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Stable volume masks changing dynamicsThe European NPL Barometer
www.pwc.com/financialservices
Portfolio Advisory Group
February 2012
2 Portfolio Advisory Group
Welcome to the second edition of the PwC NPL Barometer. The Barometer provides both an assessment of the volume of non-performing loans (‘NPLs’) in the major European economies as compared to overall loan provisions and an analysis of trends over the past few years.
Since the publication of our first edition in April 2011, the Eurozone debt crisis has worsened: the results of the stress testing performed by the European Banking Authority in the summer of 2011 were published with many commentators asserting that the stress testing did not go far enough. The EU summit in October estimated the required bank recapitalisation at €106 billion, subsequently revised to €114 billion following further stress testing. It was estimated that 31 banks required additional capital. The corresponding deleverage task faced by many banks is significant.
Our analysis of non-performing loans indicates that across Europe, total balances have remained stable, at around €500 billion. Countries such as Spain, Greece and Italy have seen balances increasing, which offset reductions in other countries including Germany and the UK. It is also worth noting that there has been a small increase in the coverage ratio (total provisions as a proportion of NPL balances) from 48% to 51%.
We estimate that identified non-core loan assets across the whole European banking sector total €2.5 trillion. While not all of the NPL exposure referred to above will be designated as non-core, a large proportion will be. Over the past year we have seen an increasing volume of non-core loan portfolio transactions and our pipeline is now the strongest it has been for many years.
The main markets for transactions over the next year are likely to be Spain, the UK and Ireland, but we do expect increasing activity in some of the other European markets, including Germany and Italy. Despite the difficult conditions in the debt markets, we believe that completed loan portfolio deals across Europe over the next 12 months will involve loans with a face value of around €50 billion. This is small in relation to the total deleverage task, indicating continuing transactional activity over many years to come.
Richard Thompson Partner – European Portfolio Advisory Group
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The NPL BarometerThe Barometer is an analysis of the level of NPLs and provisions across key Western European financial markets. Our analysis covers at least 75% of bank loans in these markets and uses this as an estimate for the total European market. Our data draws from over 45 banks. It is based on publicly available data from the following markets:
Belgium•
Germany•
Greece (introduced in this edition)•
Ireland•
Italy•
Portugal•
Spain•
United Kingdom•
The NPL Barometer analyses the key movements over time to identify how the growth or decline in NPLs compares to the provision coverage ratio.
The objective of our analysis is to identify key trends in NPLs and provision coverage across each of the countries within our scope.
Methodology
The definition of reported NPLs varies by bank and region. We have • selected the most appropriate data available in each region.
The NPL ratio represents NPLs over standardised gross loans.•
Standardised gross loans includes, loans to banks, loans given to • customers and financial leases.
The provision coverage ratio represents allowance for loan losses • over NPLs.
Our analysis does not take into account those loans that may have been • modified or restructured and hence may not need to be classified as an NPL from an accounting perspective. Inclusion of these loans may increase NPL volumes further.
Data for international banks has been consolidated in the country of • origin. Therefore subsidiary bank data is included in the consolidated statements of the parent.
All data is shown in Euros and where applicable has been converted • at historic rates.
Government institutions and national banks have been excluded from • this analysis.
Overview of our methodology
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What does the NPL Barometer mean?
Our NPL Barometer plots the provision coverage ratio against the NPL ratio for a particular region. Depending on the level of NPLs and provision coverage, a region will sit in a certain quadrant of the chart.
The chart opposite presents an illustrative overview of the quadrants:
Quadrant A – lower level of NPLs which are relatively well • provisioned for;
Quadrant B – higher levels of NPLs which are relatively well • provisioned for;
Quadrant C – lower level of NPLs which may not be relatively well • provisioned for; and
Quadrant D – higher levels of NPLs which may not be relatively well • provisioned for.
