Capitalising on the acceleration in bank restructuring
April 20, 2016
Last month we hosted our seventh European Bank Restructuring Conference. The annual conference explores the investment opportunities opened up by the restructuring in the European banking industry and how sellers, investors and servicing companies can capitalise on them. This year’s event attracted around 650 market participants from over 25 countries, representing around 100 different banks and 100 investor groups.
European banks hold €2.3 trillion of loans they no longer want. The scale of the opportunity is highlighted by the fact that 74% of conference participants believe that up to €1 trillion of the €2.3 trillion in non-core lending will end up trading as a portfolio transaction. Further opportunities are emerging in Asia, including the €640 billion in identified non-performing loans (NPLs) in China and €125 billion in India. Recent regulatory changes and other factors may open these markets to independent investors and servicers.
Fresh deal opportunities?
The pressure to boost return on capital through the divestment of non-core loans has been heightened by the poor performance of European banks of late. Our own research suggests that less than 10% of the biggest 40 European banks were able to cover their cost of capital (return on equity higher than cost of equity) in the year to June 2014. The resulting need for restructuring and cost cutting is set to bring a fresh wave of deal opportunities to the market. Regulation will also continue to drive the bank restructuring agenda and hence deal activity. Key developments include possible changes to provisioning under IFRS 9 and the capital requirements directive (CRD IV).
The deal momentum is reflected in the €141 billion in transaction values recorded in 2015, up more than 50% on 2014. The big year-on-year rise in deal activity already seen in 2015 and the pipeline of deals already in the market in 2016 suggests that this year could be another record year. Reforms in Italy are set to assist in the acceleration of NPL sales. In turn, the strong recovery in Ireland and Spain is broadening the focus of buyer interest in areas such as SME debt.
It’s set to be a long, long road
What came through strongly from both the questions from delegates and panellist responses is the strong sense of realism within the market; realism that the clean-up of balance sheets and refocusing of resources needed to spur sustainable returns still has a long way to go on the one side and the importance of credible valuations, effective servicing and continuing legal reform in making deals happen on the other. In an increasingly mature and sophisticated debt portfolio market, buyers and sellers immediately know who is serious and who is just dipping their toe in the water.
Thank you to all of the speakers, panellists and delegates for providing their valuable time and insights, which generated a lively debate throughout the day.
*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.
To what extent are banks economically viable? What will the future of banking look like? Where do you see the deal opportunities? Share your thoughts below or schedule a meeting to discuss your situation in confidence.