Non Performing Loans (NPL‘s) – how to handle and optimize
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The document discusses non-performing loans (NPLs) across Europe, highlighting the prevalence and treatment strategies for these loans, including restructuring and liquidation. It outlines the results of the ECB's Asset Quality Review (AQR) which assessed banks' NPLs and their provisioning levels, impacting banks' equity and P&L accounts. Additionally, various NPL sale strategies and recent portfolio sales in different European countries are examined, focusing on trends and recovery rates for corporate loans.
Non Performing Loans (NPL‘s) – how to handle and optimize
- 1. Non Performing Loans (NPL‘s) – how to handle and optimize Ralf Zeitlberger Head of Group Corporate Workout Erste Group Bank AG 11 September 2015 1
- 2. Agenda 11 September 2015 2 1. • NPL portfolios across Europe 2. • Outcome and treatment in the AQR test of ECB 3. • Relevance for banks‘ equity and P&L account 4. • Possible solution strategies: restructure, liquidate, sale 5. • Sale of NPL‘s 6. • NPL‘s of corporates, real estate and retail 7. • Most successful recoveries for corporate loans
- 3. 1. NPL portfolios across Europe 11 September 2015 3 Country Total NPL‘s as % of total banking assets Austria 3,5% Netherlands 3,1% Sweden 1,2% Ireland 20,7% Romania 13,9% Portugal 11,9% Spain 8,5% Croatia 16,7% Hungary 15,6% Czech Rep. 5,6% Source: IMF, Financial Soundness Indicators, NPL Balances as of Dec. 2014 • € 1,2 trillion of NPL‘s across Europe (= 3% of total banking assets) • Current indicators for total Europe as of Dec. 2014
- 4. 1. NPL portfolios across Europe – CEE • 9 countries in CEE accounted for € 58bn NPL‘s in 2013: 11 September 2015 4 CEE country Total NPL‘s (as % of total banking assets) % Corp. % Retail Poland 16,5bn (8,5%) 11,5% 7,1% Romania 10,7bn (21,9%) 29,1% 13,7% Hungary 6,4bn (18,4%) 17,9% 18,8% Croatia 5,9bn (15,6%) 28,1% 11,1% Bulgaria 4,9bn (14,5%) 19,3% 13,3% Czech Rep. 4,7bn (5,9%) 7,1% 5,0% Serbia 3,5bn (21,4%) 27,3% 11,2% Slovenia 3,4bn (13,8%) 20,4% 5,3% Slovakia 2,0bn (5,8%) 8,1% 4,2% Source: Houlihan Lokey
- 5. 1. NPL portfolios across Europe – trend • Upward trend of NPL‘s started with the outbreak of the economic crisis in 2008 • NPL‘s reflecting macro-environment (unemployment rates, low GDP growth, …) • Increased GDP growth in CEE region: • The northeastern European countries (e.g. Latvia, Poland, Estonia) are driving the CEE growth • Croatia and Serbia as the only CEE countries with negative GDP growth until 2014 11 September 2015 5 Development of NPL as % of total bank loans Source: World Bank 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
- 6. 2. Outcome and treatment in the AQR test of ECB (2014) • AQR („Asset Quality Review“) = Assessment of data quality, asset valuations, classifications of NPE (non-performing exposures), collateral valuation and provision • Risk-based portfolio selection, covering at least 50 % of RWA • Exercise included the calculation of AQR-adjusted CET1 („Common Equity Tier 1“) results were compared with the Capital target of 8 % CET1 • Assessment of provisioning levels based on „Going or gone concern?“ • Going concern cash-flow analysis • Gone concern collateral analysis • Various NPE definitions across participating banks AQR imposed a standard definition acc. to final draft of forbearance and NPE standards by EBA NPE stocks of in-scope institutions were increased by total € 136bn to € 879bn 11 September 2015 6 Source: ECB
- 7. 2. Outcome and treatment in the AQR test of ECB • Total adjustment in participating banks asset carrying values as a result of AQR was € 47,5bn: Credit file review € 16,4bn adjustments • Exposures reclassified from performing to non-performing € 6,6bn • Increase of provisioning of existing NPE‘s € 8,1bn Projection of findings (findings of the sample were extrapolated) € 10,3bn adjustments Collectively assessed provisions (review of provisioning models) € 16,2bn adjustments Review of fair values € 4,6bn adjustments 11 September 2015 7 Source: ECB
- 8. 3. Relevance for banks equity and P&L account • NPL‘s are part of the banks balance sheet • NPL coverage = the extent to which NPL‘s are covered by Loan Loss Provisions (LLP‘s) • LLP‘s are needed to cover expected losses effect of Loan Loss Provisions on banks financials – increase of LLP‘s as an expense in the banks P&L 11 September 2015 8 If a bank tries to reduce NPL‘s without having them sufficiently covered with LLP‘s, the losses need to be directly covered by equity (= expensive).
