Pw c 2012-06-23-issue-4-a-growing-non-core-asset-market


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Pw c 2012-06-23-issue-4-a-growing-non-core-asset-market

  1. 1. European PortfolioAdvisory GroupJuly 2012Issue 4:A growing non coreasset marketEuropean outlook for non coreand non performing loan
  2. 2. ContentsForeword................................................................................................................5Executive summary.................................................................................................6Highlights...............................................................................................................8NPLs by country 2008-11........................................................................................9Germany..............................................................................................................10UK .......................................................................................................................12Spain....................................................................................................................16Ireland.................................................................................................................20Italy.....................................................................................................................23France..................................................................................................................26Netherlands..........................................................................................................28Greece..................................................................................................................31Sweden.................................................................................................................33Russia...................................................................................................................34Austria.................................................................................................................35Denmark..............................................................................................................36Poland..................................................................................................................37Portugal...............................................................................................................40Turkey..................................................................................................................42Ukraine................................................................................................................44Hungary...............................................................................................................46Romania..............................................................................................................48Czech Republic......................................................................................................49Slovakia...............................................................................................................50Finland.................................................................................................................51Kazakhstan..........................................................................................................52United Arabic Emirates (“UAE”)............................................................................53European and global contacts...............................................................................54
  3. 3. ForewordRichard ThompsonChairman, EuropeanPortfolio Advisory GroupWelcome to our 4th annual European outlook for non coreand non performing loan portfolios. In this document weexplore the activity and outlook for the key European noncore asset markets where the deleveraging process is justbeginning.Overall we expect activity levels to gradually increase over therest of 2012 and 2013, following a strong start to the year.Funding for non core asset sales is and will remain an issuebut there is liquidity in the market if you know where to look.We are working with a large number of financial institutionsaround Europe and our pipeline is the strongest it has everbeen. We have advised on a significant number of deals thisyear and we expect a substantial number of transactions tocome to the market in the coming months.
  4. 4. 6 PwC • Issue 4: A growing non core asset marketWe believe that the European deleveraging process is stillat a very early stage. We strongly believe therefore that themarket has significant room for growth and we estimatethat non core loan portfolios with a face value in excess ofEUR 50bn will be transacted by the end of 2012.According to our latest estimates, total European non coreloan assets amount to EUR 2.5trn with European NPLsexceeding EUR 1trn at the end of 2011, an increase of c.10%compared to 2010. Spain, Ireland and Italy were the largesteconomies experiencing a significant increase in NPLs from2010 to 2011. Germany and the UK were the two large noncore asset markets where asset quality appears to havestabilised with no further NPL increases reported.With almost all major European governments implementingsignificant austerity and budget deficit reductionprogrammes, the likelihood of European asset qualityimproving in 2012 has decreased significantly.Transaction levels for non core and non performing loanportfolio assets, have increased by 227% between 2010 and2011 and have made a very strong start during 2012 withEUR 27bn of non core assets transacting between Januaryand June 2012 (see Graph 1). However, the relativetransaction sizes compared to the total volume of non coreand non performing loan portfolio assets suggest that thedeleveraging process is likely to be a very protracted one.We estimate that investors are currently sitting onc.EUR 65bn of funds available to invest in loan assetscoming out from the banks deleveraging process. Evenafter taking into account the effects of investor leverage, itis evident that banks who are successful in matching theright assets to the right investors and are willing to explorevendor financing options will have a significant advantagein achieving a successful sale.Over the last 12 months, transaction levels in the non core loanportfolio and NPL market have increased significantly, with banksmore actively looking to dispose non strategic or non performingparts of their loan portfolios. So has the “golden age” of investingin distressed debt finally started?Executive summaryGraph 1: Non core asset transactions have increased by more than three fold between 2010 and 2011and have made a strong start to 20122010 2011 2012 (6m)France, EUR 11.1bnGermany, EUR 4.3bnUK, EUR 7.5bnUK, EUR 8.8bnUK, EUR 3.6bnSpain, EUR 4.0bnSpain, EUR 3.7bnItaly, EUR 1.9bnIreland, EUR 15.0bnPortugal, EUR 4.2bnOther, EUR 1.2bnOther, EUR 4.0bnOther, EUR 2.0bnSwitzerland, EUR 2.1bnEUR 36.0 bnEUR 26.6 bnEUR 10.8 bnSource: Press articles, company and other publicly available information
  5. 5. Issue 4: A growing non core asset market • PwC 70204060801001201401601802002 4 6 8 10 12 14 16 18 20NPLsize(EURbn)Market transactions (face value) Jan 2010 - Jun 2012 (EUR bn)IrelandSpainGermanyUKItalyFrancePortugalNetherlandsCISNordicAustriaGreeceTier 4Low marketliquidityTier 2Low marketliquidityTier 3High market liquidityTier 1 High market liquidity(focus on international investors)CEETurkeyGraph 2: International investors have focused on liquid markets with a significant amount of non core assetsNote: Liquid markets are defined as markets where loan transactions have exceeded EUR 4bn between January 2010 and June 2012Source: Press articles, company and other publicly available informationBased on our analysis using transaction data for the last three years, we estimate thatEurope is currently a four tier market from a non core market perspective:Tier 1 (Liquid markets with EUR 80bn of NPLs):This tier includes the UK, Spain, Ireland, Germanyand France. These represent markets that arecurrently the focus of international investors and areable to absorb multibillion Euro transactions.Tier 2 (Illiquid markets with EUR 80bn of NPLs):This category includes Italy which is one of the largestEuropean markets although we are seeing somesigns of increasing transactions after a long period ofinactivity.Tier 3 (Liquid markets with EUR 80bn of NPLs):This category includes markets that, despite theirmoderate size, are characterised by a significantdegree of liquidity. Portugal is one of the smallerEuropean markets where transaction levels andaverage sizes of the portfolios transacted haveremained significantly above expectations given themarket size, EUR 12bn of NPLs in 2011.Tier 4 (Illiquid markets with EUR 80bn of NPLs):This includes moderate size markets (such as CEE,CIS countries, Greece) which, for a number of reasons(such as increased sovereign risk, dominance of localinvestors lacking significant firepower and lack ofdeveloped non core asset transaction framework), arecharacterised by relatively few transactions.
  6. 6. 8 PwC • Issue 4: A growing non core asset marketGermany:Experienced stabilisation in asset quality compared to 2010 on theback of a strong economic recovery. Taking into consideration the size of the market, noncore asset transactions have remained at relatively low levels and we expect only a gradualincrease driven mainly by non German institutions looking to exit the German market.UK: Overall asset quality has stabilised compared to2010. We expect the UK to be one of the key non core assetmarkets for the rest of 2012 and 2013 since it remains themost popular investment destination for internationalnon core asset investors. The market is characterised bysignificant liquidity and depth, being able to absorb securednon core portfolio sizes in excess of EUR 1bn. Total non coreloan assets transacted during 2011 stood at EUR 8.8bn,with Q1/Q2 2012 recording asset sales of EUR 3.6bnHighlightsIreland:Asset quality has continued to deteriorate, albeit at aslower rate than in 2010. Irish banks were one of the most active sellersof non core assets in 2010 and 2011, focusing mainly on assets outsideIreland. We expect the rest of 2012 and 2013 to see the first significantsales of Irish assets, the outcome of which will play a significant role inprice setting and the success of the Irish banking deleveraging process.CEE:The regionremains dominatedby local players who are now in the process ofexpanding their presence across the whole ofCEE in order to leverage their experience andexpanding capital base since, given their limitedsize, local markets may offer limited room forgrowth. Preferred asset classes remain retail NPLs.Nordics:Covered for the first time in issue 4 of our publication,the Nordics are gradually becoming the focus of international investorsgiven the regional political and economic stability. However the relativesmall market sizes and lack of a developed non core asset market willfacilitate only selective transactions in the next 12-24 months.Spain:Asset quality continued to deteriorate with NPLs recording anincrease of 23% year on year as the property market continues to registerprice falls. 2011 has been one of the most active years for the Spanish noncore asset market, driven primarily by increased regulatory pressure onbanks to increase provisions and clean up their balance sheets. Total non coreassets transacted during 2011 stood at EUR 5bn, driven primarily by sales ofunsecured portfolios. We expect transaction volumes and number of sales toincrease further in 2012.Italy:The Italian market experienced the largestrecorded increase in NPLs from all major westernEuropean economies in 2011, with NPLs increasingby 37% compared to 2011. The non core asset marketappears to be coming back to life after a significant periodof inactivity, with a number of transactions occurring inthe second half of 2011 and first quarter of 2012.
