Trend 8: Non-performing loans (NPLs) - KPMG Global
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Trend 8: Non-performing loans (NPLs)

Trend 8: Non-performing loans (NPLs)

Europe

Regulatory pressure to create more opportunities
The region witnessed varying levels of bank deleveraging in 2018. Regulatory changes and European Central Bank (ECB)/Single Resolution Board (SRB) pressure are key to further accelerate deleveraging strategies via portfolio sales. The situation is largely stable in the UK, Ireland, Nordics and some CEE countries. Countries such as Greece, Spain, Italy and Portugal remain key markets for deal activity and are attracting investors globally. In France, Germany, the Netherlands, Turkey and Ukraine, deal activity has been passive, but a new deleveraging wave is expected. 

Real estate market is expected to improve passively
There was continued interest in all asset classes in 2018. Some countries have higher SME-secured deal flow while there is recurrent activity in unsecured portfolios in most parts of the region. Both performing and sub-performing portfolios are potential targets in the new trend of deals. Additionally, granular real estate-owned (REO) rented portfolios is a new asset class, and land/work in progress (WIP) portfolios are capturing more interest as the RE market improves. However, political and legal uncertainty can reduce the recovery of the RE market and can also impact investor appetite in some markets. 

Further AMC's and securitization as tools for delegeraging
We still believe the European bank deleveraging story has a few more years to fully unfold. As momentum grows for a recalibration of regulations governing securitization, we expect further asset management companies (AMCs — state or semi state-owned) to be used as a tool for deleveraging or solving specific banking issues. Europe’s new securitization regulatory framework, which came into effect fully on 1 January 2019, is expected to broaden investment opportunities for long-term investors. To further tackle the issue of NPL deleveraging, many countries need to attack sub-performing (unlikely-to-pay [UTP]) or hard asset loans. 

Servicing market to further evolve
We expect the new regulatory framework to change the market, especially for servicers structured as banks (linked to the calendar provision and the new risk-weighted assets [RWAs] request from the ECB). We also noticed a sharp decrease in the share price of listed servicers — a sign that the servicing market should be very hot and set for further evolution. For example: (i) Spain has seen several secondary deals, where new industrial investors have entered the market and large servicers are increasing operations. We expect some consolidation of this market; (ii) Greece still has few players; (iii) Nordic players are relocating their businesses in southern countries; and lastly, (iv) Italy is likely to see consolidation after an intense couple of years of acquisition. 

"NPLs in Europe as per European Banking Authority (EBA) data stands at USD844 billion (Euro 747 billion): an average NPL ratio of 3.6 percent. However, individual country NPL ratios range from 0.6 percent to 46 percent and countries whose ratio exceeds 4 percent will have to narrow down NPL volume over the next 2 years." -Domenico Torini & Carlos Rubi Montes, Partners, Deal Advisory Portfolio Solutions Group KPMG in Italy and KPMG in Spain (respectively)

Asia

Deleveraging expected to continue in 2019
 This is due to several triggers including the impact of IFRS 9, a stronger regulatory environment, weak commodity pricing, and trade tensions between China and the US causing possible collateral damage across the entire region and a general economic slowdown. As a result, consolidation among SMEs is expected, driven by local regulators to strengthen balance sheets and asset qualities. More IPO activities and securitization products might be promoted to improve capital adequacy, with the latter used as a tool to further deleverage bad loans. This has attracted the attention of US and European special situation funds, as well as international asset servicing companies like Pepper, who are experienced in picking up distressed assets at a discount.

New set of investors to tap Asian market
The interest of investors globally should accelerate, because local banks and AMCs are under pressure to offload their NPL inventory faster and at a deeper discount. Additionally, liberalization/opening-up of the banking sector is expected to attract more local and international investors into the distressed market to purchase assets from local banks. Traditional buyers have been local PE firms and individual investors, but listed companies and industrial players are now emerging as players. With the new entrance of internet transaction platforms like Alibaba or Taobao, and local financial asset exchange with the launch of NPL transaction services, more investors are expected in 2019. International investors should gradually shift their focus from Europe and start to consider Asia as an alternative investment opportunity.

Economic and structural reforms to foster and create further opportunities
These reforms should continue and intensify in China and most Asian countries. Restructuring and reorganization typically accompany distressed and special situation opportunities. These opportunities are highly correlated to the disposal of NPLs and non-performing assets (NPAs). International investors initially positioned for NPL portfolio trade are likely to gradually seek single credit and sizable distressed opportunities. As China gradually opens up its financial services markets, we expect more international investors to take an interest in NPL transactions and also consider investing in AMCs and other servicing platforms, to build a more holistic and full-value-chained asset management and servicing business in China.  

"A combination of economic slowdown, property market correction, trade tensions and strong regulations, mean NPL ratios and volumes might continue to grow from an official single-digit ratio to a broader double-digits (including impaired non-NPL). At the same time, value could rise from a few hundred billion to more than a trillion dollars. Meanwhile, international investors should also gradually shift their focus from Europe to Asia as an alternative investment opportunity." - Wilson Pang, Partner, Deal Advisory Portfolio Solution Group, KPMG in China

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