Non performing loans

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Regional NPL markets in the focus

Press Release

Budapest, 28 January 2016.

This is the fourth time that Deloitte has prepared an annual benchmark study on non-performing bank loans (NPL), which examines the share and volume of non-performing loans in nine Central and Eastern European countries, as well as the development trends on the market of NPL portfolios. The study finds that international and local NPL investors have a growing interest in CEE with bank activity also intensifying, resulting in several closed and ongoing transactions last year. Romania remains the most active NPL market in the region in terms of transaction number and volume, with Hungary, Croatia, and Slovenia following with similarly significant market activity.

According to Deloitte's analysis, non-performing portfolios in the nine tested countries (Poland, Czech Republic, Slovakia, Hungary, Romania, Slovenia, Croatia, Serbia and Bulgaria) amount to a value of about EUR 52 billion. 2014 turned the trend of expansion with NPL portfolio volumes starting to decline. This decline was primarily due to the significant transactional activity in Romania and Slovenia, and the extensive write-off of non-performing loans.

Although the share of non-performing loans showed a decline in 2014 in the southern countries of the region, too, the trend of north-south divergence continued. While the share of NPL loans was between 6 and 8% in Poland, the Czech Republic and Slovakia at the end of 2014, in the southern countries of the region it was between 12 and 22%.

"While 2014 was the first year of large-scale NPL-transactions, NPL markets accelerated to full speed in 2015. Currently, the South-East Europe region is seeing 10-15 ongoing transactions, and another 10-15 transactions are expected in the short term. Accordingly, we expect NPLs worth several billions of euros to change hands by the end of the year and this momentum to last another 2-3 years."
Bíró Balázs, Partner-in-Charge of Deloitte's Portfolio Management Central Europe

The recovery of the macroeconomic environment also contributes greatly to the upswing of NPL markets in the region. Investors are counting on improving rates of return: rising GDP improves debtors' repayment capacity through their improving income status while the recovery of the real estate market affects the value of collaterals positively.

The comprehensive Asset Quality Review of the European Central Bank improved the impairment coverage ratio, while the continuous provisioning of banks further reduced pricing difference between demand and supply side. The main drivers of sales on the supply side remain deleveraging, the resulting improvement of the balance sheet quality, as well as a better compliance with capital requirements and an improvement of the lending capacity, which banks of the region implement using not only organic measures but seeking faster solutions, as well. According to a study of the European Investment Bank prepared in 2015, more than two thirds of the banks seek to improve their capitalisation through asset sales.

Deloitte's survey conducted among international investors highlighted their key motivations and general preferences:

  • NPL markets are competitive in Western Europe, bringing dramatically lower yields for investors, which drives international investors to the CEE region of higher returns,
  • Early stage acquisitions can help entrants dominate the regional market, ensuring a large number of transactions in the medium run,
  • Minimum transaction value between EUR 15 and 30 million,
  • Preferred asset types are dominated by secured corporate and unsecured retail exposures,
  • Investors prefer office, retail or industrial assets to hotels and land,
  • The typical expected unlevered IRR rate in the CEE market is between 15 and 25%.

Increased regulatory focus on encouraging the reduction of significant NPL portfolios has a positive effect on the activity of NPL markets; therefore, many countries introduced regulations that encourage and help NPL transactions. A comprehensive regional framework under the name "Vienna Initiative" whose members include for instance the EBRD, IMF and the World Bank group has also been put into operation. The organisation encourages deleveraging in regional bank balance sheets and the reduction of considerable NPL portfolios. In spring 2015, EBRD held a workshop together with the National Bank of Hungary concerning the potential management of significant NPL portfolios in the bank system.

The National Bank of Hungary encourages banks to sell NPL portfolios through the introduction of regulatory measures: As of 1 January 2017, the national Bank of Hungary will set additional capital requirements for constantly high non-performing project loan portfolios. In addition, MARK Zrt. also started its activity with the main focus to take over from banks large-scale non-performing mortgage loans presenting a threat to financial stability.

"Recently, particular countries of the region, including Hungary, have enacted new statutory provisions to regulate the sale of non-performing bank loans. The new provisions ensure an appropriate level of legal certainty for investors, which also drives the expansion of market transactions."
Dr. Erdős Gábor, leading attorney of Deloitte Legal Szarvas, Erdős and Partners Law Firm

As a result of the expanding activity of the NPL transactions market, investors learn more about the countries of the region through due diligence procedures, and develop more realistic risk and yield expectations. Non-performing exposures marketed more frequently and in large volumes, as well as gradually expanding collections capacities lead to a gradually enlivening and increasingly efficient and liquid NPL transactions market in the region.

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