Capital), especially forBank liquidity pressure: UK banks the funding shortfall in other ways. We investment banking arms that usuallyhave previously relied on the secured consider that NPLs and non core asset carry a higher percentage of the banks’funding markets. Given the effective disposals will play an important part RWAs. Even though the proposals areclosure of these markets during the in the banks’ 2011 strategy to improve not expected to be fully implementedcrisis, institutions became reliant on liquidity alongside restrictions on new before 2019, the market is alreadythe Bank of England Special Liquidity lending. expecting major banking players toScheme (SLS) in order to finance or clarify their strategy in relation to howrefinance part of the current they propose to address the book.12 Bank of England, Financial Stability Report, December 2010 Issue 3 • 9
  10. 10. Therefore this will put additional Selection of recent transactions pressure on banks to reduce capital in the UK markets intensive assets in their balance sheet sooner rather than later, either The UK market has seen a limited through a direct sale or through a number of transactions in the past structured solution aimed at reducing six months, since the divergence of their RWAs. pricing expectations between sellers and investors still exists, however this is to a lesser extent than in 2009. Contagion effect from the Irish We summarise a selection of recent market: Many UK banks are keeping a portfolio transactions that highlight watchful eye on what the Irish banks a range of strategies being used to will do with their UK loan exposures. deleverage. The transactions range There is an expectation that such from single credit to large portfolios, exposures will be exited, given the bilateral and auction sale procedures need for Irish banks to deleverage. The and a range of strategic and financial UK banks are cautious not to flood the buyers. market with opportunities since there is a risk that similar assets from several institutions could be brought to market at the same time. This could have an adverse effect on price and therefore, strategically thinking about timing of any major transactions is critical. Increased transaction levels in 2010 have been mainly driven by large corporate portfolios10 PwC • Debating Deleverage
  11. 11. Table 3: Selection of recent transactions in the UK marketSeller Buyer Asset type Face value Completion dateRBS13 Intermediate Capital Group European Leveraged Finance Loans EUR 1 bn August 2010RBS14 Variety of hedge funds and Mezzanine Loans EUR 250 m October 2010 private equity investorsRBS15 Mitsubishi UFJ Financial Project Finance Loans GBP 3.8 bn November 2010 GroupRBS16 Unknown Commercial Real Estate Loans GBP 1.6 bn In progressLloyds Banking Varde Corporate exposure (Crest Nicholson) GBP 150 m October 2010Group17Lloyds Banking Legal General Retail portfolio GBP 150 m Q3-Q4 2010Group18Lloyds Banking Cerberus Single Corporate Loan of Maxim GBP 95 m (price January 2011Group19 Scheme in Glasgow, Scotland paid GBP 30 m)Bank of America20 Haymarket Financial Corporate exposure (Foxtons) Unknown October 2010Unknown21 Westcore Europe LLC Commercial Real Estate Loan GBP 84.5 m September 2010Morgan Stanley Paragon Secured Buy to Let portfolio Unknown September 2010Bank InternationalLimited2213 Financial Times, 15 October 201014 Financial Times, 15 October 201015 Reuters, 15 November 201016 Financial Times, 21 February 201117 Financial Times, 15 October 201018 Property Week, 23 July 201019 Property Week, 23 July 201020 Financial Times, 15 October 201021 Marketwire News Releases, 30 September 201022 Paragon 2010 financial statements Issue 3 • 11
  12. 12. Spain: Regulatory changes driving an uptick in transactions while levels of distress keep increasing The vast majority of NPLs in Spain Graph 5: NPL development in the Spanish market relate to residential mortgages (70% of total bad debts)23. The ratio of 120 6% doubtful mortgages as a percentage 100 5% of total mortgages is approximately 80 4% 16%24. However, even though in 2010 house prices appear to have stabilised, EUR bn 60 3% industry sources suggest that they still 40 2% remain high which means that further impairments are still to come. 20 1% 0 0% Drivers for future transactions 2008 2009 2010E During 2010, there have been several Gross NPLs (EUR bn) Gross NPLs / Total loans (%) important legislative changes in Spain, which could act as a stimulus for Source: Bank of Spain, August 2010 future transactions: • Funding from the FROB (Fund for the Restructuring of the Banking sector) ceased in July Graph 6: Type of impaired assets as a percentage of total assets 2010. According to figures published by the Bank of Spain, 16% before the restructuring processes 14% began, there were 191 financial 12% institutions (including banks, 10% savings banks and credit unions). 8% As of November 2010, there were 6% just 145 institutions, reflecting the significant consolidation 4% experienced by the sector. We 2% expect many of the combined 0% entities to sell non core loans and 2007 2008 2009 2010 2011E 2012E NPLs, as part of cleaning up their balance sheets. NPLs Write -off Repossessed Source: Bank of Spain, 30 June 2010 23 Bank of Spain12 PwC • Debating Deleverage 24 Bank of Spain, June 2010
