npl europe issue aug1

8/6/2019 NPL Europe Issue Aug1

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Following the success of the NPL Asia newsletter,PricewaterhouseCoopers is launching NPL Europe to coverkey markets in Europe and the UK.

During the past 18 months, there has been an increase inthe quantum of NPLs being carried on the books of financialinstitutions in most jurisdictions (see table 1 data below) andtherefore an increased focus on the distressed debt market asinvestors look for opportunities to take advantage of discountsthat were expected to be attached to distressed debt trades.However, we have seen during this period that banks are provingreluctant to sell loans at the heavily discounted prices beingoffered by investors.

Table 1: Estimated Quantum of NPLs by Region at the

End of 2007 and 2008

in mln 2007 Act 2008 Act

Czech Republic 1,850 2,813

France 50,486 53,856

Germany 135,500 200,000

Greece 9,576 12,483

Italy 47,843 42,132

Poland 6,022 7,676

Portugal* 2,925 4,056

Spain 22,241 75,434

Turkey 4,217 4,513

UK** 80,000 107,073

Notes* Based on reported NPLs for CGD, BCP, BES, BPI, BST** FY07 estimated based on bankscope data

Source: PwC Czech, Banque de France, French Banking Commission, BaFin,Jahresbericht 2008, Bank of Greece, Monetary Policy Report 2008-2009, Bulletin ofConjunctural Indicators Feb. 2008, Governors Annual Report (2007, 2008), Bank ofItaly, PFSA, HSBC Spanish Banks Report, Bank of Spain, BRSA, Bankscope

NPL EuropeIssue 1 | August 2009

Welcome to the inaugural issue of NPL Europe, a publicationcovering non-performing loan (NPL) markets in Europe andthe United Kingdom (UK).

Key value drivers

The difference between asking prices and bids lies in theassumptions made by banks and investors when assessing

distressed asset portfolios. These assumptions are based on twokey value drivers:

The estimated time to recover cash from borrowers. Thiscan be affected by whether the recovery is achieved througha negotiated settlement, a restructuring or repaymentarrangement or legal enforcement against guarantors andtheir underlying collateral.

Their respective views about the real estate market andthe resulting impact on collateral values and consumer ormarket confidence.

Also, recent government financial system stabilisation measures

have stalled some banks plans to sell NPL portfolios. As a result,banks generally prefer holding assets, rather than selling them,or restructuring their NPL portfolios using a hybrid arrangementwhereby an ownership stake is maintained.

Better returns required

Investors are also requiring higher returns from NPL portfolioinvestments. This is due largely to the scarcity of cash and therelatively high returns achievable on less risky investments suchas corporate bonds.

Despite these obstacles, there still seems to be plenty of interestfrom investors and sellers of distressed and non-core assets,provided the pricing gap can be closed. To bridge the pricing gapthere has been a noticeable increase in bilateral structured deals.


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Since late 2008, NPL portfolios have traded in the UK, Spain,Germany, Italy, Greece, Turkey, the Czech Republic, Portugal andPoland. However, due to the global financial crisis, the numberand value of deals closed have been below market expectations.

Several changes to the current regulatory and economicenvironment are required to help bridge the current bid-askspread and stimulate NPL sale activity. These include thetightening of bond spreads, increased liquidity, clarity overgovernment support and the stabilisation of economicindicators (such as consumer sentiment, real estate marketsand foreign currencies).

Recent H109 results reported by major European and US bankshave given renewed hope to equity traders that banks haveturned the corner. However, almost all banks have continuedto experience significant deterioration in the quality of loanportfolios which in many cases more than outweighed the tradinggains. There have been many restructuring and covenant waiverinitiatives that have allowed banks to defer some of the lossesinto the future. Without a significant economic turnaround it islikely that banks are going to need to deal with their pools ofnon-performing and sub-performing consumer and corporatecustomers in a more decisive manner, either through outsourcingthe asset workout, outright sales or structured deals.

To further highlight the issues faced by the European economies,the tables below depict historical and forecast GDP andunemployment rates for 2009 and 2010. These suggest thatgenerally there is still a long way to go before underlyingconsumer demand improves enough to turn economies back toa growth phase. In addition, with the majority of EU countriesforecasting a continued increase in unemployment rates into2010, it is reasonable to expect that this will lead to furtherdeterioration in loan portfolio quality for banks in 2009 and 2010.Banks will then need to decide whether to work out the assetsor dispose of the problems of the past in order to focus on themore profitable future business.

