Full steam ahead Deleveraging report 2018 Q3 Financial Advisory Contents Introduction 1 European NPL market overview 2 Charting new waters – shipping 9 Key markets 11 David Edmonds Andrew Orr Global Head Global Transactions Leader United Kingdom 11 Portfolio Lead Advisory Services Portfolio Lead Advisory Services Ireland 15 Italy 19 Spain 25 Portugal 29 Greece 33 William Newton Benjamin Collet Cyprus 37 Head of Strategic Advisory Partner Asia 39 Portfolio Lead Advisory Services Portfolio Lead Advisory Services Contacts 42 Deloitte PLAS 43 About this report Unless specified otherwise, all the data in the Deloitte Deleveraging report is based on ongoing tracking and monitoring of deal activity, based on Deloitte practitioners’ insights into the respective markets together with public and industry sources, notably Debtwire. This combination of sources limits the detail we can provide on individual transactions or identifiable data segmentation. All data in this 2018 Q3 report correct as of October 2018. Full steam ahead | Deleveraging report 2018 Q3 Introduction The European loan portfolio market continued at pace through 2018, with €120bn in face value of deals concluded in the year to date, already surpassing the total traded in 2016, and on course to exceed €200bn in the full year. The pace of activity continued unabated through the usually quiet summer Activity by year (€bn) holidays, as banks respond to regulatory pressures to reduce leverage and offload assets, completing €48bn during the third quarter. The pipeline of €84bn 2014 44 56 €100bn in announced and ongoing deals across Europe puts 2018 on course to be 31 76 another record year, and likely to surpass the €200bn milestone by year end, as 2015 €107bn anticipated in our last report. 2016 44 64 €108bn 47 105 Italy and Spain continue to dominate the market, between them accounting 2017 €152bn for over half of the portfolio trades. Portuguese banks have accelerated their 2018 72 48 84 €204bn activity with €3bn in completed trades and €4bn in ongoing deals. Deal activity has also taken off in the Aegean, with both Greek and Cypriot banks selling H1 H2 Ongoing Total 50 100 150 200 250 sizeable secured portfolios this year. This is likely to continue as central banks and regulators continue to apply pressure on the banks to escalate their 0 Number of completed deals 2018 / 2017 deleveraging activities. 2018 has also seen a significant uplift in shipping loan portfolio activity, starting 22 10 with the successful sale of Deutsche Bank’s €1bn shipping loan portfolio, which 6 15 has been subsequently followed by over €5bn of portfolios in the market across 30 14 7 3 Europe. 41 8 3 5 5 43 The trend of an increasing proportion of performing loan portfolios continues, 2018 YTD = 108 deals 28 14 representing 15% of traded portfolios the first three quarters of 2018, as asset- 2017 = 146 deals backed security markets support pricing opportunities for non-regulated capital. 2018 2017 2017 2018 Italy Spain Austria & CEE Portugal Ireland UK Greece Other 1 Full steam ahead | Deleveraging report 2018 Q3 European NPL market overview The stock of non-performing loans (NPLs) The latest EBA Risk Dashboard calculates There is significant disparity across has been steadily declining across Europe an average NPL ratio of 3.6%, a significant European nations, with Greek and Cypriot over the past decade since the financial reduction from 5% in 2015, but still leaving NPL ratios significant outliers. crisis. This trend has continued in the year European banks holding an estimated €750bn since the European Commission’s “Action of non-performing loans and advances. Plan to Tackle Non-Performing Loans in Europe” was agreed, with the Council calling There are 17 nations which have a ratio on banks and regulators across the EU to below the European average, with 13 above take action to tackle both the legacy stock of the average of 3.6% holding 55% of the NPL NPLs, and the risk of future build-up. stock against only 23% of total assets. €750bn stock of NPLs held across Europe €180bn 50% €160bn 45% 40% €140bn 35% €120bn 30% €100bn 25% €80bn 20% €60bn 15% €40bn 10% €20bn 3.6% European average 5% €0bn 0% IT FR ES GR GB DE NL PT BE AT IE CY DK SE PL NO HU HR CZ RO FI BG SI LU SK IS LT MT LV EE NPL value (left axis) NPL ratio (right axis) Source: European Banking Authority Risk Dashboard 2018 Q2 2 Full steam ahead | Deleveraging report 2018 Q3 At the bank level, the share of European CET1 ratio banks with >14% CET1 ratio (considered 100 ‘good behaviour’ by the EBA) has steadily 80 increased over the past four years, despite 60 a slight dip in early 2018. 40 20 Similarly, there has been a steady increase 0 in the number of European banks with NPL Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 ratios below 3% (‘good’), while the share of banks with NPL ratios above 8% (‘worst’) >14% 11%-14% <12% Source: European Banking Authority Risk Dashboard 2018 Q2 has more than halved over the past year 12.1% in mid 2017 to 5.9% in the latest report. NPL ratio The picture has been less rosy in terms of 100 coverage ratios, with the share of European 80 banks in the ‘worst’ (42.9%) category 60 increasing over the past four years. 