  13. 13. • In May 2010, the Bank of Spain of selling such assets to improve of between EUR 35 bn to EUR 40 bn published the circular 3/2010 on their liquidity and pricing is likely in Spain. We believe that Spanish provisions for impaired assets which to come more in line with buyer’s financial institutions will need to modified Annex IX of the previous expectations. improve their solvency ratio and an circular 4/2004. The circular important part of this will come from simplified the provisioning process; The revision to the bad debt the sale of NPLs and non core assets it also decreased the provisioning provisioning policy triggered (mainly corporate credits given the calendar (the period over which immediate investor interest in those relative impact of those on capital and financial institutions are expected assets and although only a few solvency ratios). to build the required provisions) transactions have been completed in for all assets to 12 months, which the market (EUR 0.3 bn approximately In terms of asset class, construction has led to increased provisioning in the year to date)25, we believe that and development represents over (previously, the provisioning the increased transaction trend will EUR 400 bn of lending but is a more calendar was up to 24 months for continue over the next six to twelve complex segment with a larger price unsecured assets and up to six years months and that significant volumes gap. The residential and commercial for secured assets). In addition, of assets will come to market, eclipsing mortgage sector represents by far the a 30% provision is required for the EUR 3 bn transacted in 2008 largest credit segment in Spain at over foreclosed assets, once they have and 2009. EUR 600 bn. been held on the balance sheet for more than 24 months (if they are Furthermore, PwC estimate that one of held for investment). Therefore the key capital requirements of Basel financial institutions are starting III, that every financial institution to be more receptive to the option maintains a Tier 1 capital ratio of at least 7%, implies a capital injectionGraph 7: Credit by segment as of 30 June 2010 700 600 500 400EUR bn 300 200 100 0 Construction Development Mortgages Corporates ConsumerSource: Bank of Spain, 30 June 201025 PwC analysis Issue 3 • 13
  14. 14. Given the liquidity constraints in Graph 8: Delinquency by segment Spain and the high country risk premium currently assigned to the 12% country by the ratings agencies, a key success factor for any transactions 10% will be vendor financing and/or the 8% deferral of payments. Price continues 6% to be a key sticking point for 4% Spanish vendors, so both buyers and sellers must be willing to consider 2% structures that can bridge that gap. 0% 2008 2009 2010 Selection of recent Construction Development Mortgage transactions in the Spanish Corporates Consumer market Source: Bank of Spain, June 2010 Currently, investors are mainly interested in unsecured portfolios (although we note there is persistent aversion towards telecom receivable portfolios due to the particular future price trends. Overall, unsecured Although we have seen certain profit difficulties they have experienced portfolios have been more attractive sharing structures in the past they managing this kind of portfolio in because they align the historical have only accounted for less than the past). Mortgages and other real Spanish servicers’ expertise, are easier 5% of transactions26. We expect such estate backed assets still have a high to analyse and value than their secured arrangements to be more prevalent risk premium due to the collapse of counterparts and are, therefore, in the future and we have developed the real estate sector in Spain since deemed to offer a better investment structures that may be of interest for 2008 and continued uncertainty over return. use in upcoming transactions. Table 4: Selection of recent transactions in the Spanish market Seller Buyer Asset type Face value Completion date MBNA27 Lindorf Retail portfolio EUR 100m September 2010 BBVA27 Confidential Retail portfolio EUR 200m January 2011 Orange27 Confidential Telecoms portfolio EUR 250m January 2011 Santander 28 Lindorf Retail portfolio EUR 600m January 2011 RBS29 Perella Commercial real estate EUR 200m March 2011 26 PwC analysis 27 28 bolsa. 29 www.rbs.com14 PwC • Debating Deleverage