Table 2: GDP Trends and Expectations From 2008 to 2010

2008 Act 2009 LRP 2010 LRP

Czech Republic 3.2% -2.5% 1.2%

France 0.4% -3.0% 0.5%

Germany 1.3% -5.6% -1.0%

Greece 2.9% -1.7% -0.4%

Italy -1.0% -4.2% -0.3%

Poland 4.9% -1.4% 0.8%

Portugal 0.0% -3.7% -0.8%

Spain 1.2% -1.7% 0.2%

Turkey 1.1% -4.5% 1.0%

UK 0.7% -1.0% 0.4%

Euro Area 0.7% -4.0% -0.1%

EU 0.9% N/A N/A

Source: Eurostat, IMF and ECB

2 | NPL Europe Issue 1 August 2009

Table 3: Unemployment Trends and Expectations

From 2006 to 2010

2008 Act Q109 Act 2009 LRP 2010 LRP

Czech Republic 4.4% 5.5% 8.4% 8.0%

France 7.8% 8.8% 9.6% 10.7%

Germany 7.3% 7.6% 8.9% 10.8/%

Greece 7.7% 9.3% 9.5% 10.5%

Italy 6.8% 7.9% 8.6% 8.7%

Poland 7.2% 7.7% 12.5% 11.0%

Portugal 7.8% 9.1% 9.1% 9.8%

Spain 13.9% 17.3% 17.7% 20.0%

Turkey 10.7% 14.9% 14.2% 14.6%

UK 5.6% 6.9% 10.5% 9.2%

Euro Area 7.6% 8.9% N/A N/A

EU 7.0% 8.4% N/A N/A

Source: Eurostat, IMF and ECB

Please note the information contained in NPL Europe has been obtained fromnumerous sources in the market and is believed to be accurate at the time ofgoing to print. We trust that you will find this publication useful and welcome anycomments you may have.

United Kingdom

NPL portfolio sales quiet despite downturn

Over the past 18 months, some larger loan portfolios have tradedin the UK as investors focus on what has traditionally been aninactive NPL market. However, most of these trades have takenplace behind the scenes.

In recent years, the UK has experienced prolonged economic

growth, real estate appreciation and increases in bank andnon-bank lending. This has been coupled with an activeresidential mortgage-backed securities (RMBS) and commercialmortgage-backed securities (CMBS) origination market.

Table 4: Trend in UK Real Estate Prices From 2000 to 2008

Average Housing Prices

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

A

verageHousePrice(GBP)

-10%

-5%

0%

5%

10%

15%

20%

25%

% Change Std Price

Source: IMF World Economic and Financial Survey Global Financial Stability Report Oct 08

Recently there has been a demise of the wholesale fundingmarket, an 8% slump in real estate prices (as depicted inTable 4) and a wider macroeconomic decline, including risingunemployment rates. This has prompted an increase indelinquent and non-performing loans, downgrades in bothRMBS and CMBS and Loan to Value Ratio pressures for lenders

and borrowers.


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Large financial institutions may consider the disposal of non-core assets domiciled outside the UK. This could extend fromloan portfolios to underlying platforms and branch networks.

Both non-UK and UK-based institutions are consideringexiting markets or product types. These reviews could resultin portfolio transactions.

100 billion-plus in write-offs expected

From FY08 to FY11, UK banks are expected to write off105 billion (122 billion).1 In addition, many UK and non-UKinstitutions with local operations have sought to wind down orexit their UK lending platforms.

The changed environment has compromised the performanceof underlying loans and the stability of banks and lenders. Loandefaults and arrears and loan to value (LTV) covenant breachesare increasing and financial service providers are experiencing

eroding capital bases and reduced liquidity.

These issues prompted government intervention to support largermortgage lenders such as Bradford and Bingley, Northern Rock,HBOS and the Royal Bank of Scotland. This support is beingextended to troubled building societies.

Second-tier banks such as Heritable Bank, non-bank financierssuch as Cattles and loan originators such as Morgan Stanley arealso finding their business models severely tested.

Few transactions undertaken

While many would expect these developments to promptfinanciers to sell NPL and non-core loan portfolios, fewtransactions have taken place. The few that have occurred havebeen settled behind closed doors. The reasons for this include:

Government intervention The governments nationalisationof several lenders, introduction of an Asset ProtectionScheme and other measures to protect defaulting borrowershave reduced the urgency for banks to rid themselves ofNPLs. Banks and investors are uncertain about how theseschemes work and their financial impact.

Bank provisioning levels Under International FinancialReporting Standards, UK banks do not have to accountfor NPLs on an incurred loss basis. This means that, banksare preferring to carry the defaulted assets on their booksat the potentially higher values, rather than accept thepotentially negative balance sheet impact of selling loans atcurrent prices.

Macroeconomic expectations A large number of lenders areyet to fully absorb the impact of real estate declines to date,let alone the continued deterioration in loan-to-value ratiosand impairment calculations. Analysts place the likely declinein real estate prices at 25 per cent between 2008 and 2010.2

As a result, the views of many lenders are very different tothose of investors.

Investor pricing The withdrawal or collapse of severalinvestors due largely to the credit crunch has further reducedthe prices for loan portfolios, RMBS or CMBS. As seen in theLehman Brothers, Kaupthing Bank and Heritable Bank salesprocesses, even insolvent institutions and their administratorsbelieve greater value exists in running off loan portfolio (andrelated) assets.

In 200910, NPL sale activity is likely to focus on these areas:

The unsecured NPL sale market is likely to expand as banksproactively deal with defaulted credits and new investorsenter the UK market and establish platforms.

Smaller distressed institutions are likely to continue to tradesecured portfolios and RMBS/CMBS due to the falling realestate prices of 2008 and 2009. These institutions includeformer origination platforms and insolvent financial services

businesses. However, while the drivers for selling differ fromthose experienced by larger banks, portfolio pricing remainsa barrier.

