Why there’s more to come from Europe’s non-performing loans

Europe’s NPLs were a feature of the 2010s but the story will continue into the 2020s

December 16, 2019

It’s been more than a decade since the start of the global financial crisis, when European banks were rocked by financial lingo that became part of the common vernacular: the non-performing loan. 

Back then, huge swathes of bank loans backed by real estate assets were overdue. Banks holding these NPLs were deemed at risk of collapse, in turn risking the collapse of the broader financial system. There was even a worry that NPLs could be a potential catalyst for the break-up of the euro currency bloc. 

But 10 years on, countries that were, at one point, epicenters of the crisis - Greece, Italy, Spain, Ireland – are firmly in the euro zone. So, are NPLs no longer in the picture?

“The NPL story in Europe is not quite over,” says Emilio Portes, EMEA head of Quantitative and Risk Management at JLL. “The region’s banks continue to hold non-performing loans on their books, with real estate still accounting for around 40 percent, or €314 billion, of the overall European NPL figure.” 

Over the past decade, regulatory pressures have forced big name banks to make progress, with Europe’s NPL total down from its peak €1.4 trillion in late 2014 to around €782.6 billion in mid-2018.

New rules from regulators across Europe required higher provisions – but in a shorter time frame – for losses on new NPLs. “The past decade has seen efforts made by European banks – but not in tandem,” Portes says. “There’s still some way to go.”

Italy has the largest NPL stock in Europe at €167.5 billion and is also one of the countries with the highest NPL ratios, at nearly three times the EU average. France, with €126.7 billion is second highest, while Spain and Greece respectively hold €91.8 billion and €82.3 billion. The four countries hold 59.8 percent of the EU’s total NPL stock.

As of early October, 92 deals totaling €67.9 billion had closed in Europe so far this year, according to a recent European NPLs report by Debtwire. The figure is some way off the record €200 billion seen in 2018.

“The pace of sales has slowed, and it could be argued that the best assets traded earlier in the cycle,” says Portes. “The quality and location of the remaining underlying assets often proves decisive.”

No uniform approach

Spain’s government-created “bad bank”, SAREB, has offloaded NPLs since its creation in 2012, following the example of Irish equivalent NAMA (National Asset Management Agency), founded three years earlier and London’s UKAR (UK Asset Resolution), created in 2010.

Spain’s SAREB and its peers in Dublin and London differed not only in terms of their approach and timing – but crucially where their exposure lay; SAREB was purely Spanish, while NAMA received NPLs linked to real estate in the likes of Paris. Furthermore, SAREB held more smaller NPLs than Ireland’s NAMA, which, unlike SAREB, had greater control over the selection of the assets it took on.

The ability to act quickly and decisively was a major factor in the successful handling of both banks’ NPLs and the numerous - mainly private equity - investors who swooped early to cherry-pick from bank balance sheets. Cerberus, Fortress and Lone Star have been particularly active over the past decade, while Blackstone’s 2017 deal saw around €30 billion (gross book value) of real estate properties and loans offloaded by Spain’s Banco Popular.

“What we have seen, particularly in Spain, is that private equity players have been highly adept in creating turnaround stories,” says Portes. “As the cycle matured, assets have then been traded on.”

But, despite high demand, seeking out assets is far from straightforward, says Michael Kavanau, EMEA debt advisory at JLL.

“It’s equally tricky to find real estate opportunities within NPLs – the best deals are as hard to dig out as typical equity real estate opportunities are.

“It’s still a vast, opaque market - there’ll always opportunities there, but they may be hiding behind less attractive assets.”

Yet with investors on the lookout, deals are still happening, including those coming from primary buyers. Alternative investments specialist Värde Partners has been active, working with Italian credit manager Guber Banca on the buyout of €734 million of real estate NPLs and a separate €1.4 billion portfolio across Italy, a country where securitization via the GACS scheme, designed to incentivize domestic banks to sell their NPLs into securitisation vehicles, began in 2016.

Across Europe, there’s room for more

“France in particular, with the second highest volume in Europe, is likely to start NPL sales in the coming months,” Portes says. “It’s a market to watch.”

New, smaller specialised and NPL-focused funds are entering the market and actively looking for assets that can become a rental platform in the future, Portes says. More joint ventures between banks and loan servicers could be crucial in the coming years as the likes of Greece and Cyprus step up their drive to offload NPLs. Greece's National Bank recently offloaded €900 million to Symbol Investment NPLCO DAC.

“Europe has seen the NPL market move from the sale of wholesale portfolios through to smaller portfolio buyers looking to put workout strategies in place - and even trade out to smaller entities,” Kavanau says.

The story is far from over – and could realistically hang over into the next real estate cycle.

“We head into the next decade with European banks still looking to offload NPLs,” concludes Kavanau. “It almost feels like you never do get to the end, as the next cycle begins.”