  7. 7. NPLs by country 2008-11 Issue 4: A growing non core asset market • PwC 92008 2009 2010 2011Germany 142 204 196 196United Kingdom 88 155 172 172Spain 66 97 111 136Ireland 15 88 109 119Italy 42 59 78 107Sub-total 353 603 666 730France 51 77 87 88Netherlands 32 58 52 52Greece 12 19 27 40Sweden 7 15 14 13Russia 1 17 25 26Austria 9 12 17 18Denmark 8 13 16 17Poland 9 12 15 15Portugal 5 8 10 12Turkey 7 10 10 8Ukraine 2 6 8 7Hungary 2 3 5 7Romania 1 3 5 6Czech Republic 3 4 5 6Slovakia N/A N/A 2 2Finland 1 1 1 1Sub-total 150 258 299 318Total 503 861 965 1,048Kazakhstan 4 17 15 19UAE 4 8 14 18Estimated quantum of NPLs by country 2008-11 (EURbn)Source: Various central banks, regulatory authorities, financial statements and PwC analysis
  8. 8. 10 PwC • Issue 4: A growing non core asset marketCredit and asset quality trendsThe overall loan volume of Germanmonetary financial institutions(MFIs) remained relatively stable in2011. Total lending volume of MFIsto non-banks marginally declined by1.3% (EUR 53bn) from EUR 3,995bnin 2010 to EUR 3,942bn in 20111.In contrast, total lending volume ofGerman MFIs to banks increasedslightly by 0.1% (EUR 3bn) from EUR2,840bn as of 31 December 2010 toEUR 2,843bn as of 31 December 20112.Based on our estimates, NPLs inGermany could be as high as EUR196bn in 2011. This estimate is basedon an analysis of eight out of thetop 10 German banks (measured bytotal assets), which disclosed NPLinformation via annual reports.Additionally, NPL volumes of twobad banks EAA and FMS WM would1 Deutsche Bundesbank, Banking statisticsFebruary 2012, page 202 Deutsche Bundesbank, Banking statisticsFebruary 2012, page 16further increase our NPL estimate.These two bad banks are not includedin our estimate. We consider thatthe stabilisation in asset quality isattributed to the recent economicrecovery in Germany.Non core asset activity levelIn 2011, portfolio transactionsremained relatively low mainly due to:• Government support, whichallowed banks to run-off orrestructure distressed assets insteadof selling portfolios of non coreassets; and• the pricing gap between sellersand buyers.Based on the few publicly knowntransactions, major portfolio dealshave covered non-performingcommercial real estate loan portfoliosas well as smaller non-performingconsumer loan portfolios.Portfolio sizes traded in 2011 rangedfrom EUR 136m for smaller propertyloan portfolios to EUR 1.3bn facevalue for larger commercial realestate portfolios. The majority oftraded portfolios in 2011 were soldby commercial banks includingforeign banks as well as local financialinstitutions.The investors currently most active inthe broader European market are alsothose most active in Germany. Theseare large private equity funds andspecialised distressed debt investors.There were, however, also muchsmaller transactions, which have beenthe target of small investors.Debt fundingAvailability of debt funding for noncore asset investors has declined in2011. This was mainly due to factorssuch as the current Eurozone crisis,the overall negative economic outlookand increased capital and liquidityrequirements for banks imposed byBasel III. Consequently, certain dealswere completed with the use of vendorfinancing.Collateral valuesResidential property prices inGermany have picked up since 2010,mainly driven by favourable financingconditions. However, price movementsare subject to significant regionalvariations with the most significantincrease in prices recorded in urbanareas. Furthermore, prices of newlyconstructed houses exceeded those ofowner-occupied houses for resale.The commercial real estate marketin Germany, in contrast, appearslargely relatively stable from a pricingperspective. The vacancy rate of officespace declined, leading to an increaseGermanyAsset quality stabilises with government continuingto support bad banksGraph 1: Germany - NPLs (EUR bn)-501001502002502008 2009 2010 2011Source: BaFin Annual Reports, PwC estimate
  9. 9. Issue 4: A growing non core asset market • PwC 11in prime rents after a period ofstagnation in 20103.Nevertheless, values for non-primecommercial properties especially insecondary or tertiary locations aresignificantly below their peak.3 Deutsche Bundesbank, Financial StabilityReview 2011, November 2011, page 50Source: BaFin Annual Report 2009 and 2010, PwC estimateGraph 2: German NPL Volume 2005 - 2011 (EUR bn)190158136 142204 214196 196-501001502002502005 2006 2007 2008 2009 1H/2010 2010 2011BaFin PwC estimateTable 1: Recent transactions:Seller Buyer Asset type UPB (EUR m) Completion dateBundesbank NotapplicableCommercial mortgagebacked securities238 In progressEurohypo US Bancorp/ Blackstone/ WellsFargoMixed real estateperforming portfolio600 (EUR570mpurchaseprice)Jun-2012Bundesbank PIMCO Commercial real estate NPLs 1,275 Apr-2012Bundesbank Lonestar CDO real estate portfolio 960 Apr-2012Eurohypo Wells Fargo/ BlackstonePerforming commercial realestate US loans424 Apr-2012Eurohypo US Bancorp Single property loan 136 Apr-2012Deutsche Bank Lindorff Mixed NPL portfoliounsecured consumer loans andcommercial loans)(EUR 200mpurchaseprice)Mar-2012Bundesbank Lonestar Real estate loan portfolio 430 (EUR279mpurchaseprice)Jan-2012Eurohypo Blackstone US residential mortgages 227 Jan-2012Syndicate comprising of Eurohypo,Landesbank Hessen-Thüringen (Helaba),Berlin Hyp and Archon Capital BankColonyCapital LLCCommercial real estate NPLs 370 Aug-2011Source: Press articles, company and other publicly available informationMarket value for the rest of 2012We expect the factors that have so farlimited the number of transactionsin the German market (mainlygovernment support for the badbanks) to continue in 2012, resultingin a very gradual increase in non coreasset transactions. For that reason, weexpect that transactions will be drivenpredominantly by non German financialinstitutions looking to exit the localmarket as part of an overall strategicrethinking of their operations.
  10. 10. 12 PwC • Issue 4: A growing non core asset marketCredit and asset quality trendsTotal lending in the UK decreased atan annual rate of 4.7% year on yearin April 20121, a continuation of atrend seen in the aftermath of thecredit crisis of 2008. The decline inlending was driven by a 4.8% year onyear decline to other financial servicesfirms and a 3.7% year on year declinein lending to non-financial companiesover the same period. On the otherhand total household lending grewmarginally at 0.2%.Overall asset quality has remainedrelatively stable, compared to 20102.However, certain asset classes haveexperienced significant deterioration;commercial real estate being the worstaffected. While residential real estatevalues have remained relatively stablein 2011 and Q1 2012; commercial realestate prices are expected, accordingto many industry experts, to declinein 2012 and beyond as borrowers facecontinued challenges in refinancingtheir existing loans, especially for nonprime properties. It is estimated that1 Bank of England, Bankstats Apr 20122 Deutshe Bank: European Banks “Running thenumbers: The Question Bank”-5 September2011.between GBP 85bn and GBP 114bn ofoutstanding commercial real estateloans may not be refinancable oncurrent market terms. This is morethan a third of the GBP 280bn to GBP292bn value of outstanding debtsecured by UK commercial propertyat midyear 20113. As borrowers find itincreasingly difficult to either serviceor refinance commercial real estateloans, we are seeing an increasingnumber of loan sale transactionsinvolving this particular asset class.Non core asset activity levels2011 has seen an increase intransaction levels. We estimate thatcEUR 8.8bn of non core loan portfolioassets were transacted in the UKduring 2011, an increase of c17%compared to the EUR 7.0bn-EUR 7.5bntransacted during 2010. Non coreloan transactions for 1H 2012 stood atcEUR 3.6bn.3 De Montfort University, “UK CommercialProperty Lending Market – Mid Year 2011” –December 2011.Typical portfolio sizes sold by UK banksin the UK and abroad have ranged fromGBP 300m to GBP 1.5bn in unpaidprinciple balances, with only a fewportfolios exceeding that amount.This increase in transactions wasmainly driven by Royal Bank ofScotland and Lloyds, who pursued astrategy of disposing a mix of larger(cGBP 1bn+ face value) and smaller( GBP 300m face value) portfolios.On the unsecured side, the sale ofthe MBNA credit card portfolio wasone of the largest transactions in thatparticular asset type.The majority of the completedtransactions involved private equityinvestors as buyers. Strategic buyers(such as other financial institutionslooking to expand market share) havebeen less frequent market participantsgiven the liquidity and capital constraintsthat many of them are facing.Many investors have commentedthat tranching the larger portfoliosinto smaller pools could attract moremarket interest and further increasecompetitive tension during the sale.Furthermore, we are currently seeinginvestors discussing partnering orstructuring options for some of thelarger portfolios aimed at bridging thebid ask gap and lack of liquidity inthe market.UKMost liquid market with investor appetiteremaining highGraph 1: United Kingdom - NPLs (EUR bn)-501001502002008 2009 2010 2011Source: Deutche Bank Report, PwC analysis
  11. 11. Issue 4: A growing non core asset market • PwC 13Debt fundingAs with the general lendingclimate throughout the broader UKenvironment, debt funding for noncore asset investors has become morechallenging and expensive over thepast year. The financing structures ofseveral high profile deals have had tobe altered as conditions deteriorated,causing delays and putting deals atrisk.Completed deals have involved a largerelement of equity compared to the pre-crisis levels (up to and exceeding 50%in some cases), with debt financingbecoming significantly more scarceand expensive. Some of the largestacquisitions have involved vendorfinancing. We increasingly see theprovision of vendor financing as one ofthe key factors in achieving a seller’starget price.Collateral valuesWe consider that commercial realestate is one of the most vulnerableasset classes for the rest of 2012 andthe first half of 2013.Housing values in the UK were largelystable over 2011 and early 2012. Overthe long term, residential values inthe UK are expected to increase 6%over the five years to 20164. However,these modest increases predictedwill be challenged primarily by weakeconomic growth and constrainedaccess to mortgage finance.4 Savills, “Residential Property Focus” – Q42011.Market view for the rest of2012, 2013We expect an increase in the numberof transactions beyond Q2 2012. As UKbanks increase their provisioning andcapital levels (UK bank Tier I CapitalRatios were estimated to be over12% in 20115), we see UK financialinstitutions becoming increasinglyconfident to proceed with further salesof more complex and illiquid non coreassets. We expect average portfoliosizes to remain below EUR 1bn,given the challenges experienced byinvestors in raising finance.Completing a sale remains achallenge with asset selection,thorough preparation for sale andselected investor targeting some ofthe key determinants of a successfultransaction.Investors continue to face challengesservicing portfolios, particularly inrelation to SME loans. The addition ofa servicing platform with the portfoliosale makes deals more attractive,especially for the new entrants to theUK non core asset market.We see new players such as sovereignwealth funds, non-European financialinstitutions, insurance companies,and US investment funds looking topartner with established investorsin order to help them overcome thefinancing gap and address the lack ofexpertise in sourcing and completingnon core asset deals.5 Deutche Bank: European Banks “Running thenumbers: The Question Bank”-5 September2011.troubleshooting, abs, Due Diligence, workplace, credit, Property-Management, Immobilie, NPL, Rating, Real-Estate,Conact, conactor, Bad-Bank, Servicing, interim, turnaround, Cashflowsync, CCFS, Distressed Asset, CMBS, portalsolution, ICD, Kowollik, recupero di credito, datawarehouse, cloud-solution, Workout, Incentive Care,Institutsverwaltung, distressed, Orgaplan Italien, Special Servicing, DocRating, DueDiligence, Draftcheck, Lucidi,welltbueroTreuhand Intesa Unicredit Immobilien Ubibanca ByYou Jerome Chapuis First Atlantic Ricucci EH-Estate Fortresscondominio amministrazione immobiliare condominiale integrazione sincronizzazione ruoli immobiliare millesimo contoeconomico Fondo immobiliare IAS/IFRS commercialista KMPG Deloitte revisione MPS Unicredit SGR Banca d`ItaliaLegge 106 cartoliarizzazione Reo Immobilie imueble Casa Recupero Credito Bad Bank SIP Sistema integradaprotection Caja workout Credito fallido credits en détresse Troubelshooting incentive care ICD PfandbriefbankEurohypo Portfolio ; Exit - Strategia Immobilienfond Software Orgaplan CONact Unicredit CashflowSync RE-lifecycleKowollik deuda morosa UEN Union Estates Network lucidi vendittelli UCCMB italfondiario Due DiligencePortal-Software Web-Solutions Property
