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Deloitte: Regional NPL markets in the focus


This is the fourth time that Deloitte has prepared an annual benchmark study on non-performing bank loans (NPL), which examines the share and volume of non-performing loans in nine Central and Eastern European countries, as well as the development trends on the market of NPL portfolios. The study finds that international and local NPL investors have a growing interest in CEE with bank activity also intensifying, resulting in several closed and ongoing transactions last year. Romania remains the most active NPL market in the region in terms of transaction number and volume, with Hungary, Croatia, and Slovenia following with similarly significant market activity.

According to Deloitte's analysis, non-performing portfolios in the nine tested countries (Poland, Czech Republic, Slovakia, Hungary, Romania, Slovenia, Croatia, Serbia and Bulgaria) amount to a value of about EUR 52 billion. 2014 turned the trend of expansion with NPL portfolio volumes starting to decline. This decline was primarily due to the significant transactional activity in Romania and Slovenia, and the extensive write-off of non-performing loans.

Although the share of non-performing loans showed a decline in 2014 in the southern countries of the region, too, the trend of north-south divergence continued. While the share of NPL loans was between 6 and 8% in Poland, the Czech Republic and Slovakia at the end of 2014, in the southern countries of the region it was between 12 and 22%. 
The recovery of the macroeconomic environment also contributes greatly to the upswing of NPL markets in the region. Investors are counting on improving rates of return: rising GDP improves debtors' repayment capacity through their improving income status while the recovery of the real estate market affects the value of collaterals positively.

The comprehensive Asset Quality Review of the European Central Bank improved the impairment coverage ratio, while the continuous provisioning of banks further reduced pricing difference between demand and supply side. The main drivers of sales on the supply side remain deleveraging, the resulting improvement of the balance sheet quality, as well as a better compliance with capital requirements and an improvement of the lending capacity, which banks of the region implement using not only organic measures but seeking faster solutions, as well. According to a study of the European Investment Bank prepared in 2015, more than two thirds of the banks seek to improve their capitalisation through asset sales.

Deloitte's survey conducted among international investors highlighted their key motivations and general preferences:

  • NPL markets are competitive in Western Europe, bringing dramatically lower yields for investors, which drives international investors to the CEE region of higher returns,

  • Early stage acquisitions can help entrants dominate the regional market, ensuring a large number of transactions in the medium run,

  • Minimum transaction value between EUR 15 and 30 million,

  • Preferred asset types are dominated by secured corporate and unsecured retail exposures,

  • Investors prefer office, retail or industrial assets to hotels and land,

  • The typical expected unlevered IRR rate in the CEE market is between 15 and 25%.

Increased regulatory focus on encouraging the reduction of significant NPL portfolios has a positive effect on the activity of NPL markets; therefore, many countries introduced regulations that encourage and help NPL transactions. A comprehensive regional framework under the name "Vienna Initiative" whose members include for instance the EBRD, IMF and the World Bank group has also been put into operation. The organisation encourages deleveraging in regional bank balance sheets and the reduction of considerable NPL portfolios. In spring 2015, EBRD held a workshop together with the National Bank of Hungary concerning the potential management of significant NPL portfolios in the bank system.

The National Bank of Hungary encourages banks to sell NPL portfolios through the introduction of regulatory measures: As of 1 January 2017, the national Bank of Hungary will set additional capital requirements for constantly high non-performing project loan portfolios. In addition, MARK Zrt. also started its activity with the main focus to take over from banks large-scale non-performing mortgage loans presenting a threat to financial stability.

As a result of the expanding activity of the NPL transactions market, investors learn more about the countries of the region through due diligence procedures, and develop more realistic risk and yield expectations. Non-performing exposures marketed more frequently and in large volumes, as well as gradually expanding collections capacities lead to a gradually enlivening and increasingly efficient and liquid NPL transactions market in the region.

Romania, champion of Central and Eastern Europe at non-performing loans (NPL) sales

Romania was champion of Central and Eastern Europe at non-performing loans (NPL) sales, with transactions worth EUR 3.5 billion in 2015 and 2016, says Deloitte's annual NPL Study sent on Wednesday.

Central and Eastern Europe drew increased interest from investors and saw more intense bank activity due to the improvement of the economic conditions and of provisions growth in several countries in the said region, following the exercise of Assets Quality Assessment. 

Most of the NPL sales took place in Romania (37 percent), followed by Hungary (24 percent), Poland (11 percent) and Slovenia (9 percent). 

"In 2017, the Romanian banks aim at shrinking the 10 percent NPL rate recorded at end-2016, so that they will target to cut the gap between the current level and the 5 percent European average. Therefore, I expect to see four to five NPL transactions this year, each worth several hundreds of millions of euros. The corporate and the mortgage retail NPL will continue to take central stage in Central and Eastern Europe deals," said Radu Dumitrescu, Deloitte Romania partner.