  15. 15. Italy: NPLs increased Market trends in NPLs The quality of banking assets hassignificantly more than the deteriorated over the last two years, pushing up gross NPLs (NPLs beforeother Western European any provisions) to c. EUR 76 bn (November 2010). The Italian Banks Association (ABI) forecast a doublemarkets, however digit year on year increase of 10% in NPLs in 2011 and a decrease of 1.7% intransactions remain at 2012. The ratio between net NPLs and total assets is 2.8% in 2010 (comparedrecord lows to about 1.2% in 2008) and is estimated to drop to 2.4% in 2011 and 2.3% in 2012. The majority of this growth in NPLs is expected to come from real estate and consumer lending, partly driven by increased unemployment, which has risen to over 8% in 2010.Graph 9: NPL development in the Italian market 90 8% 80 7% 70 6% 60 5% 50EUR bn 4% 40 3% 30 2% 20 10 1% 0 0% Net NPLs (EUR bn) Gross NPLs (EUR bn) Gross NPLs / Total loans (%)Source: Bank of Italy / ABI Issue 3 • 15
  16. 16. Drivers for future transactions incentive for the investors to buy assets in the legal procedure. In the NPLs in Italy are The low level of NPL transactions characterising the Italian market is, current market, where real estate expected to increase prices are flat, this incentive has similar to other markets in Europe, been reduced. by 10% in 2011 attributable to the pricing gap between buyers and sellers. However, we Currently, the Italian marketplace is consider that the following factors being monitored at arm’s length by have also contributed to the low a number of potential investors and transaction levels in Italy: we are expecting more NPL portfolios to come to market. Nevertheless, • There has been a general lack the likelihood of successful sales of financing for leveraged will depend on a number of factors transactions, which has made similar to other European markets existing opportunities quite costly such as increasing bank provisioning for buyers. levels and availability of funding for transactions. • The lengthy execution / foreclosure procedures in Italy have constrained Certain structures (e.g. vendor investors’ appetite for NPL finance, earn out mechanisms and portfolios. This has also been deferred payments) are also being exacerbated by the declining trend considered by buyers and sellers but in property prices, especially in their application has not yet fully rural areas. Historically, a rising mitigated the price gap. property market between the foreclosure and auction date (as the first auction could occur several months after the initiation of foreclosure proceedings) was an Table 5: Selection of recent transactions in the Italian market Seller Buyer Asset type Face value Completion date Cross Factor SpA30 Agathos Finance Srl Retail portfolio EUR 4.1m 6 August 2010 Non-Performing Sagittaria Finance Srl Retail portfolio (Mortgages) EUR 39.1m 9 September 2010 Loans SpA30 30 16 PwC • Debating Deleverage
  17. 17. Total transfers to NAMA €71.2bnEstimated level of NPLs in Ireland in 2010 €109bnIreland: Currently the focus of manyinvestors due to the high levels of distresswith expectations of significant sales inthe next 12 to 36 monthsMarket trends in NPLs originated during the peak of for non-performing assets (this 2005-2007, with two thirds of is according to the PwC InvestorWe estimate that NPLs in Ireland them having average LTVs of Confidence Survey – Irelandstood at EUR 109 bn as at June 2010, 70% and the remaining third Q1 2011). We are aware thatincreasing by 24% compared to 2009. having LTVs of 100%. Given some Irish banks are considering the reducing real estate prices, disposals of their non-IrishThe Irish economy agreed a bailout it is expected that a significant assets first, which is notpackage of EUR 85 bn from the portion of the overall mortgage surprising given such discountsEuropean Union and International book is currently in negative for Irish assets; andMonetary Fund, of which EUR 35 equity31. It should also be notedbn represented direct support to that Irish borrowers are liable –– some Irish lenders are offeringits banking sector. There has been for losses not covered by the professional property landlordssignificant market wide commentary value of the collateral for up to a discount of up to 25% of