European loan portfolio activity is expected to rebound in the final four months of the year with close to €100bn in ongoing and as yet unannounced trade expected to close before the year end, predicts Deloitte’s Portfolio Lead Advisory Services (PLAS) team.
In its Deleveraging Europe H1 2016 report, published late yesterday afternoon, Deloitte said €44.3bn in loan sales had completed in the first half of the year. In addition, a further €67.8bn in European loan portfolio sales were ongoing.
These pending transactions, coupled with as yet unannounced but expected trades, will take annual transaction volumes to to approximately €140bn for the year. This implies around €95.7bn in further trades in the final four months of 2016, according to Deloitte’s forecast, which would reflect a 34% increase on 2015’s of €104.3bn annual tally.
According to various market sources, these could include:
- UKAR's £17.5bn Bradford & Bingley predominantly residential loan portfolio. According to UKAR's 2016 annual results, UKAR also still holds £440m in commercial loans across B&B and NRAM (Northern Rock's bad bank);
- A further Allied Irish Bank UK & Ireland NPL portfolio. AIB still has €6.2bn in ‘criticised’ UK and Irish CRE investment loans, €1.3bn and €4.8bn, respectively, according to AIB’s half year results;
- Permanant TSB, has an estimated €4bn in buy-to-let loans likely to come to market;
- Co-op's remaining Optimum portfolio. Co-op has tried to sell the UK loan portfolio before but the process was withdrawn after failing to meet the vendors’ price expectations. The carrying value of the Co-op’s Optimum portfolio was £2.8bn at end of 2015, according to its 2015 annual results;
- NAMA’s final NPL is also expected to come later this year, called Project Gem. The portfolio is expected to come with a nominal €2bn unpaid balance, comprised of 30 connections and 400 assets and real estate value of approximately €300m. The portfolio is expected to be predominantly, or entirely, Irish;
- While Goldman Sachs won FMS Wertmanagement’s €584m Project Hieronymus, according to Debtwire on Wednesday, we understand the bad bank’s negative cost of capital due to negative interest rates could stall future loan sales; and
- the potential jumbo €5bn Monte dei Paschi NPL trade.
Deloitte reported that the uncertainty by the Brexit vote had slowed the loan sale market but “a busy end to the year is expected with well-capitalised buyers hoping to make up lost ground”.
Of the completed loan portfolio sales, €21.6bn, 0r 49%, were in commercial real estate. A further €4.3bn were mixed loan types and €1.5bn and €1.3bn were in residential and corporate loans, respectively. By geography, Italy led the way, with €11.4bn closed deals, followed by Germany, Ireland, Netherlands and Spain, with €11.4bn, €9.4bn, €7.9bn and €6.7bn, respectively.
“Across Europe, increased regulation, governmental reforms and higher capital requirements have added pressure on banks to divest,” wrote Deloitte’s PLAS team. “This pressure can be seen with increased loan sale activity levels in Italy and Spain.”
Italy in particular has seen a significant increase in loan portfolio activity pushing completed and ongoing transaction levels to €52.1bn, driven by governmental reforms and the introduction of a State guarantee securitisation scheme.
These reforms have meant that Italy is currently the most active country in Europe for loan portfolio transactions, challenging the UK and Irish markets which have been the historical sales leaders. “Whilst loan portfolio activity remains strong, there is still significant headway to be made in deleveraging terms as the non-core volume in Europe is still estimated to be at least €2trn, with UK, Spain and Italy having the largest reported volumes at present.”
Deloitte identified four themes across H1 2016:
- strong activity levels seen in Southern Europe, led notably by Italy and Spain;
- a single large transaction in the Netherlands (the Project Swan Propertize sale to Lone Star and JPMorgan);
- the impact of the pre and post-Brexit referendum in the UK; and
- the results of the European Banking Authority (EBA) stress test in July.
Deloitte wrote: “We expect the ongoing turmoil in the Italian banking landscape and the continuing uncertainty about a post Brexit UK economy will continue to dominate the second half of 2016. Deal pipeline in Italy will continue to be driven by the pressing need of Italian banks to deleverage their non-performing loans. Recent legal changes designed at improving the efficiency of the Italian enforcement process should enable bidders to be more certain in their pricing and close the bid ask gap between sellers pricing expectations and buyers’ bids. The implications of Brexit continue to evolve on a daily basis, but what is clear in the short term is that a number of loan transactions were temporarily put on hold.
“Uncertainty around the UK economic environment and the future direction of interest rates will weigh on the market in the short term. A fall in the value of the pound may increase foreign investment in CRE property, although investors will be weary of committing foreign capital considering increased market volatility. However, in the long run UK property may remain a safe haven market. Market fundamentals remain robust and the CRE transaction infrastructure will continue to be strong, transparent and liquid.
“Additionally, as revealed by the stress test results, certain European banks still need to work on strengthening their capital buffers. Overall, capital ratios were perhaps better than might have been expected, reinforcing greater steps towards bank resilience the sector as a whole has taken.”
The EBA stressed the “continued capital strengthening of EU banks” since the last stress test. EU banks in the sample raised more than €180bn in capital, increasing the capital ratio from 11.1% at end-2013 to 13.2% at end-2015.
“Whilst the continued uncertainty is likely to create opportunity for buyers in certain markets, we still expect a further move towards performing assets as banks across Europe build on their ongoing long term restructuring and deleveraging efforts of the last number of years,” Deloitte concluded.