The Strategist

European Banks Set to Offload 100 billion Euro on Non-Core Loans

03/24/2015 - 18:18

European bad banks are experiencing boom in their businesses.

European Banks Set to Offload 100 billion Euro on Non-Core Loans
Europe banks are ready to divest 100 billion euros (73 billion pounds) of unwanted loans in 2015. The banks sold off nearly 91 billion euros of its non-core loans in the year 2014. This amount is expected to increase by 10% this year (according to PWC report). Moreover, the report’s prediction stated that the European banks will take minimum 5 years to shed off their problematic assets, indicating that the clean-up process will take nearly 10 years since 2007-2009 financial turmoil. The 1.9 trillion euros of non-core loans of European banks are equivalent to almost 4% of the industry’s total assets. Nearly half of these are non-performing loans while the other half represents performing loans, which are also not considered to be a part of European bank’s core businesses as a result of modification of the strategy.
The balance sheets of European banks were bloated prior to the financial crisis. Now the banks are continuously selling off their loan portfolios to quicken the process of shrinking their inflated balance sheets.
Particularly in Italy, the bad loans is a big problem as the Italian banks maintains almost 186 billion euros of non-core loans. A state-backed company will be helping Italian banks to divest their loans and start lending once again. In 2014, the banks offloaded nearly billion euros of non-preforming loans which is expected to increase more than 15 billion euros in 2015. Majority of the loan sales in the year 2015 were from banks in Ireland, Britain, Spain and Germany. The asset divestment included corporate loans, credit card portfolios, commercial property loans and other unsecured retail loans.

According to PWC, private equity investors as well as firms hold almost 70 billion euros to spend on non-performing assets sold by European banks and there was a substantial competition for assets which in turn pushed up the prices thereby making the market more lucrative for the banks to divest.

In the low interest environment in Europe, investors which are hungry for larger returns are competing to purchase assets parked in government bad banks, fully charged to get offloaded from bank’s unwanted loans. Government’s bad banks in Netherlands and Austria are considering to accelerate the divestment in loans acquired from creditors, stumbled by the financial crisis. Furthermore, Ireland has also witnessed a rise in loan sales in 2014. While the UK government announced about its plan to speed-up the winding down process of its non-performing assets and sell of around nearly £13 billion of loans to investors. Presently, the market is flooded with buyers, ready to fight for the portfolio purchase. Moreover, the European Central Bank’s bond buying is providing platform to pull down bond yields thereby motivating the investors to put more money into risky assets.