NPL Europe Issue 1 August 2009 | 3

1. RBS/ABN AMRO, UK Banks Investment View, January 2009

2. PwC UK Economic Outlook Report - July 2009

Spain

Slow for a while but the NPL market is expectedto gain momentum

With an unemployment rate that reached 17.4 per cent at the endof March 2009 and an increase in the NPL ratio from 0.9 per centat the end of 2007 to 4.4 per cent in April 2009, Spain is one ofthe most talked-about NPL markets in Europe.

As recently as August 2009, PwC successfully sold a residentialmortgage portfolio on behalf of a major Spanish financialinstitution and has a number of other current mandates withSpanish financial institutions to sell additional residential

mortgage and unsecured consumer portfolios in the comingmonths. Some of the other key deals over recent years areoutlined below.

Table 5: Recent NPL Transactions in Spain

Entity UPB (M) Type Buyer Date

Banco Sabadell 100 secured Treym/Aktive

Kap.

Dec 05

Santander 230 unsecured Link Finanzas Mar 06

Santander 1,400 mixed Goldman

Sachs y

Intrum Justicia

Aug 06

BBVA 700 mixed CarvalInvestors

Jun 07

Banesto 300 secured UBS Sep 07

200 secured UBS Sep 07

ABN Amro 60 unsecured B of A Oct 07

Popular 1,000 mixed Apollo

Investment

Nov 07

Caixa Galicia 100 secured Apollo

Investment

Dec 07

Vodafone 200 receivables BofA &

WestLB

Dec 07

Telefnica 200 receivables Aktiv Kapital Dec 07

Caixa Galicia 100 secured CarvalInvestors

May 08

GMAC 3,000 mixed Banesto &

Bankinter

Jun 08

Morgan Stanley 300 mixed Lehman/

Shinshei

Jun 08

Orange 100 receivables JZ

International

Jun 08

Caixa Nova 30 unsecured

consumer

Aktiv Kapital 2008

MBNA 90 unsecured

consumer

Varde 2009

Confidential 60 residential

mortgage

Confidential Aug 2009

Source: PwC


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Relative to perceived opportunities, there have been only a fewNPL portfolio sales in Spain in 2008 and 2009. This is due to:

The liquidity crisis.

Different expectations between buyers and sellers about likelydecreases in property values.

Limited experience of local collection agencies in servicingcertain classes of distressed assets, including residentialmortgage and corporate loans, as these asset classes havetraditionally been managed in-house by the banks.

Resource constraints of investor teams.

The creation of the Financial Assets Acquisition Fund,which was established in October 2008 with the objectiveof providing liquidity to eligible financial institutions bypurchasing qualifying AAA rated covered bonds held by them.

Price gap too wide for trades

The largest impediment to successful trades of NPL portfolios(especially secured portfolios) is the gap in price expectationsbetween buyers and sellers. This bid-ask spread is explainedmainly by the different expectations regarding property pricesin Spain and the uncertainty over the recovery period. Financialservices businesses are still reluctant to accept the deflatedprices being offered by investors, which factor in a significantdecrease in property values.

Existing debt recovery platforms are already operating at or nearcapacity and have a limited ability to take on new clients. Theseplatforms are being adapted to new market requirements, butcapacity expansion is lagging. Many investors are now lookingto acquire or create a new servicing platform, meaning anypotential purchases are being postponed until additional capacityis secured.

Merger activity between financial institutions, in particular savingsbanks, is expected to increase over the next 12 months. This

may be accompanied by a heightened focus on the divestmentof non-core assets, whether performing or non-performing. TheBank of Spains recent decision to create a bank restructuringfund to take control of ailing institutions could force thoseaffected to merge or sell non-core assets.

Interpretation change influential

On the other hand, the Bank of Spain has changed itsinterpretation of an existing regulation determining how financialinstitutions can calculate delinquent mortgage debt provisions.

Under the new guidelines, which took immediate effect in July

2009, entities are required to calculate their provisions based onthe difference between the debt exposure and 70% of the current(updated) value of the security, rather than calculate provisionsbased on 100 per cent of their debt exposure. However, we notebanks are not allowed to release provisions that have alreadybeen raised.

There is no change to the policy for unsecured debt.However, in its statement, the Bank of Spain said the existingpolicy represented the minimum requirement and thatinstitutions should calculate actual provisioning levels basedon historic recoveries.

The exact impact on each bank depends on its NPL portfoliocomposition. However, we note that historical recovery ratesmay not represent the most appropriate basis for determining thecollectability of more recently defaulted loans.

Both sellers and buyers are anticipating a significant increasein deal flow (of both secured and unsecured portfolios) in thesecond half of 2009 and well into 201011.

Germany

Investors play a waiting game due to pricing gapand regulatory changes

Between late 2003 and 2006, the German NPL market was one

of the most active in the world, with several banks selling, plentyof investors buying, large transaction sizes and a strong pipeline.However, even before the onset of the global financial crisis in2008, market activity had dropped dramatically. One of the majorreasons for the 2007 decrease in NPL transactions in Germanywas a general improvement in real estate prices (as shownin table 6) coupled with a long-awaited upturn in the nationaleconomy which most likely assisted in reducing overall defaultrates and appreciation of the underlying collateral on alreadydefaulted loans.