  12. 12. 14 PwC • Issue 4: A growing non core asset marketSource: Deutsche BankGraph 2: NPLs trend 2001-2011 (EUR bn)0%1%2%3%4%5%6%7%-40801201602002001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Estimated NPLs Gross NPLs/Total LoansSource: Bank of EnglandGraph 3: Total UK Lending - Annual Growth Rate %-6-5-4-3-2-10123May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 Apr 12Source: Nationwide Building Society, HalifaxGraph 4: UK Housing Price Index0100200300400500600700Q11983Q11984Q11985Q11986Q11987Q11988Q11989Q11990Q11991Q11992Q11993Q11994Q11995Q11996Q11997Q11998Q11999Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Nationwide Index Halifax Index
  13. 13. Issue 4: A growing non core asset market • PwC 15Table 1: Recent transactionsSeller Buyer Asset type UPB (EUR m) Completion dateLloyds Banking Group Not applicable Shipping loan portfolio 7,600 In-progressLloyds Banking Group Not applicable Corporate debt positions 1,390 In-progressLloyds Banking Group Not applicable UK property loans 720 In-progressLloyds Banking Group Kennedy Wilson Europe Irish property loans 360 (EUR 61mpurchase price)Jun-2012Lloyds Banking Group Morgan Stanley RealEstate / BlackstoneAustralian commercial realestate loans938 (EUR 450mpurchase price)Jun-2012Lonestar Tristan and Ellandi Single property loan 51 (EUR 25mpurchase price)Jun-2012Undisclosed global FI Aktiv Kapital Unsecured consumer loans 264 Apr-2012Varde/MBNA Aktiv Kapital Unsecured consumer loans 545 Mar-2012Lloyds Banking Group HSBC UAE commercial and retailbusiness434 Mar-2012Lloyds Banking Group Sankaty Advisors (BainCapital )Leveraged loans 580 Mar-2012Babson Capital Not disclosed Leveraged loans 150 Feb-2012Barclays Bank Kotak Mahindra Indian NPL credit card loanportfolio45 Feb-2012Lloyds Banking Group Not disclosed Commercial real estate assets 208 (EUR 66mpurchase price)Jan-2012Barclays Bank Standard Chartered Indian credit card portfolio 27 Jan-2012Lloyds Banking Group Varde Partners Consumer loans Not disclosed Jan-2012Lloyds Banking Group Lonestar Commercial real estate loans 1,050 Dec-2011Royal Bank of Scotland Blackstone Sub-performing commercialreal estate loans1,622 Dec-2011Lloyds Banking Group Telereal Trillium Commercial property assets (EUR 52mpurchase price)Dec-2011Lloyds Banking Group Goldman Sachs/Morgan StanleyDistressed property loans 1,159 Nov-2011HSBC Cofidis Hungarian consumerfinance portfolio20 Oct-2011Royal Bank of Scotland Paragon Group Unsecured consumer loans (EUR 49mpurchase price)Oct-2011Citigroup (Egg Banking) Yorkshire Building Society Mortgage book 500 Jul-2011Lloyds Banking Group Haymarket Financial Leveraged/Corporate loans 100 Jul-2011MBNA Barclays Bank Consumer credit card portfolio 150 Apr-2011Royal Bank of Scotland Perella Weinberg Spanish mortgage portfolio 290 Mar-2011Citigroup (Egg Banking) Barclays Bank Consumer credit card portfolio 2,667 Mar-2011Barclays Bank Crexus InvestmentCorporationPerforming commercial realestate loans(EUR 444mpurchase price)Mar-2011Lloyds Banking Group Cerberus CapitalManagementPerforming commercial realestate loans110 (EUR 35mpurchase price)Jan-2011Source: Press articles, company and other publicly available information
  14. 14. 16 PwC • Issue 4: A growing non core asset marketCredit and asset quality trendsTotal loans granted to individuals andcompanies in 2011 amounted to EUR1,783bn, representing a 3.3% decreasecompared to December 2010 (EUR1,844bn1).In 2011 NPLs of the banking sectorincreased by c30% compared toDecember 2010, due to the economicdownturn and high unemploymentrate, with the delinquency ratiostanding at 7.8% as at December20112.In 2012 the delinquency ratio hascontinued to increase and stood at8.4% in the first quarter of 2012Non core asset activity levelsTransactions on NPL portfolios haveincreased considerably in 2011, withSpain being one of the most activemarkets in Europe. Since January2011, at least 31 transactions (mainlyunsecured portfolios) have closed witha total book value of over EUR 9bn.The principal drivers behind theincrease in transactions are:• increased regulatory pressurethrough an increase in core capitalrequirements from 8% to 10%for those groups or institutionsthat have not placed securitiesrepresenting at least 20% of theirshare capital or voting rightswith third parties and that havewholesale funding of morethan 20%;• the need for liquidity as wholesalemarkets shut off funding to largeSpanish banks in the second half ofthe 2011; and1 Bank of Spain, March 20122 Bank of Spain, March 2012Source: Bank of SpainGraph 2: Delinquency rate (EUR bn)0%1%2%3%4%5%6%7%8%9%-4008001,2001,6002,0002008 2009 2010 2011 1Q 2012Loan NPL ratioSpainRegulatory reforms and high distress levels keep thepressure on banksGraph 1: Spain - NPLs (EUR bn)-40801201602008 2009 2010 2011 1Q 2012Source: Bank of Spain
  15. 15. Issue 4: A growing non core asset market • PwC 17• the 100% loss provisioningrequired, according to Bank ofSpain regulations, of banks forunsecured doubtful accounts thatare over 12 months past due.The type of portfolios that tradedwere mainly secured loans, real estateowned (REO) assets and unsecuredportfolios, with unsecured portfoliosaccounting for over 50% of thedebt sold in 2011. The majority ofunsecured portfolios that traded weremade up of lending either to individualhouseholds or Small and MediumEnterprises (SME) debt.Sellers in the Spanish NPL market aretypically primary financial institutions,such as banks, along with utilitiesand telecom companies. However,it is expected in the coming monthsadditional sellers will consider thedisposal of retail, business and publicentity debts.The main buyers for the NPL portfoliossold to date have been internationalinvestors ranging from distresseddebt funds to private equity andinternational debtservicing companies.The newly elected Spanish governmentis implementing deep reforms in orderto strengthen the balance sheets ofSpanish financial institutions includingstronger provisioning criteria. Thegovernment is currently in the processof implementing a new round ofausterity cuts, as part of the2012 budget.During 2011 the Spanish Governmentpassed a series of measuresdriven by the uncertainty in thefinancial markets regarding thevalue of construction and propertydevelopment related assets, in thecontext of increased macro-economicand financial tensions in the euro area.In February 2012, Royal Decree2/2012 was approved in order toreduce the uncertainty of the Spanishfinancial sector. The two principalmeasures adopted were as follows:Performing Assets: a generic provisionrequirement of 7% was establishedon performing loans to constructionand property development companies(these loans amounted to EUR 123bnas of December 2011).Non-performing assets: theGovernment required an increasein the level of provisions andan additional capital buffer forproblematic loans related to land,housing, developments underconstruction andcompleted developments.The total amount of these additionalprovisions required, together with thecapital buffer, amounts to EUR 54bnfor the entire financial system.In May 2012, the second reform ofthe Spanish financial system (RoyalDecree 18/2012) was approved, withthe intention of dispelling doubtsabout the quality of the assets in thefinancial system. It stipulated furtherincrease in the generic provisions forperforming real estate assets to coverthe risk of a hypothetical deteriorationin asset quality. The decree establishesan increase in provisions to 30% onaverage (up from 7% in the previousreform) thereby increasing thevolume of existing provisions byEUR 2bn. Additionally, the decreerequires entities to transfer all of theirforeclosed assets to an off balancesheet Asset Management Company(AMC) at fair value prior to the end of2012. The decree requires that thosefinancial entities that receive supportfrom the Fund for Orderly BankRestructuring (FROB) must dispose of5% of these foreclosed assets per yearand will have a maximum term of 3years to deconsolidate the AMC (saleof 51% of equity).In June, the Spanish Governmentrequested Eurogroup aid for therecapitalization of the Spanishfinancial institutions amountingto EUR 10bn. The objective of thisassistance is to meet the capital needsof those entities that do not reach theminimum requirements as a result ofprovisioning requirements.Graph 3: NPLs - Individuals (EUR bn) as at March 2012Source: Bank of Spain-4812162024Mortgage Consumer Durable goodsTreuhand Intesa Unicredit Immobilien Ubibanca ByYou Jerome Chapuis First Atlantic Ricucci EH-Estate Fortresscondominio amministrazione immobiliare condominiale integrazione sincronizzazione ruoli immobiliare millesimoconto economico Fondo immobiliare IAS/IFRS commercialista KMPG Deloitte revisione MPS Unicredit SGRBanca d`Italia Legge 106 cartoliarizzazione Reo Immobilie imueble Casa Recupero Credito Bad Bank SIPSistema integrada protection Caja workout Credito fallido credits en détresse Troubelshooting incentive care ICDPfandbriefbank Eurohypo Portfolio ; Exit - Strategia Immobilienfond Software Orgaplan CONact UnicreditCashflowSync RE-lifecycle Kowollik deuda morosa UEN Union Estates Network lucidi UCCMB italfondiario DueDiligence Portal-Software Web-Solutions Property Property Management Amministrazione immobiliareCondominio ciclo di vita del Immobile fundos immobiliarios