For the purpose of this analysis we define ‘lower NPLs’ as anything less than 5% of total loans. We consider provision coverage greater than 50% to be ‘better provisioned’.
1. NPL Barometer quadrants
A
Higher
NPL ratio
Pro
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over
age
ratio
50%
Lower
Lower Higher5.0%
C
B
D
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Total volume of NPLs appear stable, but the make-up by country is changing
As of June 2011, NPLs for the countries included in our analysis totalled approximately €518bn. This is nearly identical to the June 2010 value of €514bn.
At June 2010, NPLs stood at approximately 5% of total lending and provision coverage was at 48%. 12 months on, this is now closer to 5.5% with provision coverage in excess of 51%. This increase is based on a stable gross NPL figure but falling total overall lending, with increased provisioning levels.
From looking at the adjacent graph, it appears the level of NPLs has stabilised and provisioning is starting to catch up, but there are a number of opposing forces which have impacted the figures presented. We outline these by the major country movements on the following pages.
* Our previous June 2010 edition estimate of the NPL market was €508bn. The difference is due to restating prior year numbers to include Greece in this edtion, plus any updated adjustments made in available financial data.
2. The European NPL Barometer 2010 - 2011*
Europe 30 Jun 2010
Europe 30 Jun 2011
0%
20%
40%
60%
80%
100%
0% 5% 10%
Pro
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cver
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NPL ratio
€514bn
€518bn
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Spain Ireland
Italy
Germany
Greece
0%
20%
40%
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100%
0% 5% 10% 15% 20%
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Major movers in the past 12 months include, Spain, Italy, Greece and Ireland
3. Key country movements from June 2010 - June 2011
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The trend in the previous edition of the NPL Barometer highlighted one of rising NPL ratios and lower provision coverage ratios across all countries. We are now seeing a number of diverging trends with a number of markets seeing a falling NPL ratio and higher provisioning levels while some countries – generally those affected the most by the Eurozone debt crisis (Greece, Italy, Portugal, Spain) continuing the trend of rising NPLs.
We can see in the chart on the previous page that the largest volume movements are from Germany, Spain, Italy, Ireland and Greece.
Germany, one of the biggest NPL markets, has seen the one of largest volume reductions of reported NPLs of over 19% over the past 12 months. This is a direct result of the economic recovery, stricter credit criteria, along with a number of German banks setting up ‘Bad Banks’. These ‘Bad Banks’ are vehicles in which NPLs are transferred into and are outside of our reported numbers as they no longer sit on the Bank’s balance sheet.
Ireland has undergone significant structural changes in their banking market in the past 12 months. The focus is now on the two ‘Pillar Banks’ (Allied Irish Bank and Bank of Ireland) and the government has provided capital to assist with their restructuring. Provisioning levels have increased from 23% to 56% which we believe shows that Irish institutions have been actively looking to address the NPL issue in 2011. In addition, we have seen a minor fall in the NPL ratio from 20% - 18%.
Spain has seen an increase in its levels of gross NPLs with an increase of its NPL ratio from 4% to 5%. At the same time provisioning has fallen from 64% to 58% suggesting that provisioning is not keeping pace with the increase in NPLs. With an overall worsening economic outlook in Spain (elevated levels of unemployment and falling collateral values), we expect further provisions to come through in the reported numbers in 2012.
Italy is also seeing rising levels of NPLs. Gross NPLs have increased by 15% from 2010 to 2011 and this is mirrored in the NPL ratio which has increased by approximately 12% from over 5% to over 6%. The average provisioning ratio is stable and, compared to the countries included in our review, is better provisioned at 58%. In Italy, similar to Spain, the deteriorating economic climate again results in higher levels of expected unemployment and potentially increased levels of default.
This edition of the NPL Barometer includes Greece for the first time. The deteriorating economic situation and significant austerity measures are leading to an increase in unemployment and a sharp increase in defaulted loans. The past 12 months have seen the NPL ratio increase from over 6% in June 2010 to over 9% at June 2011. Given the macroeconomic outlook, we expect NPLs to continue rising in 2012.