theirand press coverage of the implications 12 years; mortgage debt to encourageof this support along with the them to refinance their existingadditional EUR 24 bn of expected –– 60% to 70% of all commercial facilities, a practice that,additional capital that the Irish banks and development property loans according to the same presswill require (in accordance with the are currently estimated to be in reports33, is also prevalentlatest stress tests performed by the negative equity; among some of the UK lenders.Central Bank of Ireland). Such a strategy often delivers –– historical data on defaults better economic outcome for the is very limited and has been lender. However, given the sizeDrivers for future transactions heavily influenced by the various of the problem, Irish banks willWe believe that the following factors Government schemes imposing need to supplement this withwill significantly affect the level of moratorium on repossessions32 portfolio sales.portfolio transactions. which makes future defaults hard to forecast and gives risea) ncertainty over collateral values: U to uncertainty over ability to House prices in Ireland have fallen foreclose; by approximately 35% to 40% since their peak in 2006-2007: –– investors are likely to apply a general country discount to Irish –– the vast majority (c. 70%) of the assets of around 20%-30% for EUR 100 bn of mortgages were performing and up to 60%-70% Goldman Sachs ‘Europe Weekly Analysis’,31 33 FT Weekend Money Section, 25 January 2011 18 November 2010 Department of Finance- Amendment to Code32 of Conduct on Mortgage Arrears, 17 February 2010. Issue 3 • 17
  18. 18. Table 6: Loan Balance Transfers to NAMA EUR bn (face value) Tranche 1 Discount Tranche 2 Discount Tranche 3 Total (Completed) (Completed) (Completed) Allied Irish Banks 3.29 42% 2.73 49% 3.3 9.3 Bank of Ireland 1.93 35% 1.82 38% 2.4 6.2 EBS Building Society 0.14 36% 0.04 46% 0.0 0.2 Irish Nationwide Building Society 0.67 58% 0.59 72% 2.8 4.1 Anglo Irish 9.25 55% 6.75 62% 3.6 19.6 Total 15.28 50% 11.93 56% 12.1 39.4 Source: NAMA presentation ‘Key tranche 12 data’, 23 August 2010. As of 2 March 2011 NAMA had acquired loans with a face value of EUR 71.2 bn for EUR 30.2 bn (suggesting an average haircut of 58%). No analysis of the acquired amount as at 2 March 2011 was available. b) mpact of NAMA: loans transferred I skills shortage in specialised Transactions in the Irish market to NAMA have been at a significant servicers able to cope with an haircut to their current recorded increasing number of mortgage The Irish market has seen a very values34, implying that full recovery arrears and potential repossessions. limited number of transactions in of the loan principal is highly In order to address the above, the past 12 months, as a result of the unlikely. Furthermore, NAMA is potential investors looking to move factors highlighted above. However, still at its early stages and hence into the Irish market may have as part of the Government’s plan to there is limited information in to “transfer” UK special servicing recapitalise the banks, we expect the relation to actual versus expected skills into the Irish market, either Irish banks to proceed with significant realisable values from the workout via intensive training of local disposals of non core and non- of the property loans transferred. operations or outsourcing of performing assets in the next 12 to 36 Therefore there is no immediate servicing to UK operations. months. benchmark for investors to compare collateral prices against d) egal processes: Market L However, in view of the results of our (mainly due to the dearth of participants comment that the investor confidence survey, we believe comparable transactions in the legal environment in Ireland that any transactions that do occur in market); remains untested with few relation to Irish based assets will take completed foreclosures compared place at a significant discount to book c) ack of specialised servicers in L to the perceived level of distress, values, and innovative structures along the Irish market: Due to its small particularly in the residential with complete and accurate data will size and the very benign credit mortgage market. That creates be required in order to bridge pricing. conditions in the decade prior to additional uncertainty for potential the credit crisis, the Irish market investors regarding the ability and is currently experiencing a severe timing to collateral recovery. NAMA 34 18 PwC • Debating Deleverage