  16. 16. 18 PwC • Issue 4: A growing non core asset marketMeanwhile, the Ministry of theEconomy and Competitivenesstogether with the Bank of Spainasked for two independentconsultants to estimate the capitalneeds of Spain’s 14 main bankinggroups under two specific scenarios(a base scenario and a stressedscenario). The consultants concludedthat under severe macroeconomicpressure (the stressed scenario)capital needs for the Spanish bankingsector as a whole would range fromEUR 51bn-EUR 62bn. Additionally,Spain’s four largest audit firms,including PwC, are carrying out adetailed analysis of the banks’ loanportfolios assessing, among othermatters, provisioning levels. Thefindings are due to be publishedby 31 July. The Bank of Spain willreview and validate the results of thisanalysis and mandate, if applicable,the relevant additional capital needsand/or bank provisions.We expect that increased corecapital/loan loss provisionrequirements will drive new playersto bring new portfolios to the marketas potential asset sales are used as away to quickly improve liquidity andstrengthen capital ratios.Debt fundingIn unsecured debt deals, there hasbeen a strong reluctance to provideany vendor financing. However,in some cases profit sharing ordeferred payment structures havebeen employed in order to bridgethe price gap between seller andbuyer. In the case of secured deals,vendor financing and retail financingis relevant in order to narrow thebid/ask gap and improve real estatefuture marketability.Other sources of financing includeUS based credit facilities available toUS distressed debt funds along withinternational investment banks; whoinstead of investing directly in thesetypes of assets via equity, as was thecase prior to the credit crisis, nowprefer to take more seniordebt positions.Source: Bank of SpainGraph 4: NPLs - Corporates (EUR bn)-20406080Agriculture Industry Construction Real Estate ServicesCollateral valuesAccording to the Spanish NationalStatistics Institute (INE) as of March2012 real estate prices have fallen by10% since the fourth quarter of 2010and by 22% since the first quarter of20083. The main reasons for the declinein the price values are:• the deterioration of the economyand high unemployment, whichstands at approximately 25% in firstquarter of 2012; and• the increase in housing supplyfrom the construction boom inrecent years.Overall, real estate transaction volumeshave declined 76% between 2006 and2011. Real estate market activity is at itslowest and new government measureswill attempt to reactivate transactions.However, real estate prices areexpected to decline further due to thehuge stock of first and second homescurrently owned by the banks, whichare expected to come to the marketgradually over 2012 and 2013. Spanishbanks are currently one of the majorsuppliers of property in the Spanishmarket. We understand that in order tofacilitate asset sales, financial institutionsare currently offering 100% mortgages toprospective buyers of REOs.3 Spanish National Statistics InstituteMarket view for the rest of2012, 2013The transaction volume of non coreassets in the market in 2012 is expectedto be far greater than those seen in 2011.A wider variety of assets is also expectedto trade, including unsecured retail/SME debt, real estate assets, servicingplatforms (currently a market underconsolidation), other subsidiaries, singlenames/corporate restructuring andpublic administration debt.NPLs will continue to increase in 2012.The Spanish economic downturn, bothin terms of GDP and unemployment,has meant that the delinquency ratestood at 8.4% as at March 2012, whichis the highest default level since 19944.Economic forecasts agree that during2012 the increase in NPLs will even begreater, as the recession deepens.4 Bank of Spain, November 2011
  17. 17. Issue 4: A growing non core asset market • PwC 19Seller Buyer Asset type UPB (EUR m) Completion dateConfidential Confidential Unsecured consumer loans 624 Jun-12Confidential Confidential Unsecured SMEs 176 Jun-12Confidential Confidential Consumer loans 305 May-12Confidential Confidential Consumer loans 1,100 Mar-12Confidential Confidential Mortgage loans 90 Feb-12Confidential Confidential Consumer loans 574 Feb-12Confidential Confidential Mortgage loans 230 Feb-12Lindorff Confidential Servicing Platform - Feb-12Confidential Confidential Mortgage loans 170 Jan-12Confidential Confidential SME loans 100 Jan-12Confidential Confidential SME loans 240 Jan-12Confidential Confidential Mortgage loans 150 Jan-12La Caixa Confidential Consumer loans 900 Jan-12Confidential Confidential Consumer loans 430 Dec-11Confidential Confidential Consumer loans 300 Aug-11Confidential Confidential Consumer loans 760 Aug-11Bankinter DE Shaw SME loans 130 Jul-11BNP Confidential Consumer loans 300 Jul-11Bankia Confidential Performing consumer loans 200 Jun-11Credifimo-Caja Sol Cerberus Mortgage loans 200 May-11Santander Cerberus Mortgage and Corporateloans260 Apr-11MBNA Apollo Performing consumer loans 500 Mar-11BBVA DE Shaw Consumer loans 300 Mar-11Citigroup Aktiv Kapital Consumer loans 400 Feb-11Unnim Aktua Mortgage loans 20 Feb-11Santander Lindorff Consumer loans + ServicingPlatform350 Jan-11Orange Confidential Consumer loans 260 Jan-11Table 1: Recent transactionsSource: Press articles, company and other publicly available information
  18. 18. 20 PwC • Issue 4: A growing non core asset marketCredit and asset quality trendsThe decrease in lending following the2008 credit crisis continued in 2011with overall lending to households andnon financial corporations decreasingby 3.8% and 1.6% respectivelycompared to the previous year. Two ofthe most affected areas were mortgage(decrease of 2.5%) and consumptionlending (decrease of 8%)1.Asset quality deteriorated marginallyin 2011 as the NPLs of the major Irishbanks (including NAMA) increased by18% year on year to cEUR 128bn. Themajor reason for the increase in NPLlevels has been due to the continuingdecrease in property prices.The NPLs constituted c25% of thetotal loans of the major Irish banks(excluding NAMA) with a provisioncoverage ratio of c56% as at December20112.1 Central Bank of Ireland2 Financial Reports, PwC analysisNon core asset activity levelsThe Irish non core asset market hasbeen one of the most active marketsin Europe during 2011, experiencinga significant increase in non core assettransactions. The uptick in activityis a direct result of Irish financialinstitutions planning to divest EUR73bn of assets, from January 2011 toDecember 2013, under the FinancialMeasures Programme3. NAMA is alsoin the process of divesting loans itpreviously acquired from these Irishbanks.Deal sizes have varied widely withassets being sold ranging from EUR100m to in excess of EUR 5bn. Thetypes of assets that have been putto market and subsequently soldhave been diverse both in type andperformance.3 Central Bank of IrelandIn total more than EUR 14bn of noncore Irish owned assets were tradedin 2011, making Irish financialinstitutions the most active sellers inthe European market.Market activity has mainly beenrestricted to non Irish assets, giventhe lower market liquidity in the Irishmarket and the higher discountsrequired by investors. Assets traded in2011 and in early 2012 ranged fromproject finance loans to commercialreal estate assets and smaller retailloans. Larger non-performingcommercial and residential real estateloans have also traded4.The loan portfolios have soughtinterest and been bought by a mixof private equity type investors aswell as strategic investors, mostly USbased. The private equity investorsinclude Kennedy Wilson, Lone Star,Urbicus and Varde Partners. Strategicbuyers such as SMBC, Wells Fargo,Nationwide, JP Morgan and GE havealso acquired portfolios5.4 News articles, PwC analysis5 News articles, PwC analysisIrelandIrish banks are on path to achieve theirdeleveraging targetGraph 1: Ireland - NPLs (EUR bn)-204060801001201402008 2009 2010 2011Source: Finanacial Reports, PwC analysis
  19. 19. Issue 4: A growing non core asset market • PwC 21Debt fundingExternal debt financing has been scarceand we believe that most assets werepurchased predominantly through ownfunds available to major US privateequity players, global banks and morestrategic acquirers (such as Nationwideand Wells Fargo).We expect that Irish banks looking todispose of Irish portfolios and assetswill need to give serious considerationto the provision of vendor financinggiven the scarcity of finance for thesetypes of assets and the high discountsrequired by investors.Collateral valuesProperty prices in Ireland continued todeteriorate with residential propertyindex declining by 14% year on year in2011 as compared to a 10% decline in20106. Similarly commercial propertyvalues posted a year on year decline of10% in 2010 and 20117.6 News articles, PwC analysis7 News articles, PwC analysis(10%)(5%)0%5%10%15%20%25%Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Total Lending to HouseholdsTotal Lending to Non-financial corporationsSource: Central Bank of IrelandGraph 2: Changes in lending to households and non-financial corporations6080100120140Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Source: Central Statistics OfficeGraph 3: CSO Residential Property Price Index
  20. 20. 22 PwC • Issue 4: A growing non core asset marketSeller Buyer Asset type UPB (EUR m) Completion dateAllied Irish Bank Not applicable Property loans 675 In-progressAllied Irish Bank Not applicable SME/real estate loans 480 In-progressUlster Bank Not applicable Commercial real estate loans 1,000 In-progressAllied Irish Bank Bank of AmericaMerill LynchLeveraged and corporate loans 300 Jul-2012Bank of Ireland PensionDanmark UK infrastructure project finance loans 270 (EUR 255mpurchase price)Jul-2012GE Money Pepper Irish residential mortgage business 600 Jun-2012Bank of Ireland Aviva Special PFI UK infrastructure project finance loans 200 (EUR 162mpurchase price)Jun-2012NAMA Morgan Stanley REI Property and development project loans 220 Mar-2012Bank of America Apollo Credit card portfolio 650 Mar-2012NAMA Pears Group/DevelopmentSecuritiesDevelopment assets 120 Mar-2012Allied Irish Bank Swedbank Mortgage portfolio Latvia Not disclosed Mar-2012NAMA Orion capitalmanagementProperty loans to Cyril Dennis 600 (EUR 326mpurchase price)Dec-2011Bank of Ireland Sumitomo MitsuiBanking CorporationProject finance loans 590 Nov-2011NAMA John Caudwell Car park (EUR 174mpurchase price)Oct-2011Bank of Ireland Kennedy Wilson Institutional InvestorsUK commercial real estate loans 1500 (EUR 1,215mpurchase price)Oct-2011Bank of Ireland Mortgage Works/NationwideUK residential property loans 1350 (EUR 1,240purchase price)Oct-2011Bank of Ireland GE EnergyFinancial ServicesProject finance loans 700 Oct-2011Allied Irish Bank Blackstone andWells FargoUS commercial real estate loans 460 Oct-2011NAMA MaybourneFinance LtdHotel loans (EUR 800mpurchase price)Sep-2011Anglo Irish Bank Lonestar, Wells Fargoand JP MorganUS commercial real estate loans 7,200 Aug-2011Bank of Ireland Wells Fargo US commercial real estate loans 1,000 Aug-2011Anglo Irish Bank Elliot Associates/UrbicusScottish property loans 348 Jun-2011Market view for the rest of2012, 2013In 2012, we expect to see acontinuation of the banks’ efforts todeleverage which will help maintainthe upward trend in transactionsexperienced during 2011. Thereare transactions with a total UPB ofgreater than EUR 2.5bn which arecurrently either in progress or aboutto be brought to the market.We expect to see continued interest inthese assets, especially by US privateequity players that have availablefunds for investment in case suitableopportunities arise. A substantialincrease in supply could lowerprices of these portfolios and help inreducing the bid-ask gap.Table 1: Recent transactionsSource: Press articles, company and other publicly available information