Rising levels of NPLs in Spain, Italy and Greece are being offset by significant reductions in Germany and Ireland
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Appendix
European overview and regional breakdowns
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Appendix A: European overview
4. Europe 2010 5. Europe 2011
Ireland
UK
Italy
Germany
Spain
Belgium
Portugal
Greece
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40%
60%
80%
100%
120%
0% 5% 10% 15% 20%
Pro
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NPL ratio
Ireland
UK
Italy
Germany
Spain
Belgium
Portugal
Greece
0%
20%
40%
60%
80%
100%
120%
0% 5% 10% 15% 20%
Pro
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NPL ratio
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30 Jun 2011
30 Jun 2010
0%
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100%
10% 15% 20%
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NPL ratio
30 Jun 2011 30 Jun 2010
0%
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0% 5% 10%
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NPL ratio
30 Jun 2010 30 Jun 2011
0%
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0% 5% 10%
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NPL ratio
30 Jun 2010
30 Jun 2011
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Regional breakdown
8. Greece 2010 - 2011 9. Ireland 2010 - 2011
6. Belgium 2010 - 2011 7. Germany 2010 - 2011
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30 Jun 2010 30 Jun 2011
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0% 5% 10%
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NPL ratio
30 Jun 2010 30 Jun 2011
0%
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0% 5% 10%
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Regional breakdown
30 Jun 2010 30 Jun 2011
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0% 5% 10%
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12. Spain 2010 - 2011 13. UK 2010 - 2011
30 Jun 2010
30 Jun 2011
0%
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0% 5% 10%
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10. Italy 2010 - 2011 11. Portugal 2010 - 2011
12 Portfolio Advisory Group
Central TeamRichard Thompson +44 20 7213 [email protected]
Jaime Bergaz+34 915 684 [email protected]
Jens Roennberg+49 69 9585 [email protected]
Antonella Pagano+39 8064 [email protected]
Robert Boulding+44 20 7804 [email protected]
Chris Mutch+44 20 7804 [email protected]
Czech Republic and SlovakiaPetr Smutny+420 251 151 [email protected]
DenmarkBent Jørgensen+45 3945 [email protected]
FranceHervé Demoy+33 1 56 57 70 [email protected]
Germany and AustriaJens Roennberg+49 69 9585 [email protected]
Thomas Veith+49 69 9585 [email protected]
GreeceEmil Yiannopoulos+30 21 0687 [email protected]
HungaryMiklos Fekete36 1461 [email protected]
IrelandAidan Walsh+353 1 792 [email protected]
ItalyAntonella Pagano+39 8064 [email protected]
PolandJanusz Sekowski+482 2 523 [email protected]
PortugalLuis Boquinhas+35 12 1359 [email protected]
RomaniaMarius Zidaru +40 212 253 [email protected]
RussiaTim Nicolle+74 952 325 [email protected]
Slovenia and CroatiaPhilippe Bozier+38 615 836 [email protected]
SpainJaime Bergaz+34 915 684 [email protected]
SwedenPer Storbacka +46 85 553 [email protected]
TurkeyOrhan [email protected]+90 21 2376 5320
United Kingdom Robert Boulding+44 20 7804 [email protected]
North AmericaMitchell Roschelle+1 646 471 [email protected]
Jeff Nasser +1 267 330 1382 [email protected]
Asia PacificMichael McCreadie+61 38 603 [email protected]
Latin AmericaMarcia Yagui+55 11 3674 [email protected]
Middle EastIan Schneider+971 430 [email protected]
Our European and global contacts
Across Europe and the UK we have experienced partners and directors to assist you with your non-core asset and NPL related needs. Through this group both buyers and sellers of non-core assets and NPLs can receive consistent and seamless service across the world, integrated with country-specific knowledge and expertise.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.
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