  19. 19. Greece: Deepening recession anduncertainty over economic recovery islimiting investor appetiteGraph 10: NPL development in the Greek market Market trends in NPLs NPLs have grown in the first half of 25 10% 2010 by 20% to EUR 24 bn compared 9% to 2009, mainly as a result of the 20 8% 7% deepening recession in the Greek 15 6% economy (GDP for the whole of 2010EUR bn 5% contracted by 6.6%)35 and the decrease 10 4% 3% in consumers’ disposable income. 5 2% We estimate that NPL ratio has reached 1% 0 0% 10.5% at the end of 2010. During the same period total provisions are 2003 2004 2005 2006 2007 2008 2009 Jun 2010 estimated to have increased by around 25%. Gross NPLs (EUR bn) Gross NPLs / Total loans (%)Source: Bank of Greece, PwC analysisGraph 11: NPLs as a % of total loans by category Growth in NPLs 18% has been severe in 16% 14% consumer lending, 12% which has seen some 10% 8% banks’ NPL ratios 6% 4% reach 17% by June 2% 0% 2010. 2005 2006 2007 2008 2009 Mar 2010 Jun 2010 Mortgages Consumer Corporate TotalSource: PwC analysis35 Greek Statistical Authority Issue 3 • 19
  20. 20. We expect NPLs in Greece to reach EUR 26 bn in 2011. Bank trends in NPLs consumers (the so- called consumer bankruptcy law), both of which appear to have had a very limited impact. Graph 12: Gross loans development for key Greek banks However, we understand that the banks have already implemented 70 restructuring practices for the SME 60 asset class along the broader principles 50 set by the law. These practices may include deferral of capital payments EUR bn 40 30 and overdue interest write offs and may have been implemented even in 20 cases that fall outside the scope of the 10 consumer bankruptcy law. This could 0 lead to portfolios being unattractive 2006 2007 2008 2009 H1 2010 to potential purchasers if a loan is restructured such that foreclosure on NBG Eurobank Alpha Bank Piraeus Bank Emporiki Marfin Bank the underlying security is no longer an option. Source: Published Financial Statements presentations / PwC analysis There is currently market pressure for major financial institutions to merge, as it is considered that consolidation will The NPL ratio for all the major Greek and Piraeus Bank completed a share strengthen the local banking system. banks is expected to have continued capital increase of EUR 800 mn. We see that as a driver for potential to increase during the second half Geniki Bank of Greece, a subsidiary of future sales as merged institutions may of 2010 and to continue increasing Societe Generale has also raised EUR look to clean up their balance sheets. during the first half of 2011, due 300 mn of capital. to continuing deterioration in the economic conditions. Deteriorating asset quality will force banks’ Drivers for future transactions management to consider alternative Appetite from investors is currently ways of improving liquidity and limited as continuing fears of further restructuring of their balance sovereign risk have only recently sheets, including the sale of NPLs and started to recede, while local other non core assets. banks are currently reluctant to sell portfolios at a loss due to the In order to address the liquidity and pressures to safeguard capital and asset deterioration issues, Greek profitability. banks are increasingly looking to the international capital markets in In 2010 the Government implemented order to strengthen their capital base. certain legislative measures with National Bank of Greece completed regards to the restructuring of debt a 2.8 bn EUR share capital increase obligations for small businesses and20 PwC • Debating Deleverage
  21. 21. Poland: Market remains active, withincreasing demand for smaller portfolios Graph 13: NPL development in the Polish market Market trends in NPLs The total value of NPLs in the Polish 70 10% banking sector was estimated at PLN 9% 62 bn (or EUR 16bn) as at the end of 60 8% 2010. According to the Polish Financial 50 7% Supervision Authority, there has been 40 6% a continuing decline in the quality of PNL bn 5% 30 the banks’ loan portfolios with the 4% NPL ratio for the Polish banking sector 20 3% 2% rising from 6.5% in June 2009 to 8.3% 10 1% by June 2010. Going forward, NPLs 0 in Poland are expected to continue 2007 2008 2009 H1 2010 2010E increasing until 2012, driven by a deterioration in retail credits. Gross NPLs (PLN bn) Gross NPLs / Total loans (%)Source: BRE Bank Securities, Polish Financial Supervision AuthorityGraph 14: NPL ratio development for key customer groupings Bank trends in NPLs According to certain bank forecasts, 14% NPLs among retail loans are expected 12% to increase through to 2012. Credit quality has been adversely impacted 10% particularly in relation to the following % of total loans 8% sub-types of loans (see table on next page for more details): 6% 4% • Consumer loans (households) 2% –increase in NPL ratio by 59% (from 9.8% in June 2009 to 15.6% in June 0% 2010); and Jun 2009 Dec 2009 Jun 2010 • Corporate loans secured on Households Corporations Non-commercial institutions property – increase in NPL ratio by 76% (from 8.8% in June 2001 toSource: Polish Financial Supervision Authority 15.5% by June 2010). Issue 3 • 21