  21. 21. Issue 4: A growing non core asset market • PwC 23Credit and asset quality trendsTotal lending by Italian banks increasedby 3.6% in the period from December2010 to December 2011. Short termlending (up to 1 year) grew at a rateof 5.4% while medium and long termlending grew at 3% only. Corporatelending increased 3.1% over the yearwhile lending to households increasedby 4.3%. Real estate lending grew by4.4%. Overall, banks have continuedto tighten underwriting criteria, withmany corporate borrowers concernedover their ability to access credit.Property lending has been adverselyaffected as well with the applicationof stricter loan-to-value (LTV)requirements, which have restrictednew lending significantly1.1 ABI Monthly Outlook – February 2012 –SynopsisIn December 2011, total gross NPLs inthe Italian banking system exceededEUR 100bn, reaching EUR 107bn(an increase of 37% compared toDecember 2010). At the same time,loan provisioning increased to 44%from 40% over the same period.The significant deterioration inasset quality is mainly attributed toworsening economic conditions inItaly, exacerbated by the austerityprogramme implemented by thecurrent government2.Non core asset activity levelsIn 2011, various banks started toactively look into their options formaximizing value from NPL portfolios.2 ABI Monthly Outlook – February 2012 –SynopsisIn the first half of 2011, threecompetitive bid processes commenced,involving a variety of portfolios: UBIBanca (EUR 0.8bn), Intesa SP (EUR4bn) and Banca delle Marche(EUR 1 bn)3.However, the escalation of the Italiansovereign debt crisis affected thedisposal processes adversely. This wasmainly due to the increasing returnexpectations of investors driven by theincreasing country risk premium forItalian assets, resulting in a significantincrease in the price gap betweenbuyers and sellers.3 Press release, Financial statement notesItalySignificant increase in NPLs as economicconditions worsenGraph 1: Italy - NPLs (EUR bn)-204060801001202008 2009 2010 2011Source: ABI Italian Banking Association
  22. 22. 24 PwC • Issue 4: A growing non core asset marketDespite the sovereign crisis, all of thethree banks managed to completethe sale of a portion of the originalportfolios, comprising mainlyunsecured well provisioned loans. UBIBanca sold a portfolio of EUR 0.1bnin H1 2011, while Banca delle Marcheand Intesa SP sold EUR 0.3bn and EUR1.6bn in Q1 2012, respectively. UBIand Banca delle Marche mainly soldunsecured portfolios whereasIntesa SP sold a mix of secured andunsecured portfolios4.In addition to the above, other salesof small NPLs, highly provisionedunsecured portfolios closed over thepast year in the Italian market. This wasdriven mainly by the need of financialinstitutions to reduce NPL levels whileat the same time minimise losses.4 Press release, Financial statement notesDebt fundingThe three disposal processes started in2011 attracted the interest of differentinternational investors together withlocal small funds, financial boutiquesand servicers. The limited sizes of theportfolios finally sold by UBI Banca andBanca delle Marche pushed the dealtowards local players who financedthe deal solely through equity. On theother hand, the more recent and sizableIntesa SP NPL portfolio was sold tointernational investors, using leveragedstructures. The buyers have not beenpublicly disclosed except for FBS, whichbought the portfolio from Banca delleMarche5.5 Press releaseThe funding market conditions, whichdeteriorated significantly since thesummer 2011, are now improving as aresult of the new technocratic ItalianGovernment and the measures adoptedby the Euro leaders to address EUsovereign debt crisis. Moreover, theECB LTRO facility in addition to Italianstate guarantees on new bank bonds,helped stabilise liquidity and funding inthe short and medium term. We believethat, going forward, this could facilitatethe application of vendor financing ordeferred payment structures in noncore asset transactions.Collateral valuesIn the last 10 years, the Italian realestate market has not experienced areal estate bubble.In 2011, despite underwriting criteriacontinuing to tighten and despite theliquidity shortage, the Italian real estateturnover recorded a marginal increase(2011 year on year change expected toclose, on average, at +1.7%) with thispositive trend expected to continue in2012 (year on year change estimatedat 2.0%)6.In terms of price changes, the realestate market in 2011 remainedrelatively stable compared to theprevious year. In 2012 the real estatemarket is expected to record a marginalgrowth from a pricing perspective(residential expected year on year pricechange at +1%; offices at +1% andcommercial at +1.4%)7.6 ABI Monthly Outlook – February 2012 –Synopsis7 European Outlook 2012 - Scenari Immobiliari0%1%2%3%4%5%6%7%Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11Source: ABI monthly outlookGraph 2: Loan growth analysis
  23. 23. Issue 4: A growing non core asset market • PwC 25Market view for the rest of2012, 2013As a result of the economic downturnin 2012 we expect NPLs to continueto grow with banks consideringthe various options available forenhancing their balance sheetsituation and improving liquidity.At the same time, the recentmeasures (such as the labour andstructural reforms) undertaken bythe technocratic government havestrengthened confidence in the Italianeconomy and increased the appetite ofinternational investors for investmentsin the Italian non core assets.We believe that this will lead to theincrease of NPL deals starting from H22012. Furthermore, in order to bridgethe bid ask gap, financial institutionsand investors are currently exploringstructured solutions such aspartnership or other profit sharingarrangements.0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11Source: ABI monthly outlookGraph 3: Net NPL/total assetGraph 4: Gross NPL (EUR bn) and coverage rateTable 1: Recent transactionsSeller Buyer Asset type UPB (EUR m) Completion dateIntesa SP Not disclosed Mixed secured and unsecuredloans1,640 (EUR270m purchaseprice)Q1 -2012Banca delleMarcheFBS Mainly unsecured loans 305 Q1 -2012UBI Banca Not disclosed Unsecured loans 130 Q2 - 20110%10%20%30%40%50%60%-20406080100Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar 11 Jun-11 Sep-11 Dec-11Gross NPL Provision coverageSource: ABI monthly outlookSource: Press articles, company and other publicly available information
  24. 24. 26 PwC • Issue 4: A growing non core asset marketCredit and asset quality trendsTotal loans remained broadly stablecompared to 2010, increasingmarginally by 1.17% in 20111. Eventhough banks have confirmed theyare still willing to continue extendingcredits to consumers, SMEs, andcorporate borrowers, they havetightened underwriting criteriasignificantly, especially in relationto borrowers in perceived “highrisk” activities such as real estate,Leveraged Buy Outs (“LBOs”) andshipping.Overall asset quality has decreasedonly marginally, with NPLs increasingby only 1% to EUR 88bn in 2011,compared to EUR 87bn as at the sameperiod in 20101 Source: Capital IQNon core asset activity levelsFrench banks have been relativelyinactive in 2011 in relation to noncore asset sales. However, a significantincrease in transactions has beenexperienced during the first quarterof 2012 when French banks tradedassets in excess of EUR 8bn, focusedmainly on non French exposures(predominantly USD exposures).We believe that this is mainlyattributed to the EBA announcementthat all key Eurozone banks willneed to meet 9% Tier 1 capital bufferratio by 30 June 2012. As part of thisprocess, we expect loan portfolio salesto accelerate during the second half ofthe year and 2013.The majority of the sellers to datehave been major French financialinstitutions, which have beentransparent in relation to theirdeleveraging targets. On the otherhand there have been limitedannouncements in relation to theregional and mutual banks.As a result of the above, internationalinvestors are now becoming moreinterested in the French market after along period of inactivity.Debt fundingAvailability of funding for investorsis expected to decrease in 2012especially for portfolio sizes in excessof EUR 300m given the limitedliquidity and funding forFrench banks.Source: Financial Reports, PwC analysisGraph 1: France - NPLs (EUR bn)-204060801002008 2009 2010 2011FranceActivity peaks driven by French banks disposing nonFrench assets
  25. 25. Issue 4: A growing non core asset market • PwC 27Market view for the rest of2012, 2013It is expected that most of the majorFrench Banking institutions havealready met the 9% Tier 1 capitalbuffer ratio expected by the EBA as at30 June 2012. As a consequence, weexpect that asset sales will continueto increase albeit at a marginal ratefocusing on non French assets (US,UK, other European countries). Dueto political pressures, French bankinginstitutions are still reluctant to launchsales process in France.Source: Press articles, company and other publicly available informationTable 1: Recent transactionsSeller Buyer Asset type UPB (EUR m) Completion dateSociete Generale Citigroup Shipping loans (EUR 1,000mpurchase price)Jun-2012Societe Generale AXA Real Estate Performing real estate loans 1,200 Jun-2012BNP Paribas Wells Fargo American energy lendingbusiness8,300 Apr-2012Societe Generale Lone Star Mainly unsecured loans 200 Apr-2012Societe Generale Wells Fargo Property loans 454 Nov-2011BNP Paribas Not disclosed Spanish unsecured loans 300 Jul-2011
  26. 26. 28 PwC • Issue 4: A growing non core asset marketCredit and asset quality trendsTotal loan levels on a consolidated levelhave increased marginally by 2.6% toEUR 1,921bn in 20111.Many banks are trying to reduce theirresidential mortgage portfolios.NPL levels for both corporate andhouseholds have remained relativelystable over 2011 and currently totalEUR 52bn. NPLs as percentage oftotal loans stood at 2.7%, a decreasefrom the peak in 2009 when theyreached 3.2%2.Non core asset activity levelsThere were no large, complex portfoliosales. While banks have generallytried to decrease their exposures toresidential mortgages, it has provendifficult to find buyers for suchportfolios. We understand that localand foreign lenders are currentlyexploring options in relation tomortgage and corporate portfolios.Both SNS Bank and DSB Bank (inbankruptcy) have sold parts of theirmortgage portfolios. DSB Bank has soldparts of its portfolios in earlier years aspart of the bankruptcy and liquidationproceedings. At the same time SNSbank has recently come under marketpressure and is looking to strengthen itscapital base3.Typical sizes of portfoliossold varied between EUR 80m andEUR 900m.1 Source: De Nederlandsche Bank (DNB)2 Source: De Nederlandsche Bank (DNB)3 Source: SNS press release, Novapars pressrelease, ReutersNetherlandsLimited transactions as pricing gap remains highGraph 1: Netherlands - NPLs (EUR bn)-102030405060702008 2009 2010 2011Source: DNBSource: De Nederlandsche BankGraph 2: Netherlands - Loans and receivables (EUR bn)1,7401,7901,8401,8901,9402008 2009 2010 2011
  27. 27. Issue 4: A growing non core asset market • PwC 29Local investors have been the mostactive ones to date in the market.These are, in most cases, independentfinancial investment firms that focus onthe acquisition of performing and non-performing, consumer and mortgageloan portfolios in the Beneluxand Germany.Debt fundingIn general, banks have been much morecautious about lending and we believeare unlikely to finance non coreasset deals.Source: De Nederlandsche BankGraph 3: Netherlands - NPL / Total loans (%)0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%2008 2009 2010Source: Kadaster (Land registry), House price indexGraph 4: Netherlands - House price index (2005 = 100)951001051101152008 2009 2010 2011
  28. 28. 30 PwC • Issue 4: A growing non core asset marketCollateral valuesResidential property prices in theNetherlands have decreased by 4% in20114. This represents a continueddecline in house prices after decreasingin both 2009 and 2010. The financingmarket tightened further in 2011with the risk appetite of the existingproperty lenders continuing to reduce.In addition, commercial real estate -especially office buildings - has shownincreasing rates of vacancy. As ofJanuary 2012 approximately 14% (or6,795,000 m2) of the total availableoffice space stood vacant5. This impliespressure on commercial real estatevalues, which are expected to fallfurther in 2012.4 Source: Kadaster (Land registry), House priceindex5 Source: Real estate agency DTZ ZadelhoffMarket view for the rest of2012, 2013We expect that banks will continue tohave a preference for mainly runningoff non core portfolios and only sellingselected parts of their loan book inorder to avoid reporting large losses.This is because the potential lossesfrom a large non core asset sale arelikely to outweigh any benefits fromcapital release.Table 1: Recent transactionsSeller Buyer Asset type UPB (EUR m) Completion dateUni-Invest(Opera Uni)Patron Capital /TPG CapitalDefaulted CMBS 365 Apr-2012Confidential Novapars Capital Residential mortgages (EUR 80mpurchase price)Sep-2011DSB Bank Novapars Capital Mortgages andconsumer credit(EUR 115mpurchase price)Jun-2011SNS Bank SNS Reaal First loss pieces ofmortgage securitisation(EUR 900mpurchase price)Dec-2010Source: Press articles, company and other publicly available information