Table 6: Movement in Real Estate Index in Germany 200108

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

2001 2002 2003 2004 2005 2006 2007 2008

Annual change in Pty Index

Source: Bulwien Gesa, Property Market Index 1975 to 2008

Total NPLs as at the end of 2007 were 135.5 billion3 due toGerman banks retaining the loans on their books rather than

selling at the depressed prices on offer. However, as Table7 shows, NPLs as a percentage of total loans, had droppedsignificantly since 2003, until the increase in 2008.

3. BaFin (the Bundesanstalt fr Finanzdienstleistungsaufsicht is the German banking regulatorybody), Jahresbericht 2008


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Table 7: Market NPL Ratio Germany 200307

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2003 2004 2005 2006 2007 2008

Market NPL Ratio

Source: ECB and Frankfurt School of Finance & Management, Transaktionen und Servicing in derFinanzkrise: Berichte und Referate des Frankfurt School NPL Forums 2008, page 11

With the onset of the financial crisis, German banks sufferedsubstantial losses due to their exposure to subprime mortgagesand the relatively high contribution of Industry (30.1 per cent)to GDP in 2008.4 The German government took action tohelp shore up the balance sheets of many of the banks,including Commerzbank.

NPL market quiet in 2009Many participants and observers expected the German NPLmarket to pick up in 2009. However, to date, this has noteventuated. Some investors have indicated that banks pricingexpectations still reflect the levels of 200506 when competitionand funding were strong.

Another consideration is that banks are waiting to see what othermeasures are implemented by the German State. The authoritiesare discussing setting up a National Asset ManagementCompany or Bad Bank to clean up bank balance sheets. Sellersare likely to postpone NPL sale processes until the finer details ofthis initiative are made public.

In June 2009, sentiment among Germanys businesses roseto a seven-month high, boosting hopes that Europes largesteconomy is stabilising after suffering its sharpest slump sincereunification in 1990. The IFO think tank said that its businessclimate index climbed to 85.9 in June 2009 from 84.3 in May, itsthird successive monthly rise in succession. This may give someconfidence to investors and sellers that the German economy isstarting to stabilise.

Investors still have a big appetite for German NPLs. Manyinvestors maintain a head office in Frankfurt, due largely toGerman banks using periodic NPL sales as an integral part oftheir loan portfolio management process. However, due to theuncertainty around government plans and the pricing differential,both parties are prepared to wait until circumstances aremore favourable.


4. https://www.cia.gov/library/publications/the-world-factbook/geos/gm.html


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Table 8: Factors Affecting NPL Transactions in Germany

Investors Banks

Banking secrecy uncertainty: The general

assumption under German law is that

no information on borrowers may be

provided unless a credit agreementhas been cancelled or the transaction

is virtually agreed. In contrast, the

consensus for NPL transactions is that

the identity of the borrower may be

provided.

Complex accounting: German Generally

Accepted Accounting Principles (GAAP)

are very restrictive regarding balance

sheet de-recognition of the loan portfolio,

while International Financial Reporting

Standards (IFRS) and US GAAP are more

flexible.

Collateral transfer: This can be

cumbersome and in some cases very

difficult (i.e. mortgage collateral in the

land register). Borrower consent: Change of lender may

require the agreement of the borrower.

Banking licence: May be required (for

performing assets).

Price: This remains the largest barrier

to successful transactions in Germany.

Investors have historically required an

Internal Rate of Return (IRR) of at least15 per cent post-tax. The recent decline

in the value of underlying collateral (in

particular real estate), underprovisioning,

relatively poor due diligence information,

banking secrecy and the lack of

understanding of buyers needs all

contribute to this.

Government action: The German

government has injected substantial

resources into stabilising its banks. A

number of banks appear to be capitalised

to the extent that pressure to sell NPLs

has been reduced.

Servicing: As banks have expanded

outside Germany, they face the

challenging exercise of establishing top-quality cross-border servicing platforms.

Portugal

Improvement expected following the past12 months which included Lehman departure,

global financial crisis and sizeable bidask spreads

The Portuguese NPL market is small compared to many otherEuropean countries. However, it is mature and attracts a largenumber of international investors who see it as an extension ofthe Spanish market. NPL transactions started in 2003 after therestructuring of the banking system during the late 1990s, and inthe last two years almost all of the major banks were active in theNPL market selling secured and unsecured portfolios (consumer,SME, corporate and mixed).

The current NPL market size is close to 5 billion (the NPL ratiowas below 2 per cent at the end of 2008), with average provisioncoverage around 138 per cent of total NPLs.5 All major financialinstitutions regularly assess the value of NPL portfolios for futuresales to improve their bad debt and solvency ratios.

Table 9: Top Five Bank NPLs and NPL Ratio

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

2004 2005 2006 2007 2008

Top5BankNPLs(EURinmillions)

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

NPLRatio(%)

NPL s NPL Ratio

Source: CGD, BCP, BES, BPI, BST Financial Statements

Legal authorities have recently introduced changes allowingcreditors to start enforcement processes via the internet. This hasreduced the time required to enforce real estate collateral to 28months for residential loans and 21 months for corporate loans.

These changes have helped to make the Portuguese NPL marketmore attractive to investors.

With most Portuguese banks servicing NPL portfolios in-house,there are few independent servicers with the experience andsophistication required by international investors. Expertisein third-party servicing for secured portfolios is currentlyconcentrated in financial services specialists Domusvenda andWhitestar. We expect this situation to change in the near future asinvestors try to establish their own platforms.

