European loan transactions set to rise 50% in 2014 – but this is a drop in the ocean?
December 05, 2014
In the nine months to the end of September 2014 loan portfolios with a face value of €67bn have been sold by Europe’s banks. I estimate that there are transactions currently in process for portfolios totalling a further €50bn.
The majority of these transactions are scheduled to complete by the year end which means that the total unwanted portfolios held by banks sold during the year will easily exceed €100bn.
The face value of loans transacted in 2012 totalled €46bn and in 2013 €64bn. Expectations for 2014 are an increase of at least 50% over 2013.
Commercial real estate dominates
Commercial real estate lending continues to dominate current transactions and I estimate that in 2014 such lending will account for around 50% of total transactions. Whilst many of the transactions represent non-performing loans there is an increasing number of performing loans coming to market driven by an increased number of buyers looking to acquire performing pools of assets.
Along with increased appetite for performing mortgage pools, I am seeing increased interest in bundles of performing corporate loans, particularly in the BB to B- risk families. The combination of rapid deployment, in built risk diversity and significant yield to maturity is highly attractive to a number of funds who are increasingly driving both the primary and secondary market pricing for those rating categories.
The increased volume of performing assets coming to the market is attracting a diverse group of potential acquirers: some of the traditional financial investors are now firmly focused on building broader based financial services businesses across Europe and, in addition, I am seeing a small number of banks looking at portfolio acquisitions as a means of customer acquisition. There continues to be a high level of interest from a number of sovereign wealth funds but to date their impact on the market is limited.
A drop in the ocean?
Transaction levels have easily exceeded expectations for the current year. However, with European banks holding what we estimate to be at least €2.4tn of unwanted assets*, even these volumes represent a small drop in a very big ocean.
There has been much speculation concerning the impact of the recent European Central Bank‘s (ECB) asset quality review (AQR) and stress tests on likely transaction volumes. Whilst a number of the transactions to date have been prompted by the reviews I expect that, as the market digests the increased information available concerning the state of bank balance sheets, there will be an increased impetus for continued and much needed restructuring of the banking sector in many countries. We will therefore see a continuing high level of transactions for years to come.
Investors hone in
In Italy transactions volumes are expected to more than double between 2013 and 2014. With the Italian banking sector in the spotlight following the ECB reviews, I expect the Italian loan portfolio market to be especially active in the next few years. The large global investors are looking at multiple markets, but as transaction volumes increase in some of the smaller markets, regional investors are honing in on particular country markets.
There’s enormous interest from investors in the Italian market and, with the Italian banking system holding more than €150bn of non-performing loans, it has been a recurring question over the last couple of years as to when the Italian market for non-performing loans will take off.
*This is a high level estimate based on public information concerning non core assets held and stated objectives around reductions in assets. There is limited information available as to the underlying nature of such assets. Consequently this estimate should be viewed as illustrative in nature only and the total amount is likely to include assets other lending.
Enjoy the festive period and look out for my next blog where I will report on what 2015 may have in store for us.