Reducing the European NPL burden Smith Novak Conference, London Tom McAleese, Managing Director

Transcription

1 Reducing the European NPL burden Smith Novak Conference, London Tom McAleese, Managing Director September 28, 2017

2 Key themes impacting the NPL market 1 The size of the NPL problem 2 2 The regulators response to tackle the issue 5 3 The challenges for banks 8 4 Investors perspective 11 5 The servicing market 15 1

3 01The size of the NPL problem

4 RO HU SI* HR CZ PL BG AT SK FR IT GR EU PT BE ES LU CY DE IE NL MT* SE EE* LT GB LV NO FI DK GR CY PT IT SI* IE BG HU HR RO PL ES EU AT MT* SK LT FR DK LV BE NL DE CZ NO GB FI EE* LU SE The rate of improvement NPL portfolios remains slow with wide dispersion across countries 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 80% 70% 60% 50% 40% 30% 20% 10% 0% NPL ratios across Europe - March 2017 Coverage ratios across Europe - March 2017 Banks asset quality remains a major concern for the European banking system with total NPL volume exceeding 1 trillion NPLs continued their downward trend and decreased to 4.8% (EU average) in Q However, there is a wide dispersion among the countries, with ratios ranging from 1% (SE) to 46% (GR) EU average coverage is 45.2% but ranges from 29% (DK) to 67% (RO). Structural (e.g. slow judicial system) and market (e.g. lack of efficient secondary markets) impediments still persist Source EBA Risk Dashboard Q

5 There are wide gaps between how various markets are addressing the NPL problem NPL Ratio Coverage (%) You can analyse the European landscape by dividing the countries into 3 blocks: Block 1: 2 countries Countries with NPL ratios above 20%. Eg: GR & CY This block has remained static over the past 3 year with no movement in avg NPL ratios and small increases in coverage percentages Systematic barriers are in place restricting progress. Eg: Greek loan book sales restrictions. The vast majority of future loan book sales with originate from this block. Block 2: 10 countries Countries above the EU avg NPL rate but below 20%. Eg: IRL & ES This group is seeing the most improvement over the past 3 year with falling NPL rates and increasing coverage ratios. These are the countries which have issues but are actively addressing them through state AMC s, bad bank units and loan book sales. The majority of the loan book mark for the past few years originates from this block. Italy is the stand out country in this group as it although its NPL rate is 14.8% due to its size the actual stock number is extremely large at over 300bn Block 3: 15 countries Countries at or below the EU average. Eg: UK, DE, NL FR Similar trend to Block 2 but a much lower NPL rate. Decreasing NPL rates by 34% in past 3 years. Large systematically important countries to the EU. Largely protected from massive NPLs due to tighter lending laws before the crash. 4

6 Coverage ratio (%) Coverage ratios continue to improve with CEE countries leading the way due to stringent provisioning rules from local regulators EU avg 65% 55% CZ AT SK PL RO HR HU SI BG FR IT GR 45% LU BE EU ES PT CY EU avg 35% DE NL MT SE EE LT GB LV FI NO DK IE 25% 0% 10% 20% 30% 40% 50% Source EBA Risk Dashboard Q NPL ratio (%) 5

7 02The regulators response to tackle the issue

8 EU regulators are keen to address the NPL issue, evidenced by various initiatives taken proactively in 2017 The ECB guideline to banks on non-performing loans March 2017 The ECB s second stocktake of national supervisory practices and legal frameworks related to NPLs in the euro area June 2017 Council of the EU conclusions on Action plan to tackle nonperforming loans in Europe July 2017 Public consultation on the development of secondary markets for non-performing loans and distressed assets and protection of secured creditors from borrowers default July 2017 The European Systemic Risk Board (ESRB) report to identify macroprudential policy-oriented issues related to NPLs and to develop ideas on possible macroprudential responses to the current high levels of NPLs in the European Union - July

