Q: What are the trends surrounding NPLs (non-performing loans) in CEE?
Andrea Jádi Németh, managing partner, bpv Jádi Németh: Since the outbreak of the financial crisis, CEE countries have experienced a significant turnaround in the banking sector.
The whole region showcased an extraordinarily high NPL ratio that required prompt and unusual measures. The tough regulatory actions resulted in serious one-off losses for the banks and necessitated total NPL restructurings. The extensive lending practice came to a halt and project financing became bound to increased institutional cautiousness and risk-based portfolio selection.
As a result, the ratio of NPLs started to decrease, while asset quality has been improving slightly but continually. Despite diverging characteristics in the individual CEE countries, the overall NPL ratio has become fairly consistent (although still too high) throughout the region.
Mihai Dudoiu, banking and finance head, Tuca Zbârcea & Asociații: In recent years, the Romanian market has been one of the most dynamic in the CEE region in terms of transactions with NPLs.
Starting in 2013 the regulatory bodies, mainly the National Bank of Romania (NBR), required the commercial banks to offload their balance sheets and reduce the ratio of NPLs in their overall portfolios, which at that time was one of the highest in Europe. The same probably also applies to other CEE countries.
In 2014, Romanian banks, which are to a large extent controlled by European financial groups, started a process of preparing and selling their non-performing assets to various investors. The most interested potential buyers are large US funds investing in distressed assets, European investment banks, and more recently international financial institutions.
Razvan Popa, partner, Kinstellar: The general trend in Slovakia is a decrease in the overall percentage of NPLs. In the case of business loans exceeding €1m (£787,000), there has been an ongoing slow increase in NPLs. On the other hand, there has been a reduction in NPLs of lower amounts, which represents more than 90 per cent of total loans. Banks recorded the highest percentage of NPLs in the construction and wholesale industries. The least risky areas are the energy and industrial sectors. Regarding the absolute value of NPLs, the highest losses were seen in the real estate sector.
“Despite diverging characteristics in the individual
CEE countries, the overall NPL ratio is now
fairly consistent”
Q: Why have NPLs become an issue in the last year?
Popa: Romania’s NPL issue has its origins in 2009/10 when banks persistently strove to hide balance sheets revealing bad loans, hoping that the economy, companies and debtors would recover so that debtors would eventually repay their debts. To the contrary, the number of insolvent companies increased, while the value of the charged assets and collateral diminished.
As the asset market plummeted, banks recovered even less than in the first two years following the outbreak of the economic crisis. In response to this unprecedented market turmoil, the NBR enacted special regulations allowing and encouraging Romanian banks to dispose of their NPLs through write-offs from their balance sheets. The aim of these measures was to improve the prudential and solvency ratios of Romanian banks and stimulate lending.
Dudoiu: I would not say that NPLs only became an issue in 2015, as concerns have been raised ever since 2010.
A bank’s lending appetite is considered to be largely dependent on the bank rebalancing its portfolio by reducing the ratio of NPLs in the overall credit portfolio. Also, from a bank’s perspective, the disposal of non-performing assets is one of the most effective methods for improving its capital ratios and other financial indicators.
This is particularly important for banks in the current challenging environment, where sluggish economic growth, increased regulatory requirements and unusual financial conditions (such
as negative interest rates) put the banks under
pressure.
Last but not least, the pressure from the regulator (for instance, the NBR) increased, pushing the banks to resolve the NPL issue.
“International players are coming into the market and becoming more interested in the banks’ portfolios of NPLs”
Martin Aschenbrenner, partner, and Radka Rutar, associate, PRK Partners: NPLs are currently not a significant issue in the Czech Republic. However, the percentage of uncollectible NPLs has been increasing. This fact ultimately leads to an increase in costs for those consumers paying their loans duly.
Q: Are some countries more advanced in the process than others and why?
Aschenbrenner and Rutar: EU countries had to harmonise their regulations on consumer agreements and loans with EU standards set forth in the EU Directives. Therefore, since all countries have based their regulation on EU legislation there should be no significant differences. The Czech Republic has not yet implemented the latest EU Directive regarding consumer loans and the implementation is expected in the fourth quarter of 2016, instead of the intended date of March 2016.
Popa: The Czech NPL market is quite advanced, with a history of large NPL transactions. The largest NPL portfolios were sold between 2000 and 2007, in particular through the Czech Consolidation Bank. A distinctive feature of the current NPL market in the Czech Republic is the high average prices for consumer loan portfolios, which is attributable to the limited supply and high achievable recovery rates.
