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European NPL deals to surge under pressure from policymakers

Record sales of non-performing loans are expected in Europe this year with a more urgent approach from policymakers driving increased activity, according to Deloitte.

As much as €200bn of debt could be sold during 2017, almost double last year’s total of just over €100bn of sales, said the professional services group, which advises banks and investors on NPL transactions.

Europe’s banking sector is weighed down by more than €1tn of toxic loans, which it has struggled to shrug off since the eurozone crisis.

Last year, the European Central Bank said it was stepping up measures to encourage banks to resolve their NPL issues. Banking regulators, meanwhile, have suggested a state-backed bad bank.

David Edmonds, a partner at Deloitte, said banks were under pressure to put forward explicit plans. “The number one driver is that the ECB has now clearly put a big focus this year on NPL levels,” he said.

He added that there was a “visible pipeline” of €100bn in deals.

Italy is expected to play a big role in loan sales. Of deals that were ongoing at the end of 2016, €40bn were in Italy. Intesa Sanpaolo and UniCredit are said to be in the market.

Activity has picked up at Pillarstone, a platform set up by KKR, the US private equity group, which takes on NPLs and tries to turn European businesses round.

“It’s busier this year than it was last year,” said John Davison, chief executive. “The banks have NPL and non-performing exposure targets in Italy and Greece and other countries, and they’re serious targets and they’re determined to hit them, and that does change behaviour.”

The gap between price expectations of buyers and sellers of the loans has been a significant impediment to a reduction in NPL volumes.

Banks typically sell bad loans to private equity firms. In Ireland and Spain loans were transferred to bad banks.

In a speech this month Vítor Constâncio, ECB vice-president, said a Europe-wide asset manager for NPLs “would be a welcomed initiative” and “facilitate raising private funding in the market”, though he acknowledged there would be difficulties.

Securitisation, whereby loans are packaged together and then sold as bonds, could “complement outright NPL sales”, he added.

In Italy a government-backed securitisation scheme has been introduced for NPLs, though it has yet to be tested at scale.

Some of the proposed NPL solutions have attracted scepticism. On Wednesday Fitch, the rating agency, published a report that said an EU bad bank would face “significant hurdles”, although the approach would be positive in countries with large volumes of NPLs.

The creation of an EU-wide asset manager would be “unlikely in the near term”, Fitch added.

“Any move towards further risk-mutualisation in the eurozone would
be politically difficult, notably in Germany.”

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