9 ECB published guidelines to set best practices in key areas of NPL management in March 2017 Strategy Establishes strategic objectives for high NPL banks for the timebound reduction of NPLs over realistic but sufficiently ambitious time-bound horizons Lays out the bank s approach and objectives regarding the effective management and ultimate reduction of NPL stocks in a clear, credible and feasible manner for each relevant portfolio Governance and Operations Sets out key elements to the governance and operations of an NPL workout framework starting with key aspects related to - steering and decision making - operating model - internal control framework - monitoring and early warning processes Forbearance Focuses on viable forbearance solutions aligned with the supervisory expectations i.e. banks should implement well-defined forbearance policies aligned with the concept of viability and recognise in a timely manner those borrowers who are nonviable Recognition Outlines selected issues regarding the definition and recognition of NPEs in accordance with the EBA definition and gives some best practice examples to reduce the diversity in implementation Impairment measurement & write-offs Provides guidance on - adequate measurement of provisions across all loan portfolios through sound and robust methodologies - timely recognition of loan losses within the context of relevant and applicable accounting standards and timely write-offs - enhanced procedures including significant improvement to the number and granularity of asset quality and credit risk control disclosures Collateral Guidance on obtaining periodic financial information from borrowers or updated real estate valuations in order to assess the quality of loans on their balance sheets and the adequacy of collateral 8

10 The Counsel of the EU Action Plan encompasses actions in 3 key areas i) banking supervision, ii) insolvency and debt recovery framework and iii) secondary market for NPLs Areas of Action July 11 th, Summer Autumn Winter Spring Summer Autumn Winter Owners Enhanced Banking Supervision Enhance supervisory provisioning policy changes capacity Commission Introduce, within on-going CRD IV revision, prudential backstops to address under provisioning Commission Implement a NPL Guidance for non significant institutions SSM Issue General guidelines for NPL Management EBA Issue Detailed guidelines for Loan Origination, monitoring and internal governance (*) Develop macro-prudential approaches to prevent the emergence of system-wide NPL problems Reform of Insolvency & Debt Recovery Framework Benchmark efficiency of National Loan Enforcement regimes Commission Carry out dedicated peer-reviews on insolvency regimes Member States Development of Secondary Markets for NPL Implement enhanced disclosure requirements on asset quality and NPLs to all Banks EBA ESRB EBA / ESMA Issue Guidelines for bank on loan tapes monitoring EBA Propose initiatives to strengthen the data infrastructure (uniform & standardizes NPL data) EBA / ECB / Commission Consider the setting-up of NPL transaction platforms Develop a blueprint for the potential set-up of national AMCs Commission Develop a European approach to foster the development of secondary markets for NPLs (**) Commission 9

11 03The challenges for banks

12 High volumes of NPLs can cause a significant drag on a bank s performance High volumes of NPLs can cause a significant drag on a bank s performance in the form of reduction in net interest income increase in impairments costs additional capital requirement for high risk weighted assets lower ratings and increased cost of funding, adversely affecting equity valuations reduced appetite for new lending additional management time and servicing costs to resolve the problem Banks have put significant resources and effort into action in the last few years to deal with their NPLs: aligning their businesses with regulatory requirements such as setting up separate dedicated in-house NPL units identifying, categorising and provisioning NPLs more rigorously standardising and improving work-out, legal enforcement and underwriting processes developing additional restructuring products 11

13 NPL management requires a systematic, pro-active and focussed approach with focus on i) strategy & governance ii) processes iii) infrastructure & control 12

14 04Investors perspective

15 Face Value ( bn) Face Value ( bn) Across Europe deal momentum remains strong, with total transaction volume is expected to exceed 100bn for a third year in a row Transactions by Country ( bn) Transactions by asset class ( bn) Q Q UK Ireland Spain Germany Italy Netherlands Other Estimated In progress Completed Specialized SME/ Corporate Unsecured Retail Secured Retail CRE Estimated In progress Completed Throughout 2017, total EU sales have reached 23bn of closed deals while 29bn are still in progress In 2016 the European loan portfolio market achieved 118bn in completed deals, mainly from Italy ( 33bn) and Spain ( 22bn) Source PwC Market Update Q

16 Main drivers of a successful transaction are asset quality, bid/ask price spread and data quality Main elements of a successful deal Good asset Good price Good information Other Factors: Existing servicing capacities Financing options (acquisition and retail end financing) and Stable legal system 15

17 Impact of price expectations on market value varies across different European countries - ranging from c.15% in Ireland to over 50% in Slovakia, and to c.30% in Portugal Impact on Market Value of NPLs Long duration and high cost of legal procedures significantly reduce market value of NPLs A private investor may required a discount above 40% even on fully secured loans according to estimates Within secured portfolios, developers/land collaterals usually suffer the highest haircuts Structural inefficiencies and informational asymmetries create a significant difference between book values and market values of NPLs Most of the factor contributing to the discount would not be recognized in banks provisioning Source ECB calculations based on World Bank Doing Business 2016 data 16

