The European non-performing loan (NPL) market reached a new peak in 2018, with disposals totalling €205.2 bn in gross book value (GBV), according to the new European NPL FY report from Debtwire ABS.

Debtwire’s report tracked 142 transactions, recording a particularly intense pace of activity in the last quarter, given that at the end of 3Q18, closed deals totalled € 125bn.

Italy was the most active country in 2018, producing half of the total NPL sales. Debtwire identified 64 closed NPL sales with a GBV of € 103.6bn, almost half of which were via securitisations within the government’s Garanzia sulla Cartolarizzazione delle Sofferenze (GACS) scheme, which runs only until 6 March 2019.

At the same time, sales started to slow down in Spain as large Spanish banks near end of their balance sheet clean-ups.However, a massive € 43.2bn was completed in 2018 across 27 deals and most of these have involved two jumbo buyers, Cerberus Capital Management and Lone Star Funds.

Other significant trend is that the sales are starting to accelerate in other Southern European countries, still the ones with the highest NPL ratios, and market participants expect to see more in 2019. In 2018, Greek banks closed eight sales for a total volume of €13.9bn, Portuguese banks closed 16 NPL and REO deals for a total volume of €8bn and Cyprus saw two deals for €2.9 bn.

In Ireland, there were eight deals for EUR 14.3bn, while in the United Kingdom the bad bank UKAR dominated the loan disposal market with £5.8bn of sales out of a total £6.5bn. Germany has also seen disposal of NPLs connected with troubled local banks. HSH Nordbank’s € 6.3bn portfolio, sold together with the bank to Cerberus, made up most of the €7.7bn volume in the country.

«The NPL market has reached a peak that will not be topped in 2019. This is especially the case in Italy, where the GACS effect will slow down, with most large banks having already taken advantage of the program and now needing to focus on unlikely to pay (UTP) portfolios. Still, with European regulators pushing for banks to dispose of their bad loans quickly, activity will remain consistently intense across the continent» said Alessia Pirolo, Head of NPL Coverage, Debtwire.

Original Story: Property EU| Jane Roberts
Photo: 
Edition:Prime Yield

Global economic growth is expected to slow down in 2019, according to UBS, as tighter monetary policy, weaker earnings growth and political challenges confront the world’s major economies.

After seeing a growth of 3.8% in 2018, UBS said in its outlook for the year ahead that it expected global economic growth to slow to 3.6% in 2019.

«The decline in global growth will mean a weaker tailwind for global markets, which could begin to anticipate an end of the economic cycle as 2019 progresses,» the investment bank said in a note.

In the meantime, solid domestic demand in the euro zone will not be sufficient to offset reduced export growth, UBS’s economists said.

On the bright side, UBS said a recession looks unlikely given current rates of consumption, investment and employment growth «and we think the typical causes of a downturn are unlikely to materialize in 2019.»

«Our base case is for inflation to stay contained, allowing central bankers to remain sensitive to growth. We don’t foresee a major fiscal policy shift or a commodity price shock. Consumer balance sheets are in solid shape and improvements in banking sector capitalization since the financial crisis reduce the risk of a global credit crunch.»

It also noted that there are growth opportunities and pockets of value.

Tighter monetary policy

Among the biggest challenges facing the world’s largest economies is a new era of tighter monetary policy following a decade of stimulus after the financial crisis of 2008.

Central banks in the U.S., U.K., euro zone, Japan and elsewhere introduced a mixture of low interest rates and expansionary monetary stimulus programs, known as “quantitative easing” (QE) — essentially large-scale asset purchases — in a bid to boost spending in the economy.

While these tools were useful in re-establishing stability in global financial systems, central banks are keen to “normalize” such policies.

The U.S. has already stopped its QE program and hiked interest rates four times in 2018 while the European Central Bank confirmed in December that QE would end at the end of the month, with bond purchases falling from €15 bn ($17 bn) a month to zero. Amid ongoing Brexit uncertainty, meanwhile, the Bank of England has yet to say when its own QE program will end, although interest rates have been raised slightly.

