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2017 H1 Deleveraging Europe

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2017 H1 Deleveraging Europe Shifting momentum Regulation driving change in European loan portfolio markets Deleveraging Europe H1 2017 Financial Advisory Shifting momentum | Regulation driving change in European loan portfolio markets Contents Introduction 01 Market overview 03 European NPLs – The clash of politics and the markets 09 David Edmonds Andrew Orr Global Head of PLAS Partner & UK Head Italy 13 United Kingdom & Ireland 16 Spain & Portugal 20 Germany & Netherlands 25 Greece & Cyprus 29 Will Newton David Lane Partner & Head of Partner Austria & CEE 31 Strategic Advisory France 34 Nordics 36 Emerging markets 37 China 38 Benjamin Collet Indonesia 38 Partner Thailand 39 India 39 Middle East 40 Brazil 41 Deloitte Portfolio Lead Advisory Services 42 Contacts 43 Shifting momentum | Regulation driving change in European loan portfolio markets Introduction The European loan portfolio market had a slow start in the first half of 2017 compared to the same period last year, as sellers and investors pushed deals into the second half of the year. But with a large number of ongoing deals still in the pipeline for the second half, the total market for 2017 is currently set to exceed the record deal making of the previous two years when over €100 billion of deals were concluded. The pipeline is busy Regulatory influence Headline facts and figures At the mid-year point €42 billion of One element that has tempered the Ativity by year bn deals had been completed in Europe pace of deals in 2017 has been the heavy (compared to €45 billion last year) with regulatory load on potential NPL sellers in 2014 €82.9 €82.9 another €3 billion in emerging markets, and 2017. They are dealing with the European 2015 €104.3 €104.3 €87 billion of deals were ongoing. The only Central Bank’s new guidelines on NPL market that has currently outperformed recognition and disposal strategy, the 2016 €103.3 €103.3 last year is the UK, where the forthcoming adoption of IFRS 9 standards 2017 €42.0 €86.5 €20.2 billion of completed sales is which will push banks towards a more €128.5 accounted for almost entirely by a single forward-looking and rigorous approach to Completed Ongoing sale of a residential mortgage portfolio loss provision, and the European Banking from the UK wind-down institution UKAR. Authority’s 2017 Transparency Exercise, Number of ompleted deals H1 2017 The rate of deal completions in Ireland, which draws data from all significant the Netherlands and Germany has been eurozone banks on current NPL exposure. modest given the strong momentum built The first two of these regulatory changes 7 12 12 1 2 up in 2016, while Spain and Italy – the have created a heavy workload for banks. 1 3 busiest markets in Europe last year – has They have had to hire new staff and 2 18 seen €4.7 billion and €9.3 billion of deals create new divisions to identify NPLs in 15 completed respectively by mid-2017 considerable granular detail, and to report (excluding the €26.1 billion loan portfolio back to the ECB on exposures and disposal that was transferred to Intesa as part of its strategies. In some cases, they have simply Italy Spain Austria & CEE Portugal acquisition of Banco Popolare di Vicenza been too busy to sell. Germany Netherlands Ireland and Veneto Banca). With a total of €75 UK France Emerging markets billion in ongoing deals these two markets have busy times ahead. Data as of 30 June 2017 01 Shifting momentum | Regulation driving change in European loan portfolio markets But these regulatory initiatives are positive however sourcing and delivering data “We continue to believe for the market. Unaddressed NPLs in high on these loans remains a challenge for NPL-ratio economies such as Portugal, some sellers. Markets are considering that it will take five or Greece and Cyprus are likely to come to securitisation funding for some loan more years of bank market. Markets that have paused in early sales both in the performing and non- 2017 are likely to see many more deals than performing categories, something which restructuring and risk in the past, like Ireland. we take as a sign of returning broad reduction before the confidence and a lack of product and yield Emerging markets in traditional ABS markets. Securitisation demands of regulators As the European portfolio market evolves is attractive because of its ability to spread and the capital resources and matures the focus of investors risk, and to appeal to a wider range of gradually widens to include markets in potential buyers which enlarges the of banks reach a point of the east. In several western European funding base of distressed debt market. equilibrium.” economies such as the UK, Ireland and the Its success is largely dependent on good Netherlands, the large distressed portfolio quality data being available. trades have already taken place, but more deals are yet to come. Investor