Post on 11-Feb-2017
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
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
1. NPL portfolios across Europe
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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
1. NPL portfolios across Europe – CEE
• 9 countries in CEE accounted for € 58bn NPL‘s in 2013:
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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
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
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Development of NPL as % of total bank loans Source: World Bank
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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
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Source: ECB
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
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Source: ECB
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
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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).
• 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
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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.
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
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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)
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The need for capital backing is dependent on the level of provisioning.
4. Possible solution strategies:
restructure, liquidate, sale
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“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
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
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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):
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Source: Deloitte
5. Recent NPL portfolio sales – examples from
CEE
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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
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…
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6. NPL‘s of corporates, real estate and retail
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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…
7. Most successful recoveries for corporate
loans
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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
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
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NO HAIRCUT and full release
on loan loss provisions
Thank you for your attention!
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