  29. 29. Issue 4: A growing non core asset market • PwC 31Credit and asset quality trendsTotal loans to the private sector in 2011decreased by approximately 3.6%1from 2010 levels, mainly as a result ofrestricted supply from the banks.On the demand side, the decline inhouseholds’ borrowing is the directresult of the significant decreases indisposable income. This is evidenced bythe already high NPL ratio in consumerloans and the extensive restructuringsof retail loan portfolios by the banks.Particularly with regards to mortgageloans, demand has been low, aspotential property buyers anticipategreater adjustment in property prices.On the supply side, banks’ limitedaccess to funding, uncertainty over thefinal amount of their recapitalisationneeds arising from the Greek debtrestructuring and general uncertaintyover the prospects of the Greekeconomy, have resulted in a significanttightening of lending criteria.Asset quality has significantlydeteriorated in 2011, with gross non-performing loans surging from 10.5%in December 2010 to 15.9% of totalgross loans2. Consumer loans’ NPLratio reached 28.9% in December2011, while mortgage and corporateNPL ratios stood at 15.0% and 14.1%3respectively. Contributing factors tothe disposable income deteriorationinclude increased GDP contractions(approximately 6.9% year on year in2011) and high unemployment levels(unemployment reached 17.7% in 2011vs. 12.5% in 2010)4.1 Bank of Greece, Apr 20122 Bank of Greece, June 20123 Bank of Greece, June 20124 ELSTAT-51015202530354045502008 2009 2010 2011 Mar-2012Graph 1: Greece - NPLs (EUR bn)GreeceDeteriorating economic conditions and uncertaintykeeps investors awaySource: Bank of Greece0%5%10%15%20%25%30%35%2008 2009 2010 2011Mortgages Consumer Corporate TotalGraph 2: NPL as a % of total loans by categorySource: Bank of Greece
  30. 30. 32 PwC • Issue 4: A growing non core asset marketNon core asset activity levelsBanks’ deleveraging has been focusedmainly on non core foreign assets. Inthe last two years banks focused onthe disposal of foreign subsidiaries,rather than on the disposal of NPLs ofnon core portfolios. The main reasonsbehind reduced appetite for deals inGreece include:• the increased sovereign risk andeconomic instability in Greece; and• the significant price gap betweenbuyers and sellers, makingpotential transactions prohibitivelyexpensive for banks, especiallygiven the existing recapitalisationplan arising from the Private SectorInvolvement (“PSI”) in the Greeksovereign debt restructuring.Collateral valuesResidential property prices across thecountry continued their downwardtrend in 2011. In the Attiki andThessaloniki areas, property valuesdeclined approximately 6.5%compared to 2010, while prices in otherGreek urban regions dropped by c4%5.5 Bank of Greece, April 2012Market view for the rest of2012, 2013Following their recapitalisation, Greekfinancial institutions are expected toundertake significant deleveragingsteps over the rest of 2012 and 2013.The consolidated core Tier 1 minimumregulatory capital requirement forGreek banks has been set at 9% byend-September 2012 and 10% fromJune 2013 onwards6. We expect thatthis will force banks to restructuretheir balance sheets through thedisposal of non core assets that carryan increased risk weight and higherregulatory capital requirements.There is limited visibility on howthe loan portfolio market willperform in 2012. Any marketdevelopments will depend on thebanks’ shareholding structurefollowing the recapitalisation andthe macroeconomic environment, asthe economy is expected to enter ina sixth year of recession in 2013. Onthe positive side, the conclusion of theloan quality assessment by Blackrockshould provide investors with a clearerview regarding the quality of loanportfolios in Greece.6 Law 4046/2012 (Government Gazette nr. Α’28/2012)Blackrock estimated system-wide loanlosses over a three year horizon in therange of EUR 30-EUR 35 bn (beforeprovisioning and future profits)7, out ofwhich, reportedly, approximately EUR18bn have already been provided for.So far, balance sheet deleveraging isfocused on the disposal of bankingand non banking subsidiaries andinvestments -both domestic andinternationally based (realising EUR950m in sales of foreignloan portfolios8).The banking industry in Greece isexpected to be affected in the mediumterm by the revised bank resolutionframework. This framework providesvarious intervention techniques,including the transfer of assets andliabilities and the creation of an InterimCredit Institution (“ICI”). The HellenicFinancial Stability Fund (“HFSF”),which according to the new legislationwill provide capital into ICIs, is requiredto dispose any bank holding within aperiod of two years from the time ofrecapitalisation (although this deadlinemay be extended for an additional twoyears for the sake of financial stability).Proton bank was the first bank to beresolved, setting up an ICI inOctober 2011.7 IMF Country Report No.12/57, March 20128 IMF Country Report No.12/57, March 20120%2%4%6%8%10%12%14%16%18%2402442482522562602008 2009 2010 2011Gross loans Gross NPLs / Gross loansGraph 3: NPL development in the Greek market (EUR bn)Source: Bank of Greece
  31. 31. Issue 4: A growing non core asset market • PwC 33Credit and asset quality trendsOverall bank lending in Swedendeclined nearly 1% from December2010 to June 20111. Gross NPLs as apercentage of total lending decreasedfrom 1.8% in December 2010 to 1.6%in June 20112.1 PwC estimates and bank information2 PwC estimates and bank informationNon core asset activity levelsand market overview.Sweden is a relatively new market inrelation to non core asset sales, giventhat Swedish banks have not beensignificantly affected by the Eurozonecrisis. Even though we are not aware ofany significant transactions occurringduring 2011 and the first quarter of2012, it is currently becoming thefocus of many international investors.In certain cases, Swedish banks havebeen looking to expand their exposuresto core markets by acquiring portfoliosfrom Western European banks lookingto exit these particular markets. Atthe same time they are focusing ondisposing holdings in markets that areno longer considered core.Table 1: Recent transactionsSeller Buyer Asset type UPB (EUR m) Completion dateSwedbank Delta Bank JSC Retail portfolio 170 May-2012Source: Press releaseSwedenRelative new market now becoming the focus of NPL-2468101214162008 2009 2010 2011Graph 1: Sweden - NPLs (EUR bn)Source: Financial Reports, PwC analysis
  32. 32. 34 PwC • Issue 4: A growing non core asset marketCredit and asset quality trendsAs at 1 January 2012 the total amountof outstanding loans by Russianbanks loans was EUR 540bn (RUR22,500bn), representing a 26%increase compared to the total loanbalance as at 31 December 20101.This growth was mainly driven byan increase in retail lending of 45%(from EUR 90bn or RUR 3,649bn asat 31 December 2010 to EUR 131bnor RUR 5,439bn as at 31 December2011). Corporate loan portfolios havealso grown by 21% in 2011 (fromEUR 337bn or RUR 13,569bn as at 31December 2010 to EUR 409bn or RUR17,061bn as at 31 December 2011)largely due to significant increase inlending to companies operating in theenergy gas and telecommunicationsectors.The overall increase in banks’lending activity in 2011 was drivenby increasing domestic demand forretail credit, rising oil prices, as wellas liquidity support provided by theCentral Bank of Russia.1 Central Bank of RussiaOverdue loan portfolios increasedby 4% to EUR 26bn (RUR 1,098bn)between 31 December 2010 (EUR25bn or RUR 1,017bn)2and 31December 2011. Due to the significantincrease in loan portfolios (whileprovision levels remained stable), theoverall delinquency rate decreasedfrom 5.9% as at 31 December 2010to 4.9% as at 31 December 2011.The delinquency rate on retail loansdeclined from 7.6% as at 31 December2010 to 5.3% as at 31 December 2011.Non core asset activity levelsNPL transactions increased by 31%from EUR 1.4bn (RUR 60.2bn) in 2010to EUR 1.9bn (RUR 78.7bn)in 20113.The main driver behind transactionslevel in 2011 is the increased interestof banks in NPL portfolio salesrather than outsourcing to collectionagencies services.2 Central Bank of Russia3 Sequioia Credit ConsolidationSimilar to most of the CEE markets,most of the transactions related to retailNPL portfolios with average transactionsizes of EUR 50m to EUR 75m. Thevery low volume in corporate portfoliotransactions can be explained by thewide price gap between buyers andsellers and unwillingness from someof the banks to make public the poorquality of their portfolios.Transactions during 2011 werepredominantly completed by localcollection agencies financed mostlythrough equity.Collateral valuesProperty prices remained largelyflat in 2011 with no expectations forsignificant price increases in 2012.Market view for the rest of2012, 2013We expect the number of NPLtransactions to increase by c30% duringthe rest of 2012 and early 2013, whichis in line with forecast growth in retaillending, as the Russian non core assetmarket continues to mature. Howeverthe lack of established regulatoryframework for NPL acquisitions is animpediment to the market reaching itsfull potential.RussiaTransactions remain limited with focus onretail portfolios0510152025302008 2009 2010 2011Graph 1: Russia - NPLs (EUR bn)Source: Financial Reports, PwC analysis
  33. 33. Issue 4: A growing non core asset market • PwC 35Non core asset activity levelsThe Austrian banking sector is currentlyfocused on meeting the EBA’s target ofa 9% core Tier 1 ratio by 30 June 2012mostly by restricting lending in theCEE market rather than cutting lendingsignificantly in their local Austrianmarket. Going forward it is expectedthat any lending in CEE will be financedsolely by local deposits rather than bywholesale funding or their own capital.During the past year (2011), theAustrian market has seen a limitednumber of non core asset transactions.In 2011 ÖVAG sold its stake inVolksbanken International, comprisingCEE network banks, to RussianSberbank for a purchase price of up toEUR 645m. This transaction has beenthe largest 2011 announced Austriantransaction2.Market view for the rest of2012, 2013We expect that non core assettransactions will remain relativelystable in 2012, focusing on selectedloan portfolios outside Austria and,most likely in CEE.2 Mergermarket-24681012141618202008 2009 2010 2011Graph 1: Austria - NPLs (EUR bn)0%2%4%6%8%10%2008 2009 2010 2011Erste Group Bank Austria RZBGraph 2: NPL ratio of selected Austrian banksCredit and asset quality trendsTotal credit in the Austrian marketincreased 1.1% over the first half of20111. This followed a 2.4% annualincrease in 2010.1 OeNB, Finanzmarktstabilitätsbericht 22 S126At the same time credit qualitydeteriorated with total NPLsincreasing by 4% in 2011 over theprior year for Erste Group, BankAustria and RZB.Source: Financial ReportsAustriaBanks concentrating on the Austrian market aslooking to decrease CEE exposuresSource: OeNB, Finanzmarktstabilitätsbericht 22 S126