Another positive for the Portuguese NPL market is that, unlikeneighbouring Spain, housing prices have remained relativelystable since 2002 and the construction industry represents only

7 per cent of GDP. However, a recent Financial Times article6

reported housing prices in Portugal fell 6.3 per cent in Q408.

Since June 2008, the volume of transactions has fallensignificantly and most of the transactions taken to market failedto close. The main reasons for this were the global financialcrisis; the entry into administration of Lehman, which had been asignificant buyer; and the increase in the bid-ask spread. In Q209a few transactions were closed and NPL activity is expected tocontinue to improve in the second half of the year.

5. CGD, BCP, BES, BPI, BST, Annual Reports 2004-2008

6. Financial Times, 6 April 2009.


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Italy

Dry 2008 but outlook positive for Italian NPLs

With market NPLs of close to 50 billion and a relatively highNPL ratio as shown in table 10 below, Italy is one of the largestand most established NPL markets in Europe. The introduction ofa securitisation law supporting NPL sales stimulated transactionsin early 2001. From 2005 to 2007, the NPL market in Italy traded

loans in excess of 25 billion to investors that included Fortress,Merrill Lynch, Deutsche Bank, Pirelli, ABN AMRO, LehmanBrothers and Goldman Sachs.

Table 10: Italian NPL Loans and Ratio From 2003 to 2008

-

10,000

20,000

30,000

40,000

50,000

60,000

2003 2004 2005 2006 2007 2008

NPL(EURinmillions)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

NPLRatio

Gross NPL NPL Rat io

Source: Bank of Italy

However, during 2008 the market all but dried up. As a result,many top-tier investors have attempted to exit, creating asecondary market for NPLs. We understand from discussionswith a number of the Italian banks that as property pricescontinue to deteriorate (as shown in table 11 below) sellers havehad problems bridging the price expectation gap with potential

buyers. With so many more investor friendly NPL marketsbecoming active during 2008 and 2009 the seven year-plusItalian legal enforcement timeline is viewed negatively bymost investors.

Table 11: Italian Real Estate Trends From 2003 to 2009

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

H1

2003

H2

2003

H1

2004

H2

2004

H1

2005

H2

2005

H1

2006

H2

2006

H1

2007

H2

2007

H1

2008

2009

YOY Movement (%)

Source: Tecnocasa study (main real estate agency operator in Italy)

Key GDP factors under pressure

The Italian market is also experiencing growing pressure witha forecasted reduction in GDP in 2009 and 2010. The tertiary/services (71 per cent) and industrial (21 per cent) sectors thataccount for 92 per cent of GDP are at the forefront of thisreduction. In March 2009, orders placed with Italian industry fellon a 12-month basis as foreign demand weakened further. Thelatest data from Istat, the national statistics agency, showed thatorders slid 26 per cent in March after falls of 33 per cent in bothJanuary and February.

The Ministry of Finance and Treasury expects unemployment inItaly to increase almost 2 per cent during 2009 to 8.6 per cent,placing further pressure on the asset quality of banks. The abilityof the Italian government to intervene should any of the majorbanks experience further liquidity shortages is limited, as Italy hasone of the highest levels of public debt in the Eurozone at 104per cent of GDP.7

NPLs an illiquid investment

The sheer magnitude of NPLs and the proven transactionprocess for sales in Italy make it an interesting market for

investors. However, in the face of the credit crisis, NPL portfoliosare perceived as a relatively illiquid investment.

Investors departing the Italian market have cited a number ofreasons for exiting, including: underperformance of investmentsmade between 2005 and 2007 against business plans; highfixed costs paid for management of NPL portfolios regardlessof performance; the disappearance of the securitisation marketin which to divest interests in NPL portfolios through the sale ofnotes; and the limited ability to leverage the assets due to theonset of the credit crunch. All these factors are driving a wedgebetween the pricing expectations of sellers and of buyers.

A number of changes need to occur before the NPL market

in Italy becomes liquid again. Italian banks are likely to writeoff more loans during 2009 to improve balance sheet ratios,resulting in a flow of new NPLs to market. Also, as the globaleconomy gradually recovers, returns from less risky assets, suchas corporate bonds, should be lower. This makes the potentialreturns from NPL acquisitions more attractive.

Many well-known investors who have previously invested inItaly will most likely keep abreast of developments. The pricingexpectations of some sellers declined during 2009 and thenumber of new NPLs coming onto the books of banks increased.These factors combined suggest there may be an up tick in NPLsales activity in the near future.

Capacity constraints a key driver

The driver for banks to sell NPLs is increasingly a commercialdecision based on capacity constraints. With many financialinstitutions restricting staff hiring, their ability to recover NPLsthat become less valuable and more resource-intensive to collecton over time is constrained. The question becomes do I have theresources to give these loans the attention needed to achieve therecoveries I have historically enjoyed? This question is pivotalin determining when and at what price sellers in Italy will cometo market and whether investors will be interested in the pricesbeing asked.

7. CIA World Factbook, November 2008.


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France

Look abroad for opportunities with French banks

In a recent report by Debtwire, investors rated France asoffering the fourth greatest opportunity in Europe for distressedinvestments during 2009.8 The country ranked behind the UK,Germany and Spain, but ahead of Russia, Italy and EasternEurope. However, banks have indicated recently that, even as

default rates in France rise, they remain at acceptable levelscompared with other European countries.