  22. 22. Table 7: NPL ratios in the Polish banking sector     Jun-09 Dec-09 Jun-10 Banking sector (total) 6.5% 7.7% 8.3% Households (total) 4.8% 5.9% 6.6%   Consumer loans 9.8% 12.9% 15.6%   Mortgage loans 1.3% 1.5% 1.6%   Other loans 6.3% 6.3% 6.6% Corporations (total) 9.6% 11.2% 11.8%   Operational loans 10.4% 11.1% 11.2%   Investment loans 9.5% 9.8% 10.7%   Loans on secured on property 8.8% 13.6% 15.5%   Other loans 4.2% 6.6% 6.4% Non-commercial institutions 2.9% 1.5% 3.7% Source: Polish Financial Supervision Authority Drivers for future transactions servicers that undertake investments NPL portfolios currently being in NPL portfolios is increasing. considered for disposal. We expect that a higher number of retail unsecured portfolios will We also expect increases in the We have also observed an increasing come to market in 2011 and 2012. supply of corporate NPLs in the demand for smaller portfolios by The motivation to dispose of NPL second half of 2011 and during 2012. some local and international investors portfolios is driven mainly by Despite corporate NPL ratios rising entering the market. Competition in operational constraints, such as in 2009 and 2010, many banks have this market segment and pricing on limited workout resources given the indicated that they currently prefer to portfolios put up for sale is largely increasing servicing needs of some restructure the corporate loans with influenced by the availability of portfolios. Currently some NPL the potential for selective disposals financing. sale transactions appear to be quite where satisfactory pricing enables attractive for banks due to aggressive them to minimise losses on sale. We pricing adopted by some local are aware of at least three corporate investors. Additionally, the number of Agressive pricing by local investors in the Polish market has increased attractiveness of NPL sales to banks22 PwC • Debating Deleverage
  23. 23. Ukraine: Lack of restructuring optionsmay increase transaction levels in 2011,although enforcement and servicingoptions remain untestedGraph 15: NPL development in the Ukrainian market 100 14% 90 12% 80 70 10% 60UAH bn 8% 50 40 6% 30 4% 20 2% 10 0 0% 2004 2007 2008 2009 Oct 2010 Gross NPLs (UAH bn) Gross NPLs / Total loans (%)Source: National Bank of UkraineMarket trends in NPLs loans being rolled over at maturity or tested NPL collection procedures. restructured such that provisioning The ability of banks to enforceAccording to the Central Bank of from an accounting perspective is not collateral (e.g. in the mortgageUkraine, GDP decreased by 15.1% in required. lending segment) as well as the2009 compared to 2008. As a result, possibility to carry out sustainableand as shown in the graph above, corporate debt restructurings will beNPLs reached UAH 86 bn (or EUR Bank trends in NPLs crucial for future profitability. The8bn) in 2010 compared to UAH 70 vast majority of banks are currently Despite state owned banks publishingbn as at the end of 2009. Since the testing a number of restructuring NPL ratios below the private sectorbeginning of the financial crisis, options such as developing special average, NPL ratios for some of thethe overall NPL ratio has increased servicing capabilities, which requires largest private banks in Ukraine were,by more than 400%, from 2.3% in a significant amount of time, or in some cases, in the range of 30%-2008 to 11.6% in October 201036. transferring all NPL and non core 40% (based on the 31 December 2009Furthermore, according to certain assets to stand alone SPVs in order to published IFRS financial statements ofanalysts, “true” NPL ratios (including allocate dedicated resources to work the banks).restructured loans) stood at 33% at out teams.the end of 2009, compared to the NPLs in Ukraine are expected to peak9.4% estimated by the National Bank in 2010. The impact on profitabilityof Ukraine. The discrepancy between will depend on the quality of thethese two estimates may be driven by legal system and the availability of36 National Bank of Ukraine Issue 3 • 23