UBS noted that the coming year will represent the first time since the global financial crisis when central bank balance sheets are on track to end the year smaller than they were at the start of it.

Original story: CNBC | Holly Ellyatt
Photo: Freeimages.com/Sergey Klimkin
Edition: Prime Yield

The European Central Bank’s (ECB) decision to take temporary control of Italy’s troubled bank Banca Carige means the government doesn’t have to consider state aid yet.

Thanks to ECB’s intervention, Italy’s populist government – an increasingly uneasy coalition of the anti-establishment 5Star Movement and the far-right League, which put banks at the top of its list of enemies — doesn’t have to find a solution to the bank’s financial problems, avoiding (for now) the use of state aid, which would have enraged many of the coalition partners’ voters.

In the root of ECB’s decision, was the risk that the failure of Carige to raise needed capital of up to €400 million could reverberate across the entire Italian banking system, possibly sparking a systemic crisis. That’s a risk the seven-month-old government wouldn’t be able to afford, as it remains torn between ambitious spending plans and modest growth forecasts for this year.

«If there was a risk of contagion from Banca Carige, that has been averted for now,» said an official close to the European banking supervisory authorities, who declined to be named. «The ECB supervision grants continuity and gives more time to the bank to find a partner and pursue its turnaround plan.»

The ECB appointed a six-person team to manage Carige, Italy’s 10th-largest bank, after most of its board of directors resigned following the collapse of efforts to raise fresh capital. It was the first time the ECB had made such a move since it acquired expanded powers in 2014 to supervise European lenders.

Italian banks and their balance sheets, burdened by Europe’s biggest pile of bad loans, have been a constant source of concern for both the ECB and the Bank of Italy.

We must note that the two new ruling parties have been among the staunchest critics of Italian banks’ costly rescue plans, and reimbursing savers hit by the crisis was among their main electoral promises. Now, faced with their first banking trouble, they have been surprisingly tight-lipped.

Original Story:EPO/ AICEP
Photo: Banca Carige
Edition: Prime Yield

ItalianNPL servicing specialist doBank announced a deal to buy 85% of Altamira Asset Management to push in to other potentially lucrative southern European markets, adding €55bn in assets undermanagement to its existing €140bn.

doBank said it is attracted by the market size and complexity of NPLs in southern Europe, identifying the region as its number one priority in terms of potential merger and acquisition activity.

Original Story: Global Capital | Asad Ali
Photo: Altamira Asset Management (LinkedIn)
Edition:Prime Yield

Even though banks are maintaining efforts to clean up their balance sheets, a stockpile of nearly €780bn worth of non-performing loans (NPLs) still weighs on the European economy, according to the European Banking Authority (EBA).

The figure has fallen significantly over the past three years, partly thanks to regulators. But much credit should go to international distressed credit managers. They have made significant efforts to rid European banks of these bad assets and reward their backers with high returns. The European NPL market is up-and-running, and the ways in which yield-starved pension funds can get involved are multiplying.

Once a source of apprehension for investors, owing to their impact on the banking system, NPLs today are an attractive investment opportunity in the South European countries. The European bank bail-in regime, introduced in 2015, was also instrumental in this market’s development. It means, among other things, that banks have to take losses on NPLs before they can access public money to avoid bankruptcy. Indeed, a bank’s decision to write down or write off the value of a portfolio of loans is the starting point of any NPL transaction.

In theory, the process is simple. When banks are ready to dispose of a portfolio of NPLs, they negotiate with potential buyers. Once the deal goes through, the buyer of the NPLs employs a credit-servicing business to realise the value of the loans. The spread between the ask and bid price represents the return for the buyer. The buyer, however, assumes several kinds of risks.

Francisco Milone, partner and head of real estate for Europe at alternative manager Värde Partners, explains: «There’s a risk to the value of the assets that were used as loan collateral, which investors come to own once they enforce the loan. Then there is a legal risk, because you are betting on your ability to convert a loan into an assets, and you are making an assumption on how long it’s going to take you to go from being a creditor to actually owning the collateral. These two risks are tied to your servicing ability». “Finally, there is financing risk because in the majority of these transactions there is leverage involved,” he says.

