EY still bullish on near-term future for NPL sales

We hesitate to report on yet another study issued by consultants EY (formerly Ernst & Young) on the subject of German non-performing loans, since it appears to us that almost annually at around this time, the group’s researchers issue a bullish forecast on the wave of NPL portfolios due to come onto the market the following year.

This has materially failed to happen over the past three years, as is widely known. NPL insiders must be smiling patiently at the release of the latest study on German and Austrian loan transaction markets by EY which – true to form – predicts that sales of NPLs will definitely pick up in the near future as the banks face up to the inevitable, and finally shift bad assets off their balance sheets.

The reality over the past few years is that only a small number of larger deals have been done, generally quietly, while others have fallen well below the expected size and volume. The largest loan deal in the last two years was the sale of a €5bn UK commercial real estate loan portfolio to a team of US lender Wells Fargo and private equity firm Lone Star. 


According to the EY researchers, part of the reason for the limited turnover is the low proportion of bad loans on German bank balance sheets. The study quotes Oxford Economics statistics that show non-performing loans accounting for just 3.2% of gross loans in 2013, with that figure is expected to drop slowly to around 2.8% in 2014.

“The German banking sector is one of the strongest in Europe and has a better lending quality and lower NPL ratio than elsewhere in the Eurozone,” EY said. In addition, banks have been unwilling to take losses by selling loans at discounts and have been holding on until pricing recovers. Where transaction have taken place, it has generally been a signal that the bank is exiting from international markets, as in the case of Commerzbank.”

“While it appears impossible to predict when the German NPL and non-core market will pick up speed again, we continue to maintain the opinion that the need for potential sellers to clean up their balance sheets and the strong interest among investors to acquire German assets in these asset classes will eventually result in very active trading activity in the near future.”

EY says there is plenty of evidence that the gap between what buyers are prepared to offer and sellers will accept has indeed narrowed, as demand for NPLs remains high, while the drive at German banks to sweep ahead with further cost-cutting measures in their workout costs should entice them to offer more assets to the marketplace.

Meanwhile, a study just released by the Bundesvereinigung Kreditankauf und Servicing (BKS), the German association for special and loan servicers, seems to confirm that the volume of NPLs coming on to the market has been stagnating, largely because of the upturn on real estate markets, but is expected to increase over the coming year.

According to BKS president Dr. Marcel Köchling, "It's mainly down to the stable economy that the transaction volume of NPLs in 2013 has more or less remained at last year's level." The association's 98 survey respondents did however confirm that trading was lively in many segments, particularly in corporate and consumer credit sub-markets – but in the real estate sector, NPL volumes were negatively affected by rising price levels particularly in the large cities.