  24. 24. Graph 16: Total loans vs gross NPLs for key Ukrainian banks 70 60 50 UAH bn 40 30 20 10 0 Privatbank Ukreximbank Raiffeisen Bank Aval Ukrsibbank Total loans Gross NPLs Source: Published Financial Statements / PwC analysis Drivers for future transactions While there is some interest in the Ukraine, price, like elsewhere, is an It is expected that after trying to work issue. We believe that banks are being out the loans themselves the banks offered 5% to 8% of the face value will be ready to sell secured retail of non-performing unsecured debt portfolios and auto loans (one of the by local collection agencies, but this most popular types of loans pre the is currently lower than the banks’ credit crisis). Additionally, some small expected internal workout value. corporate loans could be available for sale given that any losses on sale for the banks would be minimal. However, it is expected that large corporate exposures will be dealt with internally and we do not expect to see any of them being actively sold in the market, mainly as a result of legal restrictions such as those that allow the borrowers to delay enforcement proceedings through the transfer of assets to another group company, liquidation of the borrower company etc.24 PwC • Debating Deleverage
  25. 25. Czech Republic: Strong capital positionof the banks means that the majority oftransactions may come from secondarysalesGraph 16: NPL development in the Czech market 160 6% 140 5% 120 4% 100 CZK bn 80 3% 60 2% 40 1% 20 0 0% 2007 2008 2009 2010 (June) Gross NPLs (CZK bn) Gross NPLs / Total loans (%)Source: Czech National BankMarket trends in NPLs period, the total capital adequacy can be a limiting factor as the number ratios of all banks were above 10% for of delinquent cases has increased.Total NPLs increased to CZK 135 bn the first time since 200238.(or EUR 5bn) as at 30 June 2010, The sale of unsecured consumer NPLsrepresenting around 5% of the total The loan portfolios of Czech banks are continues to be a popular portfolioloan book. During the same period, currently dominated by retail loans, management strategy for a numberthe total banking sector loan book mainly mortgages, which are perceived of Czech financial institutions. Thereincreased by 3.6% to CZK 2,601 bn less risky than corporate loans due to are a large number of legal firms and(as of 30 June 201037). Overall, the underlying real estate collaterals. The collection agencies that participateNPL market size has almost doubled risk related to the concentration of regularly in sale processes.compared to the end of 2008. corporate portfolios is also decreasing as banks have diversified their credit Due to strong liquidity andBank trends in NPLs portfolios and capped exposures on profitability, we still think that it is individual industries. The banking unlikely that major banks will comeDespite the increased volume of NPLs, sector meanwhile has relatively low to market with large portfolios ofthe Czech financial system entered dependence on the interbank market defaulted corporate or real estatethe recession in good condition and thanks to low loan-to-deposits ratios. loans in 2010. However, internationalmost institutions maintained high players that grew their portfoliosprofitability in 2009. According to the aggressively during 2006 to 2009Czech National Bank, the banking Drivers for future transactions might consider NPL secondary sales assector recorded no significant liquidity Internal workout still represents the an exit route.problems and revealed a comfortable most important exit route for NPLtotal capital adequacy ratio of 14.3% portfolios though operational capacityas of 31 March 2010. During the same37 Czech National Bank, 30 June 201038 Czech National Bank, Financial Stability Report 2009/10 Issue 3 • 25
  26. 26. Table 8: Selection of recent transactions in the Czech Republic Seller Buyer Asset type Face value Completion date Confidential Unknown Retail loans Approximately Multiple sales throughout CSK 100m 2010 Source: PwC analysis Transactions in Eastern Europe have been driven mainly by local investors and international banks looking to exit non 26% strategic markets Annual increase in NPLs in CEE countries covered in our issue26 PwC • Debating Deleverage