In the past, most NPL transactions that have occurred in Francehave been relatively small. While they range between severalthousand euros to 10 million, transactions above 5 millionare relatively infrequent. This is due to the fact that banks areorganised by region and by subgroups of agencies, combinedwith the fact many are mutual institutions with independentlocal entities.

With these small entities having previously managed theirportfolios in-house, the potential size of NPL disposals is limited.However, some banks have expanded operations into Central

and Eastern European economies which have experienced amuch higher rise in default rates and greater deterioration inasset quality.

It is understood that a number of French banks fall into thiscategory and that they are currently reviewing their exposuresin each of these regions to determine whether any of thebusinesses have become non-core. Therefore, we believe thatthe NPL opportunities that originate in France will more likely befor operations abroad.

Greece

Fledgling NPL market could soar

Greece is a relatively new NPL market which started to developin 2008 when the major Greek banks sold 1 billion-plus inUnpaid Principal Balances (UPB) of unsecured consumer loanportfolios. One Greek bank brought a 300 million corporate loanportfolio to market in March 2008 which, at time of writing, doesnot appear to have been sold. Following the collapse of LehmanBrothers in September 2008, the NPL market slowed. However inMarch 2009, a major Greek bank completed a 255 million UPBportfolio sale.

Table 12: Recent Completed NPL Transactions in Greece

Completed Transactions

Seller Name UPB (M) Asset Class Date

Emporiki Bank 255.0 Consumer unsecured Mar 09

EFG Eurobank* 150.0 Consumer unsecured Sep 08

EFG Eurobank* 100.0 Consumer unsecured Nov 08

Alpha Bank* 120.0 Consumer unsecured Dec 08

* estimatesSource: PwC

Greece has a relatively investor-friendly consumer NPL market,

with a number of established and sophisticated collectionagencies. In May 2009, the government passed legislationgoverning the operation of collection agents to formally recognisethe role they play in the industry.

8. Debtwire European Distressed Debt Market Outlook 2009, 20 January 20099. Bank of Greece, http://eng.bankofgreece.gr/en/

10. International Herald Tribune, 18 June 2009

11. Bank of Greece, http://eng.bankofgreece.gr/en/

12. Bank of Greece, http://eng.bankofgreece.gr/en/

Table 13: Greek Real Estate Trends From 1998 to 2008

Property Index Growth

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

YoYMovement(%)

Source: Bank of Greece, http://eng.bankofgreece.gr/en/

Greek banks perform strongly

Compared to European banks in general, the major Greek bankshave navigated the financial crisis reasonably well. Most postedprofits in Q109 and maintained an average capital adequacy ratioof 9.1 per cent at the end of 2008 which was only slightly lowerthan for the corresponding period of 2007.

However, according to the Bank of Greece, NPLs for the Greekbanking sector rose to 6 per cent of outstanding loans in Q109,up from 5 per cent at the end of 2008. All major Greek bankshave accepted fresh capital from the Greek state in the form ofnon-voting preference shares (with the exception of Emporikiwhich is majority owned by Credit Agricole). These capitalinjections were all relatively small.

The next six months for Greece could see further deterioration inbanks asset quality as approximately 17 per cent of the countrysGDP9 is derived from tourism which is also Greeces largestemployer. According to the Attica Hotel Association, bookings forQ109 were down 20 per cent from last year. In addition, buildingactivity dropped 17 per cent in 2008 and 14 per cent in Q109

compared with the same period in 2008.10

Construction accounts for approximately 11 per cent of GreekGDP and employs about 8 per cent of the workforce.11 Currently,about 130,000 properties remain unsold in Greece, whichrepresents approximately 2 per cent of the countryshousing stock.

In addition to the above, the real estate market has seen negativegrowth in 2008 as highlighted in table 13. It should be noted thatthe recent problems in the Greek housing market are not of thesame scale as in countries such as Spain or Ireland. In Q109,housing prices fell by only 1.7 per cent12, which was the first timethat prices have fallen in Greece in 15 years. With 80 per cent of

people owning their own homes, Greece has one of the highestownership rates in the EU.

NPL ratio set to rise

The NPL market at the end of 2008 was estimated at 12billion with an NPL ratio of 5 per cent. This ratio is anticipatedto increase to 69 per cent by the end of 2009, according to theBank of Greece Governors 2008 annual report.


9/12


The IMF predicts that the unemployment rate in Greece willincrease year-on-year by 1.8 per cent to 9.5 per cent by the endof 2009 and real GDP to contract by 1.7 per cent.

However, with Greece recording an average annual GDPgrowth of 3.8 per cent between 1995 and 2007 and having theEurozones second highest public debt ratio as a percentage ofGDP (94 per cent), the government is unlikely to provide furtherassistance to troubled banks.

If Greek banking NPL ratios begin to creep up towards 7 per

cent, Greek banks may start coming to market with consumerand corporate NPL portfolios in Q409 in an effort to reduce theirNPL ratios and free up cash and resources.