  34. 34. 36 PwC • Issue 4: A growing non core asset marketCredit and asset quality trendsTotal loans outstanding forcommercial banks declined from EUR202bn in 2009 to EUR 168bn by end of2011, driven primarily by a decreasein corporate lending. However loansfrom mortgage banks have beengrowing steadily from EUR 296bn toEUR 323bn over the same period. Thedevelopment within Tier 1 banks isprimarily driven by repo lending nolonger being recorded on the books1NPL levels have increased marginallyby 6.25% to EUR 17bn in 2011 fromEUR 16bn in 2010. The trend is to alarge extent negatively affected bywrite downs in the assets managedby the Financial Stability Fund wherethe asset quality is particularly poor.There is however significant variationsbetween NPL levels among differentbanks with some struggling withmaterial increases in vulnerable andnon-performing loans2.1 Danish Central Bank2 Finanstilsynet, Pengeinstitutternesregnskaber 1. halvår 2011, Halvårsartikel2011 for pengeinstitutterNon core asset activity levelsDuring 2011, some limited activityhas occurred within real estateportfolios with banks and mortgageinstitutions trying to slim down theirbalance sheets in order to focus oncore business. Most recently, theFinancial Stability Fund took over FIHErhvervsbank’s real estate portfoliowith a clause that FIH would coverany losses Financial Stability incurs onthe portfolio.Improved asset pricing during Q1-Q2 2011 along with increased equityvalues faded during 2011, as theEurozone crisis became the investors’main focus of attention.The key loan assets that have tradedrelate to prime real estate (centralCopenhagen), infrastructure,and healthcare.DenmarkNPL levels increase marginally with transaction focusmainly on mortgage portfoliosSellers have predominantly beenlocal banks along with mortgageinstitutions. Buyers have typically beeninternational real estate private equityfunds, other major financial institutionsand, in certain cases, high net worthindividuals.Debt fundingDebt funding depends on the type ofbuyer. Although it remains available tomajor financial institutions looking toinvest in non core assets, it has not beenavailable to other investors.Collateral valuesProperty prices are now beginning tostabilise after 3 years of price falls,supported by historically low financecosts since demand for property hasbeen driven to a great extent by thevery low interest rates on mortgages.There are however very largegeographical differences between thedemand for property in the bigger citiesand the outskirts of Denmark, whichare still recording significant price falls3Market view for the rest of2012, 2013We expect that non core asset saleswill remain relatively stable for the restof 2012 and 2013, as Danish financialinstitutions wait for the Eurozone crisisto stabilise prior to proceeding withsignificant non core asset sales.3 Sadolin Albæk, Property market reports 2010and 2011-246810121416182008 2009 2010 2011Graph 1: Denmark - NPLs (EUR bn)Source: Financial Reports, PwC analysis
  35. 35. Issue 4: A growing non core asset market • PwC 37Credit and asset quality trendsLending growth has been marginallypositive1as of April 2012 compared to2010. The most significant growth hasbeen in the SME and corporate loansector with a 26% and 15% increaserespectively compared to December2010. The residential and housingloans in PLN have experiencedgrowth of 29% compared to 2010but foreign exchange denominatedmortgages remained stable (with ashift from CHF to EUR). On the otherhand, consumer loans experienceda decrease of 5% compared toDecember 2010.Foreign exchange structure was notchanged, with c1/3 of the loansoutstanding at April 2011 consistedof foreign exchange denominatedcontracts which were impacted in2011 by PLN-fx volatility (in theperiod December 2010 to April 2011PLN depreciated by 16% againstCHF and 11% against EUR). Thisvolatility resulted in an increase inNPLs, especially in CHFdenominated mortgages.1 Polish Financial Supervision AuthorityReportsLevels of NPLs have decreasedmarginally at April 2012 mostly dueto improvement in SME and corporateportfolios (from 14.6% at December2010 to 12.4% at April 2012 andfrom 9.4% to 7.8% respectively).On the other hand, non-performinghousehold consumer loans andmortgages increased by 1% to 18.3%and by 0.7% to 2.5% respectively overthe same periodNon core asset activity levelsIn 2011/12 there was an increase intransaction levels as comparedto 2010.In 2011 Polish financial institutionshave been predominantly focusedon selling their retail portfolios. Inthe first half of 2011, there were onlylimited sales of corporate portfolios.Over the last 3-5 years more banksused the sale of non core loans as aneffective way of dealing with NPLs.PolandHigh transaction activity focused on smallretail portfoliosGraph 1: Poland - NPLs (EUR bn)The most active seller in the Polish marketin 2011 was PKO BP - the largest bank inPoland. Other sellers include banks suchas BZ WBK or Kredyt Bank. In additionthe telecoms and IT industry have beenvery active in selling receivables.On the investor side, the local investormarket has also shown steady demandfor such assets.Debt fundingThe majority of completed transactionsinvolved securitization funds, which area part of specialized debtcollection companies.Financing for deals has typicallyincluded the issuance of asset backedsecurities or debenture bonds as well asrevolving loans. The receivables markethas seen interest from national andoverseas professional investors. Someof the firms are listed on WarsawStock Exchange.Availability of funding for investorsappears likely to decrease in 2011 dueto lower liquidity in the market.Collateral valuesPrices of real estate experienced amarginal decrease in 2011 and thistrend has continued in 2012. Accordingto Central Statistical Office of Poland,price per square meter for residentialproperties decreased by c14%2. Thiswas driven mainly by excessive supplyof flats and other residential propertiesavailable in the market and stricterunderwriting criteria applied by thebanks for housing andproperty lending.2 Central Statistical Office of Poland (GUS)02468101214162008 2009 2010 2011 Apr-2012Source: KNF Reports, IBnGR
  36. 36. 38 PwC • Issue 4: A growing non core asset marketMarket view for the rest of2012, 2013We expect the NPL market to growfurther over the next 2-3 years despitethe bid ask gap and uncertaintyover collateral prices and financingshortage. Banks and other creditorswill be more willing to sell theirportfolios, as they recognize benefitsfrom such transactions and investorsare able to realise their targetedreturns. However, we do not expectaverage transaction sizes to increasesignificantly given the limitedpresence of international investors.0%4%8%12%16%2009 2010 2011 April 2012Large SMEGraph 3: Non-performing loan ratios for enterprises (%)0%20%40%60%80%Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11Households EnterprisesNon-financial sectorGraph 4: NPL Provisions per loan type (%)0%4%8%12%16%20%2009 2010 2011 April 2012Credit card lending Other consumer loans Housing loans OtherGraph 2: Non-performing loan ratios for main types of loans to households (%)Source: Polish Financial Supervision Authority ReportsSource: Polish Financial Supervision Authority ReportsSource: Polish Financial Supervision Authority Reports
  37. 37. Issue 4: A growing non core asset market • PwC 39Table 1: Recent transactionsSeller Buyer UPB (EUR m) Completion dateEurobank KRUK S.A. 28 (EUR 3m purchase price) Jun-2012BPH GE Capital S.A. Fast Finance S.A. 17 (EUR 2m purchase price) Jun-2012Electronic media company P.R.E.S.C.O. 12 (EUR 2m purchase price) May-2012BNP Paribas Bank PolskaS.A.P.R.E.S.C.O. 5 (EUR 1m purchase price) Jun-2012Idea Bank S.A. Gremi Solutions S.A. 2 (EUR 0.1m purchase price) Jun-2012PKO BP SA KRUK S.A. 63 (EUR 5m purchase price) Apr-2011PKO BP SA Ultimo 4 (EUR 1m purchase price) Apr-2012PKO BP SA Intrum Justitia 163 (EUR 34m purchase price) Apr-2012PKO BP SA Kredyt Inkaso 126 (EUR 29m purchase price) Dec-2011PKO BP SA Kredyt Inkaso 122 (EUR 5m purchase price) Dec-2011BZ WBK SA KRUK S.A. 55 (EUR 11m purchase price) Dec-2011Bank P.R.E.S.C.O. 20 (EUR 2m purchase price) Dec-2011Financial institution EGB Investments SA 3 Dec-2011Krakowski Bank Spółdzielczy Cash Flow S.A. 3 Nov-2011Santander Bank S.A. KRUK S.A. 130 Nov-2011Telecom company P.R.E.S.C.O. GROUP S.A. 2 Nov-2011PKO BP SA Kredyt Inkaso 232 (EUR 28m purchase price) Oct-2011PKO BP SA P.R.E.S.C.O. GROUP S.A. 8 Oct-2011Eurobank S.A. P.R.E.S.C.O. GROUP S.A. 25 (EUR 2m purchase price) Oct-2011Insurance services company EGB Investments SA 1 Sep-2011PKO BP SA KRUK S.A. 83 (EUR 17m purchase price) Sep-2011PKO BP SA BEST II NS FIZ 13 Sep-2011Telecom company EGB Investments SA 1 Jul-2011BRE Bank S.A. KRUK S.A. 145 (EUR 23m purchase price) Jun-2011Telecom company EGB Investments SA 1 Jun-2011Insurance services company EGB Investments SA 1 Jun-2011PKO BP SA KRUK S.A. 130 Jun-2011IT company EGB Investments SA 1 May-2011IT company EGB Investments SA 5 Apr-2011Kredyt Bank SA BEST S.A. 280 Apr-2011IT company EGB Investments SA 1 Mar-2011Source: Press articles, Company and other publicly available information
  38. 38. 40 PwC • Issue 4: A growing non core asset marketPortugalServicing market and legal enforcement remains aconcern as deleverage acceleratesCredit and asset quality trendsAs at December 2011, loans granted bythe financial sector to companies (non-financial corporations), decreasedby 3% compared to December 2010.Loans to households decreased by 2%over the same period, with the mostsignificant credit reduction observedon consumer loans, which experienceda decrease of 7.2% in December 2011compared to the same period in 20101.NPL increased by 20% to EUR 12bn asat the end of 2011. The deteriorationin the overall credit quality has mostlyderived from the SME and consumerloans. As at December 2011, overdueSME loans stood at 8.1% comparingto 5.4% in December 2010. As atDecember 2011, consumer overdueloans stood at 10.5% compared to8.5% in December 20102.We believe that this is a direct resultof the economic downturn registeredin 2011 and the significant rise of theunemployment rate. According to theBank of Portugal, the unemploymentrate in Q4 of 2011 increased to 14%1 Bank of Portugal2 Bank of Portugalwhich was significantly higher thanthe 11.1% recorded in the sameperiod of 2010. At the same time,GDP for the year ended 30 September2011 dropped 1.7% compared to theprevious year.Non core asset activity levelsThe key driver behind the recentportfolio transactions has been theneed of national banks to “deleverage”their balance sheets, as a result ofthe increasing capital requirementsimposed by local regulators andinternational authorities.Portfolio sales recorded to datecomprised mostly of performing,syndicated project finance loansgranted to UK, USA, and LatinAmerican borrowers. These portfoliosare known to have been traded in Q1and Q2 2011 to several investors (soldin tranches) located in South Americaand Asia.In addition to the above, there hasbeen a significant increase in the saleof unsecured portfolios.Sizes for the non core asset portfoliossold varied from EUR 1bn – 2bn forsome of the performing portfolios toEUR 50m – 200m for the unsecuredportfolios.Banco Espírito Santo and MilleniumBCP were the most active sellersduring 2011. There have been limitedsales from non financial institutions.These portfolios were traded intranches and sold to various investorslocated in South America and Asia.Collateral valuesDespite limited liquidity, residentialreal estate prices have only droppedby 0.8% in 2011. However furtherproperty price drops are expectedin 2012, mainly as a result of theprolonged economic uncertainty andthe austerity programme implementedby the Portuguese government.-24681012142008 2009 2010 2011Graph 1: Portugal - NPLs (EUR bn)Source: Bank of Portugal