  27. 27. Romania: Lack of servicing options andhistorical data over collateral values islimiting any efforts to bridge the currentpricing gapGraph 17: NPL development in the Romanian market Market trends in NPLs According to the National Bank of 25 12% Romania, the NPL ratio may have exceeded 10% of all loans (or RON 20 20 10% bn by the end of 2010 – approximately 8% EUR 5 bn), driven mainly by defaults in 15 RON bn 6% retail loans (secured and unsecured). 10 At the end of 2008, the NPL ratio was 4% 0.32% of total loans granted by non- 5 2% Government credit institutions, while in 2009 the ratio increased to 7.8%, 0 0% predominantly as a result of changes in 2008 2009 2010E the regulatory definition of NPLs by the National Bank of Romania. Gross NPLs (RON bn) Gross NPLs / Total loans (%)Source: National Bank of Romania (NBR) Financial Stability Report (2010)To cushion the effects of the global owned institutions account for a large ensure proper accountability forfinancial crisis and support the portion of the employed workforce, distressed assets and, implicitlymaintenance of banks’ capitalisation, we expect further increases in defaults for NPLs.the Romanian Government and the in relation to retail secured andIMF agreed to a two-year Stand-By unsecured credits. In an attempt to mitigate issuesArrangement involving a EUR 13.5 bn associated with systemic risk, NBRsovereign loan. issued Regulation No 22 as of Bank trends in NPLs September 2010 requiring banks toIn the interest of reducing the budget In response to the financial crisis, the perform stress tests and hold higherdeficit, as required by the agreement Romanian authorities have focused on liquidity (cash and highly liquidwith IMF, the Romanian Government monitoring the increase of NPLs across assets) reserves as a buffer againstdecided to severely cut operating the banking sector. Subsequently, market pressures.expenditure including salaries by The National Bank of Romania (NBR)20%. Given the fact that Government issued a number of regulations to Issue 3 • 27
  28. 28. NPLs in Romania as at 2010 (expected) €5bn NPLs as a % of gross loans in 2010 (expected) 11% Drivers for future transactions Overall, we expect the NPL market 12 months. Banks continue to work will continue to register growth in out distressed assets internally and Similar to many other countries in default rates since lending criteria even transfer them to affiliated entities Central and Eastern Europe, valuation have historically been very weak. We (bad banks) as financial institutions remains an endemic problem for NPLs. see little change in the market for are attempting to capitalise on their This has been further exacerbated by mortgage assets, as we expect that the knowledge of the NPL market. In the a lack of historical data on servicing banks will continue to work out the medium to long run we estimate that costs and expected recoveries for NPLs. loans internally. certain banks will in fact be looking to Furthermore, the Government’s new acquire NPL portfolios themselves. legislation establishing a standard While the market shows potential for process for out-of-court restructuring an increase in NPL portfolio sales, the and settlement agreements, thereby uncertainties detailed above have had providing alternatives to the formal an adverse impact in the number of in-court insolvency process, has yet to sales transactions closing in the last be fully tested by the market.28 PwC • Debating Deleverage
  29. 29. Hungary: NPL increase driven by localcurrency depreciation against the CHFand lack of refinancing options for SMEborrowersMarket trends in NPLs During the same period, the According to the Hungarian Financial quality of the Hungarian loan Supervisory Authority (HFSA), theDuring the first half of 2010, total portfolios continued to deteriorate deterioration was also witnessed indoubtful and bad loans of Hungarian as depreciation of HUF against the previously restructured loans due to abanks amounted to EUR 4.1 bn, Swiss Franc (CHF) amounted to lack of noticeable improvement in therepresenting a 32% increase compared 20%. A high proportion of lending in employment the end of 2009 year-end. Hungary has been in CHF, primarily to benefit from low interest rates.Graph 18: Gross Hungarian Loans 12 25% 10 20% 8EUR bn 15% 6 10% 4 2 5% 0 0% 2007 2008 2009 Jun 2010 Doubtful loans Special watch loans Bad loans Total doubtful, bad, below average Below average loans and special watch / Total loans (%)Source: HSFADrivers for future transactions One of the most interesting NPL types in Hungary is in the SME market.In 2010 the Government introduced Loans to SMEs are in the most criticalnew regulations to limit the foreign situation due to the number ofexchange risk of borrowers and set liquidations increasing dramaticallymuch stricter rules for provisioning during the second half of 2010.of restructured loans. The decline Commercial banks either declinedin foreign currency exposure could the refinancing of SME facilities ordecrease the growth rate of new increased the cost of refinancing toNPLs, whereas tighter provisioning levels that the borrowers couldis expected to erode the price gap not afford.between buyers and sellers. Issue 3 • 29