appetite So while the European loan portfolio for portfolio trades remains exceptionally market is changing, it also still has some high – the stock of dry powder in distressed considerable way to run. We continue to debt buyout funds combined with leverage believe that it will take five or more years means that in Europe there is c. €300 of bank restructuring and risk reduction billion waiting to be deployed – but the before the demands of regulators and the search for greater risk adjusted returns capital resources of banks reach a point continues. There has been an increase in of equilibrium. Meanwhile the European emerging NPL markets such as India, China, Banking Authority estimated in its last Thailand, Indonesia and Brazil. eurozone ‘Transparency Exercise’ that there are just over €1 trillion of NPLs still on The market matures banks’ books in the eurozone; we estimate The market continues to mature in other that when non-eurozone and non-core ways. In most markets loan sales have assets are included in the total there is already moved from unsecured loans to around €2 trillion in European loans that more difficult-to-price secured assets, could come to market. This is despite the often SME and corporate loans. Banks and many years of deleveraging we have seen buyers are getting better at understanding to date. There are busy years ahead. what is required to accurately price loans, 02 Shifting momentum | Regulation driving change in European loan portfolio markets Market overview Deloitte prediction: Italy will be the busiest market in Europe for the second year running. New European markets that have not seen much activity in the recent past will now emerge, especially Portugal and Greece where momentum for significant deleveraging is building. Overall volumes in Europe are likely to exceed the record years of 2015 and 2016. The UK market has begun to A securitised market is also emerging Deal flow fell in theNetherlands recover from the pause induced in Ireland, with various Residential although that mainly reflects the very by the Brexit vote in mid-2016; Mortgage Backed Securities placed large sale of the Propertize loan book in already this year we have seen a €19 billion in the last 12 months. 2016. Nevertheless Rabobank, its sale of a mortgage portfolio from UK Asset subsidiary FGH Bank and Propertize all Resolution (UKAR). Future mortgage Deals in Germany this year are likely to have loan sales under negotiation in the portfolios from UKAR are likely and be c. €3 billion, less than the completed second half of 2017. Rabobank in challenger banks continue to be significant deals of €10 billion in 2016. Nevertheless particular is likely to sell more portfolios players in the UK market, but overall the regulatory pressure from the ECB will as part of its plan to remove €150 billion UK deal flow is likely to continue to be likely start to prompt more deals, as in non-core assets from its balance dominated by residential assets. German banks held €67 billion in NPLs sheet by 2020. Alternative assets such as student loans according to last year’s EBA data, and the and Public Finance Initiative (PFI) loans two German ‘bad banks’ EAA and Activity in France is expected to rise. may begin to appear as well as potential FMS-WM also hold around €130 billion in Banks are gradually moving from their sales from other Ireland based lenders. non-core assets, with mandates to wind preferred model of internal workouts for down these portfolios by 2027 and 2020 secured NPLs to sales of portfolios such Irish sales have been c. €1 billion in 2017 respectively. It remains the case that as residential mortgages. Investors are to date. But the beginning of the seller price expectations are higher in also committing more resources to the re-privatisation of Allied Irish Banks, one Germany than elsewhere in Europe. French market. Despite a relatively low of the pillar banks nationalised at the height of the financial crisis, is likely to “The float of AIB could trigger substantial sales of create a new deal flow as well as potential sales from other Ireland based lenders. residential and corporate loan portfolios in Ireland, The float of AIB could trigger substantial while the UK market is likely to be continue to be sales of residential and corporate loan portfolios (AIB holds €16 billion in NPLs). dominated by residential assets.” 03 Shifting momentum | Regulation driving change in European loan portfolio markets NPL ratio the large size of the financial “The takeover of Banco Popular by Santander in a market means that the potential NPL deal flow could also be large. The adoption of previously unseen process supervised by the EU's IFRS 9 is also pushing banks towards a Single Resolution Board means that Santander now has better recognition that their NPL holdings are a practical and strategic burden, and over €50 billion of NPLs to deal with.” we expect a rise in deal making over several years.
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