Turkey

Open approach expected to yield benefits

During the last Turkish financial crisis in 2002, 22 banks weretransferred to the government-controlled Saving DepositInsurance Fund (SDIF). Since then, the SDIF has managed the

run-off of the remaining assets and conducted corporate NPLsales. These include sales of approximately US$220 million(154.5 million) in 2004 and US$1 billion (702.1 million) in 2005.

In following years, Turkish banks have followed suit by sellingpredominantly corporate portfolios. In the past two years, thesehave largely been bought by a few asset management companies(AMCs) active in the market.

Vicious circle deters investors

Although the NPL market in Turkey is well established, it hasalso proved to be difficult for international investors to enter. The

communiqu on establishment of AMCs require that an AMC hasa minimum paid in capital of TL 10 million (approximately US$ 7million). Whilst complying with Turkish regulatory requirementsis not particularly difficult, the minimum capital requirement,coupled with the uncertainty regarding the total amount of futureportfolio sales and the level of competition have made it difficultfor investors to assess the feasibility of the up front investmentrequired prior to actually acquiring a portfolio.

In addition, it can take between six and nine months to receivepermission from the BRSA, which creates a vicious circleas investors find it difficult to commit the capital required toestablish the AMC until they have acquired a portfolio. Whilesome have proposed breaking this circle by redrafting the pre-

closing conditions in the Sale and Purchase Agreement, thesechanges require the agreement of the sellers. In addition, theprice offered by the investor would need to be higher than thatoffered by the local AMCs to justify the longer closing period.

NPL stock increases

The stock of NPLs in the Turkish market increased by 73% or TL8 bn (some US$5 bn) between 30 June 2008 to 30 June 2009,primarily due to increased default rates on SME and consumerloans. Total NPL volume reached TL 19 bn (some US$13 bn),which represents 5% of total loans as of 30 June 2009. SME andConsumer credits are relatively new asset classes in Turkey andonly started in earnest in 2005. Loan loss ratio has risen to 6.6%on SME loans and 5.3% on consumer loans while it was 3.7% oncorporate and commercial loans as at 30 June 2009. Due to their

high return high risk structure, SME and consumer loans are anincreasingly attractive asset class for future NPL sales.

Table 14: Turkish Real Estate Trends From 2004 to H109

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Av.

askingprice(persqmi

nUSD)

2004 2005-I 2005-II 2006-I 2006-II 2007-I 2007-II 2008-I 2008-II 2009-I

Apartment Lux Villa Duplex Apartment

Source: Colliers Turkey 2009

The above graph highlights the recent downturn in averageproperty pricing in the first half of 2009 suggesting continuedpressure on consumer loan loss ratios. However, as highlightedbelow there continues to be an active NPL market in Turkey witha recent closure in June 2009.

Table 15: Recently Completed NPL Transactions in Turkey

Date Seller Acquirer Deal Value

(US$m)

Portfolio

Size

(US$m)

Deal Value

/ Portfolio

Size

Jun-09 Yapi Kredi Girisim Varlik

Yonetimi

17.3 257.9 6.7%

Apr-08 Akbank Girisim Varlik

Yonetimi

32.8 193.8 16.9%

Mar-08 Yapi Kredi Lehman Brothers 46.3 407.2 11.4%

Mar-08 Sekerbank Lehman Brothers 48.3 193.2 25.0%

Sep-05 SDIF Lehman Brothers

- Fiba

161 * 933.8 17.2%

Sep-04 SDIF Bebek Varlik

Yonetimi(Deutsche Bank)

22.5 222.8 10.1%

Jan-04 Abank Anadolu Varlik

Yonetimi

18.7 29.2 64.0%

* Plus 43% of collection of the acquirer, as of March 2008 SDIF had earned US$236.4m(EURO165.9m) from this deal

Source: Press

Banks and customers appear to accept that NPL sales are anormal part of portfolio management and transaction results,including pricing, are published in the press. This is a verypositive aspect of the Turkish NPL market compared to othermarkets where negative press and bank concerns about potentialborrower reactions can limit the asset classes that can be traded.


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Czech Republic

Asset deterioration fuels opportunity

In 2008, the Czech Republic achieved GDP growth of 3.2 percent but is expecting a contraction of 2.5 per cent in 2009. Whileone of the primary recent drivers of the Czech economy has beenexports to other European countries (Germany represents 32 percent of exports), faltering demand prompted a 17.5 per cent year-

on-year fall in industrial production in Q109.

Domestic consumption is also expected to decline in 2009, dueto an expected 3 per cent increase in unemployment.

Table 16: Czech Republic NPL Loans (In Default) and Ratio

2004 to 2008

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2004 2005 2006 2007 2008

IndefaultLoans(CZKinbillions)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

LossandDefaultRatio

Amounts (in billion CZK) In default

Source: Czech National Bank

During 2008, the total NPL market increased by 37 per centto CZK 70 billion from CZK 51 billion (source: Czech NationalBank). If demand for exports remains depressed and domesticconsumption falls as a result of the rise in unemployment,the quantum of NPLs is expected to increase substantially.Banks see NPL sales as a legitimate way of managing capacityconstraints in their in-house collection departments.

In the Czech Republic, there are around 60 local collectionagencies, none of which are a dominant player. Historically, theselocal agencies have been the main acquirers of NPLs from banks.

Most of the portfolios sold since the closure of the CzechConsolidation Agency in 2007 have been relatively small asCzech banks were generally profitable and reasonablywell capitalised.