40 20 0 The quarterly Risk Dashboards produced Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 by the EBA include data on a wide range 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 of ‘Key Risk Indicators’ including liquidity, <3% 3%-8% >8% funding, solvency, profitability, and market Source: European Banking Authority Risk Dashboard 2018 Q2 risk, as well as asset quality including NPL ratios and totals. The data does not include NPLs held by state-owned ‘bad banks’ such Coverage ratio of non-performing loans and advances as Ireland’s NAMA, or the UK’s UKAR, and 100 also does not reflect asset sales in Q3 of 80 2018. Nevertheless, the EBA data provides 60 a comprehensive baseline reading of the 40 size of the outstanding NPL pool in Europe. 20 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 . 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 >55% 40%-55% <40% Source: European Banking Authority Risk Dashboard 2018 Q2 3 Full steam ahead | Deleveraging report 2018 Q3 Activity by asset type since 2014 (€bn) €162bn €145bn 31 11 10 5 €117bn 14 9 22 67 24 €57bn 119 €55bn 9 11 €35bn €35bn 22 €26bn 12 62 6 €26bn 9 1 9 8 2 49 3 17 6 €14bn 24 6 2 13 23 21 1 2 10 1 13 9 10 CRE Residential RED REO Corporate Consumer Unsecured Shipping Mixed Other Previous years 2017 2018 Ongoing Activity by country since 2014 (€bn) – completed and ongoing transactions IT 61 52 36 40 €189bn ES 48 53 35 12 €148bn UK 86 22 7 6 €122bn IE 64 4 12 3 €83bn GR 3 11 5 €19bn PT 4 2 3 4 €14bn CY 2 6 1 €9bn 0 50 100 150 200 Previous years 2017 2018 Ongoing 4 Full steam ahead | Deleveraging report 2018 Q3 Loan sale activity by portfolio type per country since 2014 (€bn) – completed transactions IT 147 2 €149bn ES 136 1 €137bn UK 81 34 €116bn IE 73 7 €80bn GR 15 €15bn PT 9 €9bn CY 8 €8bn Non-Performing Loans (NPL) Performing Loans (PL) Loan sale activity by portfolio type (€bn) – completed transactions 100% 80% 60% 85% 40% 20% 15% 0% 2014 2015 2016 2017 2018 Non-Performing Loans (NPL) Performing Loans (PL) 5 Full steam ahead | Deleveraging report 2018 Q3 Top sellers since 2014 (€bn) UKAR 17 61€45.9bn Santander 1 31 4 €37.4bn UniCredit 21 2 1 €32.3bn NAMA 10 €30.5bn Banca MPS 24 €29.0bn IBRC €23.3bn CaixaBank 2 2 14 €22.6bn Sabadell 41 12 €19.5bn Lloyds Banking Group 5 €18.9bn BBVA 14 1 €17.6bn Intesa Sanpaolo 3 3 11 €17.5bn Royal Bank of Scotland 1 1 €16.5bn GE Capital 3 €16.2bn permanent tsb 3 2 €11.8bn Commerzbank 2 €10.6bn Lone Star 1 8 €9.1bn Bankia 111 €8.7bn Bank of America 9 €8.6bn Banco BPM 3 5 €8.5bn BNP Paribas €8.3bn previous years 2016 2017 2018 H1 2018 Q3 6 Full steam ahead | Deleveraging report 2018 Q3 Top buyers since 2014 (€bn) Cerberus 9 15 16 2 €898bn Blackstone 1 49 1 €37bn one Star 6 13 2 €418bn CarVal 2 1 14 €258bn Deutsche Bank 11 2 €185bn Fortress 14 €170bn Goldman Sachs 3 2 2 €138bn Apollo 3 6 €134bn aktree 6 €132bn Banca IFIS 2 3 1 €128bn Barclays 12 €117bn Intrum 10 1 €112bn Bain Capital 2 3 2 2 €99bn AnaCap 3 1 €8bn loyds Banking Group 9 €8bn Wells Fargo €83bn Christofferson, Robb & Co. 2 5 €75bn B2 Holding 1 4 2 €9bn APS 3 2 €7bn LC Partners 5 1€57bn previous years 2016 2017 2018 H1 2018 Q3 7 Full steam ahead | Deleveraging report 2018 Q3 Shipping deals Project name Type Country Seller Completed Buyer Size Confidential PL France Société Générale 2012 H2 Citigroup €1.3bn Project White NPL UK Lloyds Banking Group 2014 H1 Oaktree €1.0bn Project White 2 NPL UK Lloyds Banking Group 2014 H1 Davidson Kempner, Bank of America €1.0bn Confidential Mixed Germany Commerzbank 2014 H2 KKR, Borealis Maritime USD $0.2bn Hanseatic Ship Asset Management Mixed Germany Commerzbank 2015 H2 KKR, Borealis Maritime USD $0.3bn Ship Financing Portfolio NPL Germany HSH Nordbank 2016 H1 hsh portfoliomanagement AöR €5.0bn Confidential NPL Germany Nord/LB 2016 H2 KKR USD $1.5bn Confidential NPL Greece Royal Bank of Scotland 2017 H1 Orix, Berenberg Bank USD $0.6bn Project Jewel Fish Mixed Germany Commerzbank 2017 H1 Oak Hill Advisors, Värde Partners €1.0bn Project Moon Fish Mixed Germany Commerzbank 2017 H2 Cross Ocean, Berenberg Bank €0.3bn Project Lioness Mixed Germany Deutsche Bank 2018 H2 Oak Hill Advisors, Värde Partners USD $1.1bn Confidential NPL Italy Banca MPS 2018 H2 SC Lowy Fund USD $0.2bn Project Isabella NPL Italy Banca Carige Ongoing €1.4bn Confidential NPL Germany Nord/LB Ongoing €5.0bn Project Nemo NPL Greece Piraeus Bank Ongoing €0.8bn 8 Full steam ahead | Deleveraging report 2018 Q3 Charting new waters The market for shipping loans emerges Based on conservative estimates, there is After years of relative calm, momentum Piraeus Bank is also indicating an upcoming over €300bn of shipping finance globally, is now building behind the disposal of €800m shipping portfolio.