For these reasons, NPL expertise lies firmly in the hands of alternative managers or funds with credit-servicing capacity and strong familiarity with local markets. In fact, most significant players in the market have partnered with or acquired a local credit-servicing business.  Värde is a good example, as Tim Mooney, its global head of real estate, says: «We have purchased or partnered with specialised servicers in these markets. If you don’t have that specialist skill set, you can’t compete, because you can’t really bear the risks associated with investing in these assets or really understand how to price them»

The difference between NPLs and other alternative credit investment types, such as direct lending, is that with the latter there is potentially more certainty about the evolution of these loans. This is because the capacity of the borrower to repay the loan has been tested, and plenty of data exists on the collateral.

Distressed credit funds are increasingly turning their attention towards UTP assets, according to Marco D’Arrò, founder and managing partners of Real Asset Partners, a London-based advisory business in the alternative assets sector. Banks often offer UTP portfolios following the disposal of NPLs, and existing buyers are often at the front of the line. So while the stock of NPLs is falling the opportunities are growing.

Original Story: IPE  |  Carlo Svaluto Moreolo
Edition: Prime-Yield

European Central Bank supervisors will give euro zone banks extra time to set cash aside against their bad loans if their pile of soured debt is particularly high.
Last July, the ECB announced long-delayed guidelines aimed at bringing down a 721 billion euro pile of unpaid debt, mostly inherited from the 2008-12 economic crisis and concentrated in Greece, Cyprus, Portugal and Italy.
The guidelines were the result of a compromise among supervisors after an earlier proposal to set the same timeframe for all banks had met with resistance from bankers, lawmakers and even within the ECB itself, as reported by Reuters last month.
Under the new rules, the ECB’s Single Supervisory Mechanism (SSM) will set «bank-specific supervisory expectations» for the provision of non-performing loans (NPLs), while using benchmarks to ensure consistency.
«The bank-specific supervisory expectations are based on a benchmarking of comparable banks and guided by individual banks’ current NPL ratio and main financial features,» the ECB said.
Its aim «over the medium term» is to achieve the same coverage for old non-performing loans as is the case with new ones, for which banks have to provide in full.
No further detail was given.

Original Story: Reuters | Francesco Canepa, Balazs Koranyi
Photo: European Central Bank
Edition:Prime Yield

The European Central Bank (ECB) announced its own measures to prevent Europe’s banks from becoming embroiled in another non-perfoming loans (NPL) crisis, following the mid-March announcement of the European Commission (EC) of a plan to achieve the same goal, although by different means.

According to Euromoney, «these moves are part of an effort to appease some jurisdictions, most notably Germany, hesitating to agree to a pan-European depository insurance scheme (EDIS). The reluctance stems from the higher perceived risks in banking markets such as Greece, Cyprus and Italy, where the NPL problem has been most acute and progress has been relatively slow».

The EC’s proposal provides hope that full banking union could be completed by June this year, says EC vice-president Valdis Dombrovskis. EDIS is the final piece of that plan. The EC proposal seeks to introduce a minimum coverage ratio for NPLs through an amendment to the Capital Requirements Regulation, meaning that it will be binding for all banks in the Union. Loans originated after March 1 this year will be subject to a timeline of increasing provisions. Secured loans would need a coverage ratio of 5% in year one, increasing to 100% by year eight. Unsecured loans would need 35% coverage in year one; 100% by year two. Banks would do this either by deducting from their capital or writing them off via profit and loss provisions.

The ECB’s guidance, on the other hand, is non-binding and will be set on a case-by-case basis. It only applies to loans that become delinquent after April 1, regardless of origination date and it differs in its timeline for secured loans, which would need to be fully provisioned by year seven. Its incremental step ups are also different to the EC’s, with secured loans needing 40% provisioning after three years of being classified as non-performing.

The ECB noted that if it deems Pillar 1 requirements as insufficient for any given bank, it may implement Pillar 2 requirements.

How the two proposals (if the Commission’s is adopted) would interact is unclear.

Original Story: Euromoney (Graham Bippert)
Photograph: Depositphotos
Edition: Prime Yield