Government regulation may restrict market

Recently, the Czech government has contemplated some

new consumer protection legislation which may affect theattractiveness of the Czech NPL market.

The state is considering introducing legislation that preventscreditors from forcing the liquidation or enforcement of firsthomes, places restrictions on allowable collection methodologiesand imposes a requirement to seek permission from thegovernment before forcing a corporate borrower into bankruptcy.

These factors will not only affect investor pricing, but will impactthe ability of banks to collect from delinquent borrowers, causinga further drain on capital and liquidity.

Given that banks are anticipated to face increased asset qualitydeterioration during 2009, portfolios of unsecured consumerloans and small business loans are likely to be the key targetof investors and sellers. The established NPL market and keeninvestor interest in this region should lead to an increase in NPLtrades in the second half of 2009 and throughout 2010.

Poland

NPL market active but subdued

After the Czech Republic, Poland remains the most activeand established NPL market in Central and Eastern Europe.Historically, a number of Polands banks have used NPL salesprocesses via the Polish securitisation regime to dispose ofpredominantly corporate NPLs and access tax benefits.

Until recently, Poland has enjoyed consistent economic growth,continued integration with Western Europe and robust growth inconsumer and corporate credit. The onset of the credit crunch,however, has seen a sharp devaluation in the Zloty, an increase inunemployment and a decline in real estate values. This has hada significant impact on Polands local and foreign-owned banks,particularly in relation to their retail customers, many of whomhave mortgage loans denominated in foreign currencies and havebeen defaulting at an increasing rate.

Pre-crunch boom provides a boost

The rapid expansion of the Polish banking market prior to thecredit crunch saw total banking assets increase from PLN793billion (191.5 billion) at the end of 2007 to PLN1,042 billion(251.2 billion) at the end of 2008.13 The total value of NPLsincreased from PLN23 billion (5.5 billion) to PLN27 billion (6.5billion) over the same period.

In 2008, NPLs as a percentage of total receivables decreased tohistoric lows, from 5.2 per cent at the end of 2007 to 4.4 per centat the end of 2008 (households from 4.1 per cent to 3.5 per cent,enterprises from 6.9 per cent to 5.9 per cent). This reductionresulted mainly from the fast growth of total loans.

Outlook darkerPolands economic and real estate expectations for 200910 areas follows:

Unemployment to rise to 12.5 per cent by the end of 200914

A slowdown in the primary and secondary residential realestate market is expected to result in real estate pricedecreases.15 Many of the individual borrowers that acquiredapartments during 2007 and 2008 did so in foreign currenciesand have been under increased financial pressure followingthe depreciation of the Zloty in the second half of 2008 into2009. This pressure is starting to easy as the Zloty has begunto strengthen of late.

Over the last couple of years we have seen the sale of severallarge corporate NPL portfolios including transactions by BankPekao. Other NPL sectors also saw continued activity.

13. Polish Financial Supervision Authority, Information on the condition of banks in 2008

14. Polish Institiute of Market Economy Research

15. Urban Land Institute, Emerging Trends in Real Estate Europe 2009


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Table 17: Recently Completed NPL transactions in Poland

Entity UPB (PLN in M) Type Date

Bank BPH 619 Corp & SME H106

Kredyt Bank 1,044 Corp & SME H106

PKO BP 320 Corp & SME Apr 06

BGZ 490 Corp & SME Oct 2006

Bank Millennium 340 Corp 2007

BGZ 267 Corp 2007

ING BSK 675 Corp & SME 2008

Bank Pekao 1,400 Corp & SME 2008

Source: PwC

Polands economic circumstances are likely to force banks toconsider the sale of secured and unsecured retail loans and loansyet to be fully written off. Feedback from investors has indicatedthat the Polish NPL market will remain active but subdued by thelack of debt financing and impediments to new market entrants.These obstacles include uncertain local legal enforcementprocesses and the state of the securitisation regime. Both ofthese obstacles impact the timing of cashflows from the NPLportfolios and therefore ultimately affect pricing.


12/12

International Team:

Michael McCreadie

+61 3 8603 [email protected]

Stuart King

+34 638 [email protected]

Andrew Jenke


Bruno Guillermo Perri


Frank Janik


Hernan Magarinos


Nick Colman

+49 170 3335812

[email protected]

Nicolas Malagamba Otegui


David White


Czech Republic

Jiri Klumpar


France

Jean-Pascal Cldat


Germany

Jens Roennberg


Greece

Emil Yiannopoulos


Italy

Antonella Pagano


Poland

Janusz Sekowski


Portugal

Manuel Luz

+351 21 35 99 [email protected]

Spain

Gonzalo Moro

+34 91 568 59 [email protected]

Turkey

Nuran Durmaz


United Kingdom

Graham Martin


Our Contacts

Across Europe and the UK we have experienced partners and directors who can assist you with your NPL-related needs. In

addition, PwC has a dedicated international NPL group that can act as an overall coordinator for worldwide NPL mandates

and opportunity identification. Through this group, both buyers and sellers of NPLs can receive consistent and seamless

service across the world, integrated with country-specific knowledge and expertise.

www.pwc.com/loansales

2009 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers Limited, each of which isa separate and independent legal entity.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completenessof the information contained in this publication and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty ofcare for an consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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