Europe’s unwanted loan portfolios

The European banking sector is going through unprecedented restructuring - many banks do not make an adequate return on equity and the well publicised volumes of loan portfolio trades are not just about shifting non performing lending but are part of a broader restructuring agenda.

In the last three years, PwC estimates that banks have sold loan portfolios with a total face value of around €250bn, and have likely run down or achieved single asset refinancings of a similar number. Yet the volume of non-core assets has remained very broadly constant with banks holding around €2 trillion of non-core lending* - banks are continuing to identify assets that are surplus to requirements.

It should be kept in mind that non-core is not just a non-performing story. A significant proportion of this lending is likely to be made up of performing lending - either asset classes that banks are overweight in, or now considered not part of their main activities, or in overseas markets as many banks have retrenched "back to home". A good proportion of these performing assets will be hard to shift - longer dated relatively low margin assets rarely trade at par leading to a drain on capital if sold.

Outside of this, the market for non-core lending remains buoyant in most European markets. €118bn of face value traded in 2016 - with Italy topping the table for the first time with just under €35bn traded. The UK, Ireland and Spain are also active markets. I do however expect Italy to top the table for many years to come - with around €350bn of stressed lending in the banking system and a significant restructuring of the sector underway, there are plenty of investment opportunities for the many credit funds and other buyer groups operating in this market. Greece will also be a market to watch - with €100bn of non-performing loans and recent changes to regulations designed to encourage transactions.  

The "non-core story" will certainly not go away anytime soon - banks will remain under continued pressure to streamline their operations and the buyer community has plenty of money to spend.

*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.


Richard Thompson | Global Leader, Portfolio Advisory Group 
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