In Slovakia, local players still mostly dominate the market in the sale of NPLs. These entities are well acquainted with the specific local conditions and can usually achieve a reasonably high return from insolvency and enforcement proceedings.
However, we are now starting to see the trend of international players coming into the market and becoming more interested in the banks’ portfolios of NPLs. Potentially, Slovakia may become an interesting market in future years due to the reasonably well-developed legislation in this area and the relatively standard and simple transaction structures that are available.
Németh: Due to different exposure to FX lending and economic shock-absorbing capacities, as well as changing macroeconomic environments across the region, countries show some divergence in the process.
Besides Romania, Slovenia has an active NPL market with some significant transactions attracting global asset managers as bidders. Hungary recently introduced a plan to boost corporate lending and the Hungarian Central Bank announced that it will buy non-performing commercial loans at market prices through its asset manager organisation.
Q: What does this mean for the banks in the region, and economic climate?
Aschenbrenner and Rutar: This means that the supervision and regulation of loan providers will be strengthened. With the new law on consumer loans in effect, the Czech National Bank will be the sole supervisor of loan providers; a ‘cleansing’ and reduction of non-bank providers of consumer loans on the Czech market is expected.
As a result we expect to see an increase in consumer demand for bank loans and, simultaneously, a reduction in ‘roque’ practices of certain non-bank providers of consumer loans.
“I expect our work on NPL disposal to continue for at least another two years”
Popa: The Czech banking sector displays, compared with other European banking systems, strong liquidity. In general, the Czech banks have been protected from the funding and liquidity pressures seen in the global financial crisis and European debt crisis.
The expected low interest rates combined with real GDP growth offer a positive credit environment for households and non-financial corporations, which in the long-term may result in an increase in the NPL proportion, depending on the local and global economic development.
The Slovak banks are generally in good condition with healthy loan portfolios, and due to a favourable macroeconomic environment, the ratio of NPLs in the industry is diminishing.
A potential problem for the banks could be the fact that a large portion of their loan portfolios is focused on the commercial real estate business sector and the proportion of NPLs is higher in this sector. This particular segment was a significant source of losses during the period of crisis – therefore caution on the part of banks is very important, especially in setting out secure credit standards.
Németh: The cleaning up of banks’ portfolios has led to the revitalisation of the NPL transactions market that can hopefully attract further international investors. Both the momentum for the NPL markets and healthier bank portfolios facilitate an increase in the stress tolerance of CEE countries’ financial systems and support sustainable macroeconomic growth. However, this is a lengthy process and CEE countries have to further improve their business environment and enhance competitiveness.
Q: Do you think the uptick in banking work will continue after the sale of NPLs?
Aschenbrenner and Rutar: Banking work will continue to grow due to an expected increase in demand for consumer bank loans. Another factor in favour of continuing increase in banking work in the Czech Republic could be the country’s extremely strong performance within the CEE.
With the country rebounding from recession, growth accelerated to an annual 4.7 per cent in the third quarter – the third-fastest pace in the EU. That, combined with a narrowing budget deficit, is attracting more capital.
Popa: The current uptick in banking work in Slovakia and the Czech Republic is mainly driven, regardless of the sale of NPLs, by favourable market conditions and low interest rates.
For example, in the real estate commercial business sector, which is the most active and represents a substantial portion of the banking work, good conditions have brought a reasonable amount of work. NPLs in Slovakia and the Czech Republic do not represent a significant factor to the extent that it could hinder the growth in banking work. We anticipate the same will apply in the future and that it will mainly depend on market conditions in general.
Meanwhile, the Romanian banking environment is generally shaped by market conditions. So if investors continue to deem the market conditions favourable, the uptick in banking work will also continue.
“Banking work will continue to grow due to an expected increase in demand for consumer bank loans”
Dudoiu: There is still a considerable amount of NPLs to be traded, as the NPL ratio in Romania remains rather high compared with other countries in the region and a large share of banks have not decided to act on the issue yet. However, I expect our work on NPL disposal to continue for at least another two years.
As the process continues, the banks free up capital and Romania’s economic growth remains robust (having one of the highest rate in Europe) the credit cycle should be on its uptrend. This would generate an increased volume of work for financing lawyers.
Németh: We’re seeing a growing trend for bulk selling on the seller side and therefore the portfolio sizes up for sale can attract significant market players. Still, there are uncertain points that our legislation needs to grapple with because we lack the infrastructure to handle portfolios of significant size.
We predict that the clean-up work could take one to three further years and are cautiously optimistic that the positive macroeconomic trends, especially the GDP growth, will lead to a more competitive business climate and thus, further uptick in banking work.