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News : EU Economy Last Updated: Oct 30, 2013 - 8:03 AM

Europe’s non-performing loans rise to €1.2tn; Ireland in 4th place for worst performers
By Michael Hennigan, Finfacts founder and editor
Oct 29, 2013 - 9:07 AM

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European non-performing loans (NPLs) held by banks have increased to €1.2tn (up by nearly €100bn in 12 months) driven mainly by reported increases in Italy, Greece, Spain and Ireland, says PwC in its latest market update published today. PwC tracks the volume of European NPLs and also the market for non performing and distressed lending portfolios that’s grown up around it. The value of the NPLs have doubled since 2008 and European banks have an estimated €2.4tn in unwanted loans. 

Richard Thompson, partner, PwC, said:  “We don’t see a meaningful reduction in non-performing loans across Europe any time soon. Aggregate levels of NPLs could continue rise over the coming years, adding further to the already buoyant portfolio market.”

The first eight months of 2013 have seen €46bn face value of European loan portfolio transactions, exactly the same amount that traded in the whole of 2012. At the beginning of this year PwC forecasted a 2013 total of €60bn and it looks as if this number will be exceeded. PwC is currently lead advising on portfolio deals with a face value of €8bn which are expected to complete in 2013.

The sale and purchase of non-core loan portfolios are made in the context of the continued and significant deleveraging challenge facing many of Europe’s largest banks - - the majority having established non-core equivalent divisions or their equivalent to focus on selling or running down unwanted assets. PwC has previously estimated that European banks have identified over €2.4tn of unwanted loan assets. Commercial real estate (€15bn) and unsecured retail loans (£10bn) are the most actively traded loan portfolios so far this year.

The UK tops the 2013 transaction table with an estimated face value of €13bn in transactions in the year to date, up from €10bn last year for the whole of last year. The UK market has been characterised this year by the €4bn of commercial real estate loan transactions completed. PwC expects UK deals to reach over €15bn for the full year. A large number of unsecured portfolio sales have also contributed to an increase in unsecured retail transaction volume. 

Six countries (UK, Germany, Spain, Ireland, Italy and France), reported NPLs in excess of €100bn in their banking systems at the end of last year, making a total of nearly €900bn in these six countries alone. In the first half of next year, a review of banking assets by the European Central Bank will inevitably cover NPLs.

Richard Thompson, added:  “We are seeing extremely high levels of competition in the market at the moment. Whilst the major US funds are the most active we are seeing increased interest from other sources, including sovereign wealth funds and far eastern investors. We know of over 150 different investor groups who are taking a close interest in this market.

“Although there are a large number of transactions at the moment, there remains very high demand from investors for all asset classes. As the banks try to position themselves to meet the Basel III capital requirements and react to the ECB's stress tests following the Asset Quality Review we expect more assets to come to market in 2014 and beyond.”

Irish based banks

The IMF has a value of  loans of €213.5bn in June 2013 for what are termed PCAR (Prudential Capital Assessment Review) banks - - domestic Irish banks subject to local regulation: Bank of Ireland, Allied Irish Banks, and Permanent tsb.

The 26% NPL rate in the PCAR banks is based on €56bn of NPLs out of gross total lending of €214bn. Seamus Coffey, the UCC economist, comments: "Note though that of their total loans the PCAR banks have around €55bn of loans to UK customers (and some very minor amounts elsewhere). Their Irish lending is around €160bn and that contains 90%+ of their NPLS. In their Irish books they have around €52bn of NPLs or a rate of around 33%."

See Page 43 here in IMF's Eleventh Review of Ireland 2013 [pdf]

Ulster Bank a subsidiary of Royal Bank of Scotland, the Irish unit of Danske Bank of Denmark and Bank of Scotland Ireland, which is being wound down, have all incurred big losses in the Irish domestic market.

Last week, the European Central Bank included in its list of Irish banks set to be stress-tested Merrill Lynch International Bank, headquartered in Dublin, it is a subsidiary of Bank of America/Merrill Lynch, which was formed by the takeover of Merrill by BofA in September 2008.

In 2012, it reported  a loss  of $729m and its balance sheet was valued at $490bn.

Irish Economy 2013: Minister says Irish banks “well capitalised”

PwC report (easy registration process to get free report)

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