  39. 39. Issue 4: A growing non core asset market • PwC 41Table 1: Recent transactionsSeller Buyer Asset type UPB (EUR m) Completion dateBanco EspíritoSantoTranches split byseveral banks (Asia andLatin America mostly)Performing (international)loans - Project Finance2,600 Q1 - 2011Millenium BCP Not disclosed Performing (international)loans - Project Finance1,600 Q2 - 2011Market view for the rest of2012, 2013Portuguese Banks are expected tocontinue deleveraging their balancesheets during 2012 as a result ofvarious factors, but most notably• the increasing capital requirementsfrom banking regulators;• rising funding costs stemming fromincreased reliance on wholesalefunding; and• liquidity constrains.We expect that the deleverageprocess will be completed through acombination of NPL portfolio salesalong with sales of non strategicfinancial investment/participationssuch as non Portuguese subsidiaries ofthe major financial institutions.While servicing capability is still aconcern for investors, the externalservicing market has increasedsignificantly over the last coupleof years. Concerns over the legalenforcement process remains, in ourview, one of the main constraintsfor successful portfolio trades.Enforcement timing remains wellabove European norms, contributingto a widening of the bid ask gapbetween buyers and sellers.Source: Press articles, company and other publicly available information
  40. 40. 42 PwC • Issue 4: A growing non core asset marketTurkeySignificant decrease in NPL levels and an uptickin lendingCredit and asset quality ratingsSupported by strong domesticdemand and low interest rates, Turkeyexperienced total lending growth ofnearly 9% in 20111. However, the localregulator (CBRT) put a limit on loangrowth in order to slow the overalleconomy.Even though total loan volumeincreased by 9%in 2011 compared to2010, NPLs decreased by 20% in 2011with the NPL ratio declining to 3.8%2(cEUR 8bn).1 BRSA2 BRSA and PwC estimatesNon core asset activity levelsNon core and NPL transactionlevels have continued to increase in2011, as demonstrated by the totalassets managed by the various localcollection agencies, summarised in thetable opposite.Market view for the rest of2012, 2013The Turkish local non core assetmarket is established with a majornumber of local players specialisingin the acquisition of NPLs. Given thatthe Turkish NPL ratio has consistentlyfloated in a range between 3% and 5%from 2008 to 2011 we are of the viewthat transaction levels will remainrelatively stable going forward.0246810122008 2009 2010 2011Graph 1: Turkey - NPLs (EUR bn)Source: BRSA, PwC analysis
  41. 41. Issue 4: A growing non core asset market • PwC 43Table 1: Recent transactionsSeller Buyer Asset type UPB (EUR m) Completion dateDenizbank Girişim Asset Management Consumer loans 14 Apr-2012Isbank Efes Asset Management Consumer / Corporate loans 79 Dec-2011Yapı Kredi LBT Asset Management Consumer loans 104 Nov-2011Denizbank Standard Asset Management Efes Asset ManagementConsumer / Corporate loans 48 Oct-2011Finansbank LBT Asset Management Corporate loans 103 Feb-2011Denizbank Girişim Asset Management Consumer / Corporate loans 40 Apr-2011Şekerbank Girişim Asset Management Consumer / Corporate loans 52 Mar-2011Source: Press articles, company and other publicly available information29 38 5499 118167 172 1822572796 53556 7 1010821.3%13.0%6.4%5.0%3.9%3.6% 3.8% 5.6%3.8%2.8%0%5%10%15%20%25%-501001502002503002002 2003 2004 2005 2006 2007 2008 2009 2010 2011Loans Total Gross NPL Total Gross NPL / Loans TotalGraph 2: Turkey - NPL Loan (EUR bn)Source: BRSA
  42. 42. 44 PwC • Issue 4: A growing non core asset marketUkraineFall in property prices drives banks to focus onunsecured retail loan transactionsCredit and asset quality ratingsIn 2011, total lending increased 9.7%compared to 20101. After a temporaryfreeze, almost all Ukrainian banksrenewed their lending activities, inboth corporate and household marketsfor both secured and unsecured.Despite the increase in lending, thelevel of NPLs has decreased by 5.3%in 20112. The key driver has been theimprovement of risk management atthe banks and more effective debtcollection procedures.Non core asset activity levelsDuring 2011, Ukrainian banks focusedpredominantly on selling their retailNPLs, largely through bilateral nonpublic transactions. We estimate that 80-90% of NPLs for sale are non-performingconsumer unsecured portfolios.1 National Bank of Ukraine2 National Bank of UkraineNon core sales will be driven by :• strategic repositioning by sellers(for instance, several bankinggroups have left the retail lendingmarket and some multinationalbanks announced plans toexit Ukraine);• repositioning of financial institutionbalance sheets in order to improvecredit ratings and release internalresources from debt collectionactivities; and• favourable changes in taxation.The main sellers of non core assetshave been the large Ukrainian bankswith foreign capital. The maindriver for these sellers is to complywith tighter regulatory and taxrules. Buyers of the majority of thecompleted non core transactions haveinvolved local collection agencies withsignificant presence in Ukraine.Collateral valuesProperty prices fell by 7.5% on averagesince 2010 in both residential andcommercial property, due primarily tothe depreciation in the local currency.02468102008 2009 2010 2011Graph 1: Ukraine - NPL (EUR bn)Source: National Bank of Ukraine
  43. 43. Issue 4: A growing non core asset market • PwC 45Market view for the rest of2012, 2013We expect sales of consumer NPLsto continue strongly for 2012 and2013, as an established way for thebanks to decrease their NPL ratio.We gradually expect banks to startbringing consumer residentialmortgage portfolios into the market;however that will depend on theproperty market stabilising.Source: Natioal Bank of Ukraine8.5%9.0%9.5%10.0%10.5%11.0%11.5%6062646668707274762009 2010 2011Total loans NPLs as % of total loans9.7% 9.7%11.2%Graph 2: Ukraine - Loans and delinquency rate (EUR bn)
  44. 44. 46 PwC • Issue 4: A growing non core asset marketHungaryDepreciation of HUF one of the main reasons behindincrease in NPLsCredit and asset quality trendsTotal lending of the Hungarianbanking sector has remainedrelatively stable, increasing by 3%over the eleven months to November20111. However, the two opposingfactors that have influenced totalloan growth in Hungary are:• the local currency (HUF), whichhas depreciated 15% against theSwiss Franc and has resultedin an increase in the principaloutstanding on Swiss Francdenominated lending; and• the generally restrained lendingactivity by Hungarian banks.1 Hungarian Financial Supervisory Authority(HFSA)0%5%10%15%20%25%0246810122008 2009 2010 September2011Special watch loansBelow average loansDoubtful loansBad loansTotal bad, doubtful, below average andspecial watch loans / Total loans (%)Graph 2: Hungary-Loans (HUF bn)024682008 2009 2010 2011Graph 1: Hungary - NPLs (EUR bn)Source: Hungarian Financial Supervisory Authority (HFSA)Source: Hungarian Financial Supervisory Authority (HFSA)
  45. 45. Issue 4: A growing non core asset market • PwC 47NPLs have increased by 40% over2011, primarily driven by deteriorationin the asset quality of residentialmortgage loans. The depreciation ofHUF against the Swiss Franc (CHF)was the main reason behind thisdeterioration, as loan repayments inCHF denominated loans increasedsignificantly adversely affectingaffordability2.Non core asset activity levelsKey drivers behind transactionsacross the Hungarian market are theincreased NPL levels, reduced lendingand regulatory pressure. Regulatoryissues include:• the bank tax (based on the amountof total balance sheet assets) leviedon the financial institutions, whichhas increased the cost of holdingnon core assets; and2 Hungarian Financial Supervisory Authority(HFSA)• the option for debt repaymentat fixed exchange rates for FXmortgage loan debtors.In Hungary, debt management andcollection companies are the typicalbuyers of NPL portfolios from banksand other financial institutions.Similar to the rest of the EasternEurope, transactions are financedmainly through own funds and withlimited use of debt. Details of thesetransactions are not usually public.One loan sale transaction which waspublished in 2011 was the sale byHSBC Credit Zrt. of its retail loanportfolio to the Hungarian branchof Cofidis. The deal value of thistransaction was EUR 14.8m3.3 HVG, ProfitLineCollateral valuesThe property prices and the volume ofproperty transactions remained stablein 2011, increasing only 1.5% for theyear to September 20114.Market view for the rest of2012, 2013We expect a slight increase in NPLtransaction volumes, mainly as thebanks gradually attempt to decreasethe size of their balance sheets.4 FHB House Price IndexTable 1: Recent transactionsSeller Buyer Asset type UPB (EUR m) Completion dateHSBC Credit Zrt. Cofidis Retail loan portfolio (EUR 15mpurchase price)Dec-2011Source: Press release
  46. 46. 48 PwC • Issue 4: A growing non core asset marketRomaniaForeign banks exploring exit optionsCredit and asset quality trendsTotal nominal loan growth of thebanking sector in 2011 was 4.7% forthe year. However, taking into accountinflationary pressures, in real termscredit shrunk in the second half of2011 by 3% compared to theprior year1.The largest growth in NPLs was theretail credit segment. Its deteriorationbegan in the second half of 2010 andwas primarily driven by a contractionin disposable income as public sectoremployees took, on average, a 25%2cut in their salaries, as a result of thegovernment’s effort to decrease thebudget deficit. Unemployment growthwas also a major contributor to inabilityof borrowers to service the debt.1 NBR “Financial Stability Report 2011”2 NBR “Financial Stability Report 2011”Non core asset activity levelsRomania has seen medium levels ofactivity over the last 12 months, drivenmainly by unsecured retail loans wherepricing gaps between sellers and buyershave been minimal. This was becausebanks’ provisioning levels were, onaverage, higher than secured loans andexpected recoveries closely reflectedinvestor expectations. In contrast,pricing gaps in retail mortgage NPLsare now only beginning to close asbanks are willing to accept structuredexit strategies that avoid immediate orfull de-recognition at prices which arebelow their expectations.Local affiliates of Western Europeanbanks have been the most active insales of NPL portfolios.The size of portfolios sold usuallyranged from EUR 50m – EUR 100mduring 2011, similar to what wasrecorded in 2010. Given that thenature of transacted NPL portfolios isretail unsecured, investors are willingto acquire portfolios that contain arelatively low average individual UPBto ensure a higher recovery.The majority of investors that haveacquired distressed assets were localaffiliates of international collectionagencies, given availability of specialservicing remains scarce. In most casestransactions are completed via aninternational vehicle with limited orno use of debt.Collateral valuesResidential property prices havemarginally decreased by 2.4%compared to 2010. We expect marginalprice falls to continue for the rest of2012 and early 2013.Market view for the rest of2012, 2013We expect a gradual increase in non coreasset activity levels including residentialmortgages and secured corporate NPLs,as Western and Southern Europeanbanks decide to decrease their presencein the region. We expect sellers to offerpart of their servicing platform alongwith their portfolios, given the lack ofservicing infrastructure.012345672008 2009 2010 2011Graph 1: Romania - NPLs (EUR bn)Source: NBR “Financial Stability Report 2011”