18 NPL reduction targets will form future sales pipeline 0% -10% -20% -30% -40% -50% -60% -70% Target Reduction in NPLs European banks have set NPL target rates and are in the process of formulating plans to achieve these The biggest tool these banks will have to reduce their exposure to NPL s will be to parcel them together and sell the portfolios. Removing from their balance sheets. Some of the larger exposures such as CaixaBank are targeting a 60% reduction in their NPL stock in the coming years. Greece and Italy will form the majority of the future portfolio sales. To date the portfolios sales from these two markets has been minimum. Countries which have already under gone heavy restructuring are still in need of further reduction and have also set targets. eg: AIB plan to reduce NPL rates from 17.5% to EU avg 5% in next 5 years. 17

19 05The servicing market

20 Loan servicing is a critical component of successfully reducing NPL burden across Europe Servicers typically provide services based on various features namely asset class, collateral (secured versus unsecured), servicing activity (master, primary, special, back-up), and servicing type (captive versus independent) The loan servicing market has been developing steadily in Europe over the past decade driven by (i) the large stocks of NPLs in Europe, (ii) the requirement of the main Asset Management Companies (AMCs) such as NAMA and SAREB - who use servicers, (iii) the push by banks to outsource loan book management (performing and non-performing) for effectiveness (to experts for better recovery potential) and efficiency (for cost reasons) and (iv) regulation For Funds buying NPL assets, a pan-european servicing solution is not available as yet and many PE firms must manage multiple servicer relationship across Europe. In addition specific countries have legislation requiring servicers to be licensed (e.g. Greece) and others require servicers to comply with relevant consumer banking codes (Ireland). Finally, servicing is a very localized business as (i) the debtor engagement requires local coverage and (ii) there are specific legal, regulatory and tax requirements needing local expertise Overall, in our view, the loan servicing market is fragmented with many different players servicing the key European markets which are at different levels of maturity (e.g. UK / Ireland / Netherlands are mature with Greece / Italy / Portugal still underserved). Nevertheless, there are positive developments across Europe both via new legislations and via cross border M&A activity to address these issues 19

21 06Conclusion

22 Key considerations for sellers and buyers of NPL portfolios Sellers (Banks and other FIs) Buyers (PE & hedge funds) Not all NPLs may be suited for selling. Segment the portfolio carefully through routes to recovery/routes to exit. For the portfolios identified for selling, understand investors motives and requirements. Be realistic in price expectations. Data and document quality play a critical role in attracting buyers and achieving desired valuations (perform data integrity checks). Make sure valuation of the underlying collaterals is up-to-date and valuation standards meet potential buyers expectations. Have a back-up plan. Having individual risk assessments and loan strategies as the part of routes to recovery exercise provide not only a fall back option but can also enhance value of the portfolio. Statistical analysis may not always provide all the risks. Sometimes risk driver could be a very recent development which has not resulted in losses yet. Large positions may not reflect health of entire portfolio. Choosing right sample size distributed across portfolio is key. Regulatory, legal and tax implications may have a huge impact on portfolio economics. Important to assess quality of the collections/work-out team and approach including analysis of policies and procedures (where applicable). Watch out for experienced, ideally pan-european loan servicer (currently positive developments both via new legislations and cross border M&A activity to create multi-country servicer). 21

23 The information contained in this document is of a general nature and has been obtained from publicly available information plus market insights. The information is not intended to address the specific circumstances of an individual or institution. There is no guarantee that the information is accurate at the date received by the recipient or that it will be accurate in the future. All parties should seek appropriate professional advice to analyze their particular situation before acting on any of the information contained herein. Alvarez & Marsal Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) when conventional approaches are not enough to activate change. Privately-held since 1983, A&M is a leading global professional services firm that delivers business performance improvement, turnaround management and advisory services to organizations seeking to transform operations, catapult growth and accelerate results through decisive action. Our senior professionals are experienced operators, world-class consultants and industry veterans who leverage the firm's restructuring heritage to help leaders turn change into a strategic business asset, manage risk and unlock value at every stage 22