Tony Ward is chief executive of Clayton Euro Risk
With the UK suffering a massive overload of all things Brexit this week – Article 50, Gibraltar, Donald Tusk missing us already and the great May-Sturgeon ‘legs-it’ – I thought I’d steer my blog into the quieter waters of Europe’s market for the trading of books of non-performing loans (NPLs).
This isn’t, I must confess, an entirely random choice of subject matter.
I delivered the opening address at last week’s CDSP European NPL conference in London last week, which proved a great opportunity to speak to colleagues about the issues affecting this market and in what direction its future lies.
Europe’s NPL market is extremely dynamic and is on the verge of dramatic change.
On a personal note, I have witnessed a series of marked changes over the last year or so, including a significant shift away from the UK market to other parts of the continent.
Now, this is a topic on which I could happily speak for 40 minutes – which is precisely what I did at the conference – but within the limited confines of this blog, let me summarise the main points of my speech:
- There has been a significant drop in transactions in the UK, from €54bn in 2015 to €20bn.
- Italy became the largest loan trader in Europe at €36bn (up from €19bn).
- The Netherlands was the fastest growing, up from €2.5bn in 2015 to €9.5bn in 2016.
Europe’s loan portfolio trading market has regained much of its momentum, having stalled in 2016.
But why was this the case?
It’s hardly rocket science. First, David Cameron announced the EU referendum on 20 February which put the UK market – Europe’s largest – on hold until 24 June. At least that was the expectation.
In reality, the UK market didn’t begin to wake up until Q4 2016. By Q3 it was only €9bn. And then, of course, there was the US election.
But the fundamental balance sheet and regulatory drivers of whole loans sales proved stronger and have led to a resurgence of the market.
Italy is an interesting case in point. It was the most active loan sale market in 2016. With more realistic pricing expectations, an improving transaction environment and a political commitment to NPL resolution, transaction volumes are likely to stay buoyant.
While it is true that economic and political challenges remain – the rejection of the government’s proposed constitutional reform package in December has created uncertainty – a new regime has been created to allow government guarantees to support NPL portfolios being sold. This, in turn, will allow portfolios to be securitised.
Of course, there is still much to resolve with the Italian banks: at the beginning of 2016, the Bank of Italy suggested that Italian banks held a total of €360bn of NPLs with an NPL ratio of 18%, Europe’s highest.
However, with a total of €76bn completed or in process, Italy’s transaction rate in 2016 was the equivalent of the UK, Netherlands, Ireland and Spain combined.
The market is moving towards more complex types of resolution transaction but the national sentiment still tends towards the preferred solution being where a weak national bank is acquired by a marginally stronger national bank.
Taking the NPL market as a whole, there are certain fundamental lessons to be learned.
With political and economic risks surrounding every transaction, detailed research and due diligence is essential.
Unlike other homogenised markets such as the US, European diversity means that a thorough understanding of local political, cultural and economic conditions is essential.
Aligning the interests of buyers and sellers is always difficult but remains important if these markets are to be sustained.
Currently, while the UK remains distracted by Brexit negotiations, much is happening with its European neighbours.
Dammit, I’m back to the B-word. No matter how hard one steers a course away from Brexit, one just can’t seem to avoid it these days.