Hello. Our recent European Investor Survey has shown that there is clearly an increase in demand in European non-core loan portfolios. However, we know this to be a complex and challenging market so with me here today are Rob Boulding and Chris Mutch to discuss some of the key themes coming out of our recent survey.
Chris, turning to you first of all, the enormity of the deleveraging task facing some of the European banks seems to be emerging. Last year we estimated that €1.3 trillion of non-core banking assets in the European banking sector were prevalent. This year we feel there is in excess €2.5 trillion of non-core banking assets. In our Investor Survey investors are beginning to come round to our view that it is going to take in excess of 10 years to deleverage all those assets. In your experience, why do think that deleveraging process will take so long?
I think it can really be boiled down to, one point actually, and that is that the banks realise that they are in a lot more complex situation than they already are, mainly through accounting and regulatory pressures and therefore what they have had to do over the last 12-18 months – in fact 24 months – is put proper deleverage plans in place which go hand-in-hand with the banks’ actual larger strategic plans. I think what we are finding is that investors are now stepping into the shoes of the banks and they actually understand the position that they are in, so they understand the difference between liquidity and capital and therefore they realise that the bank is not going to offload portfolios all in one go. Deleveraging is going to take a long time – it’s going to have to be managed hand-in-hand with share price, with capital and liquidity. I think one of the contrasting points however on the survey is that the majority of our investors consider that 2013 is actually going to be the peak of loan portfolio sales, which entails that there will be a very large tail to come if we think it’s going to be 10 year deleverage process.
So Rob, turning to you, our survey shows that the UK, Spain and Germany continue to dominate the market for non-core loan portfolio sales, how do you see investor appetite emerging and evolving over the next 12 months?
I think from the survey and from the investors that we speak to on a regular basis, investor appetite remains very high for western European economies. Particularly those that are stronger and have more economic – or less economic – volatility, so the likes of Germany and the UK, we’ve seen particularly in the UK a number of loan portfolio deals over the last 12 months and if we look at our own pipeline I think we expect a lot more over the next 24 months, so, I understand why investor appetite for the UK remains relatively high. I think in contrast though on a country basis, there are some interesting trends, so take Ireland and Portugal for example, investor appetite in our survey almost doubled for those countries and in Ireland one of the drivers is that the banks have been given capital to absorb losses on sale of assets, so they are a credible seller in the eyes of the investor, and in Portugal, the Portuguese banks have been given targets around decreasing their loan to deposit ratio, which means one of the options available to them is to sell assets. So investors are now keeping a very keen eye on Portuguese banks and are looking to what they may, or may not, do over the next 12-24 months, so drivers like that in different countries are increasing investor appetite and interest.
Price has always been an important consideration and we’ve often seen that it’s very difficult to bridge the gap between what sellers are prepared to accept and what investors are willing to pay. Chris, turning to you first of all, what do you see based on your experience as expectations fall, price movement over the next 12-18 months?
I still think there is some degree of uncertainty about bridging the pricing gap but I think that the pricing gap is getting bridged. There are a number of factors though that impact that, one of them is the different costs of capital that are in the market - obviously brings increased competition. One of them is how prepared banks are with regards to getting portfolios ready to take to market. One of the other aspects is obviously the macro conditions in the eurozone crisis and I still think that investors are still pricing in uncertainty whereas vendors are actually pricing in stability, and that was all quite a hot topic of debate at our European Portfolio Advisory Conference that we held in March and all those factors were discussed. But I think the pricing will always continue whether you are an investor or whether you are a vendor – there will always be the pricing debate.
So let me bring you in now Rob, what are you seeing in the market in terms of price expectations?
I think price expectations remain challenging, there has been this bid-ask gap, but I will just touch upon Chris’ point on the cost of capital in that there are new entrants into the market and one of the things that we do, working strategically with our banking clients is actually understand the assets they have and how can you match it with the lowest cost of capital, so the one thing that is improving price at the moment is the fact that you have the likes of pension funds and insurance companies bringing money into this market to invest in loan portfolios and that certainly is improving price. So identifying where you can bring those in for an asset class is going to maximise value for you as a bank in terms of your deleverage process.
Chris, Rob thank you very much.
So, in summary we have heard that the market for non-core assets around Europe has significantly increased, last year we estimated that the market was €1.3 trillion in size. This year we estimate it’s in excess of €2.5 trillion. However, while the overall amount of non-core assets is increasing we are also seeing clearly, from our Investor Survey that the investor demand is significantly increasing as well. So, therefore despite the uncertain European economic climate we believe this market will be a very active market for the next 2-3 years to come.
We estimate that identified non-core loan portfolios in the European banking sector now exceed €2.5 trillion, representing 6% of European banking assets.
The run-off or sale of these loan assets will continue for many years and will make up a significant proportion of future Merger and Acquisition (M&A) activity in the banking sector. There has already been increasing M&A activity in loan portfolio transactions, although it is still small compared to the overall size of non-core assets.
Based on our market knowledge and discussions with investors, we expect portfolios with a face value of €50 billion to trade in 2012 and €500 billion to trade in the next five to ten years.
In our second annual survey, we questioned over 50 major investors active in the European loan portfolio market.