- 9. • Additionally to the min. requirements, several additional capital buffers are being introduced such as a "capital conservation buffer“, a "discretionary counter-cyclical buffer“ and capital buffers for systemic risks. Systemically important institutions that are considered as “risky” will be required to build up additional capital buffers for these risks. 3. Relevance for banks equity and P&L account 11 September 2015 9 Basel III / capital requirements: • Acc. to Basel III the min. Tier 1 capital amounts to 6 %, thereof 4.5 % of CET1 + 1.5 % of additional Tier 1.
- 10. 3. Relevance for banks equity and P&L account • The Capital Requirements Directive (2013/36/EU) (CRD IV) and the Capital Requirements Regulation (575/2013) (CRR) together implement the Basel III international agreement on bank capital requirements into EU law. • Three approaches for the risk weighting: • Standardized Approach • Internal Ratings Based (IRB) Approach • Advanced IRB Approach • The CRR regulates among others: • The amount of the required capital according to defined and weighted risks by the supervisory authorities • The disclosure requirements • The consideration of collateral • The liquidity requirements • The calculation of the leverage ratio 11 September 2015 10
- 11. 3. Relevance for banks equity and P&L account • Risk weighting of defaulted exposures acc. to Standardized Approach (CRR Art. 127): • 150 %, if loan loss provisions are less than 20 % of the value of the uncollateralized part of the risk position • 100 %, if loan loss provisions are more or equal to 20 % of the value of the uncollateralized part of the risk position • Risk weighting of defaulted exposures acc. to IRB Approach (CRR Art. 153, 154, 158, 159): Two different approaches: • IRBF (“Foundation IRB approach” – in many banks used for Corporate exposures): No risk weight is assigned to defaulted exposures in IRBF Expected Loss (EL) is calculated based on estimates of Probability of Default (PD) and Loss Given Default (LGD) EL = PD x LGD EL excess / shortfall is calculated (difference of risk provisions and EL): EL excess = provisions > EL this EL excess is counted for in the Tier 2 capital (CRR Art. 62) EL shortfall = provisions < EL this EL shortfall is deducted directly from the Tier 1 capital (CRR Art. 36) • IRB (“Advanced IRB approach” – often relevant for Retail exposures): risk weighting might be relevant; risk weighting calculated as LGD (Loss Given Default) – ELBE (Expected Loss Best Estimate) 11 September 2015 11 The need for capital backing is dependent on the level of provisioning.
- 12. 4. Possible solution strategies: restructure, liquidate, sale 11 September 2015 12 “Restructuring / Going Concern” “Exit / Gone Concern” Restructuring of debt: • Moratorium, grace period • ST to LT debt • Restructuring interest rate • Prolongation of repayment period Usually higher recoveries Cooperation of client is necessary • Sale of exposure to an investor, usually at a discount Liquidation / sale of assets: • Insolvency proceedings • Legal enforcement proceedings • Out-of-court sale of assets
- 13. 5. Sale of NPL‘s 1. Internal: actively reducing NPL‘s through special units within the bank 2. External: Sale of single loans or portfolios of NPL‘s 3 different options of portfolio sales: Sale of receivables via an asset deal • Transfer of collateral together with the receivable • Involvement of borrower needed Sale of shares • No notification to borrower required • No transferability issues, but not every seller has such a structure available Hybrid structure • Asset transfer to a SPV („Bad Bank“) NPL‘s not in banks balance sheet anymore • Sale of shares to investor • Bank provides financing and / or equity 11 September 2015 13
- 14. 5. Recent NPL portfolio sales • In Europe, NPL portfolio sales have been most significant in the UK, Ireland, Spain, Portugal and Germany over the last years. • As competition for distressed assets intensifies in the more established European NPL markets, investors are seeking for opportunities in other countries, such as Italy f.ex. (NPL transactions 2013/2014): 11 September 2015 14 Source: Deloitte
- 15. 5. Recent NPL portfolio sales – examples from CEE 11 September 2015 15 Date Country Seller Buyer Portfolio type Size (EURm) Dec. 2014 Romania BCR Deutsche Bank Corporate and CRE 400 Nov. 2014 Croatia, Serbia, Montenegro, Slovenia Hypo Alpe Adria B2 Holding Mortgage, consumer 169 Aug. 2014 Romania MKB APS Corporate 85 July 2014 Romania BCR DB, APS SME 227 July 2014 Romania Volksbank Romania DB, Anacap, HIG, APS Mortgage 495 July 2014 Slovenia Undisclosed DDM Group Consumer Sept. 2014 Romania ÖVAG Banca Transilvania Mixed 2.000 • Some progress with regard to NPL portfolio sales can already be noticed in the CEE region • Romania has been in focus of many investors in CEE. Source: Houlihan Lokey, Deloitte, KPMG
- 16. 5. Sale of single non-performing loans • Only for large international clients there is a secondary market for the banks loans towards the client (e.g. Scholz AG, Alpine Bau, Takko,…) . • Secondary market prices are regularly quoted via brokers (e.g. large investment banks). • Sale either through brokers or directly to investors such as hedge funds, private equity funds, financial institutions… 11 September 2015 16
- 17. 6. NPL‘s of corporates, real estate and retail 11 September 2015 17 Real estate • Asset is in the main focus • Asset Takeover solutions possible: • when client is not cooperative • to increase the value of the asset (through investing or good management) • Problematic market for non-income producing assets (landplots) Retail • Standard processes for Early and Late Collection (reminder mechanism) • Portfolio sales quite common after acceleration of the loans: • Mortgage loans • Consumer loans & credit cards (unsecured) Corporate • Restructuring preferred, if possible: • Cooperative client • Sound business model • Favorable market conditions • Alignment with other stakeholders • … • Not always possible…
- 18. 7. Most successful recoveries for corporate loans 11 September 2015 18 Statistical data proves higher recoveries under the restructuring scenario Recovery Liquidation (est.) Recovery Sale (est.) Recovery Restructuring Food distribution and convenience retailer ~ 10 – 25 % ~ 20 – 30% 100% + Interest Shoe retailer ~ 0 – 20% ~ 50 % 100% + Interest Agro-industrial conglomerate ~ 10 – 20% ~ 75% 100% + Interest
- 19. 7. Most successful recoveries for corporate loans Successful case – Food distribution and convenience retailer in CEE • Total indebtedness of € 1,1bn (leverage ~11,7x in 2012) • High short-term debt significant liquidity shortfall due to repayment of CP‘s, overdue supplier payables… • Operating difficulties (poor cost efficiency, underperforming non-core investments) Restructuring solved among 55 banks and several lessors within the period of 18 months Debt reduction of € 200mn (downpayment) New shareholder with huge synergy effects Long-term stabilized financing structure 11 September 2015 19 NO HAIRCUT and full release on loan loss provisions
- 20. Thank you for your attention! 11 September 2015 20