The containment of bad debts and the scenario of higher rates has not hindered the intense process of draining “toxic assets” from the banks. The entities and funds are on track to close this year operations for the purchase and sale of problem or restructured loans and foreclosed properties for a gross value close to 15,520 million euros, an amount almost 15% higher than the 13,511 million committed in transactions last year. last 2023. Until September, the volume of agreed transfers reached a nominal value of 10,807 million and in the market there are currently ongoing operations that could increase another 4,712 million to the accountant if they are closed, as expected, within the year.
The calculations belong to the specialized consulting firm Atlas Value Management, which predicts that activity will find new incentives in the coming months thanks to the drop in rates and the regulatory requirements faced by banks. “Interest rates have begun to reduce at the end of 2024. We come from 2022 at 6%, at the beginning of 2024 they were at 3.4% and currently we are closing at 2.5 or 2.6%. This change could affect both the supply of credit and the demand for distressed assets and especially in markets such as NPLs – an acronym for non-performing loans or unpaid debt -, logically due to the competitive advantage with respect to traditionally financial products,” explains José Masip, partner of Financial Services and Real Estate at Atlas Value Management.
The rate increase truncated, in fact, operations for a combined nominal value close to 4,000 million in the last part of 2022 by preventing the price expectations that the sellers had from matching the offers received by investors who had to put in the equation of the return that they projected to generate a financing cost for the asset that would be overwhelmed by the rapid rise in rates. Not only did it make the financing that buyers often need to undertake such operations more expensive, but it also made other types of assets to which some firms, especially private equity funds, directed their investments, more profitable.
The reversal of the interest rate increase initiated by the European Central Bank (ECB) and which will continue during 2025, together with an economy with growth above 2%, is now seen as an incentive for this type of transactions to gain momentum. “With the drop in interest rates we could find that the sale of portfolios is reactivated again,” says Masip.
Delinquency contained
The determining factor that caused the market to originate after the international financial crisis was that non-payments overwhelmed the balance sheets. Today, delinquency is not only contained, despite the rise in rates and the persistence of inflation, but it has decreased and the entities do not see a worsening in the payment capacity of clients, but there is an incentive to continue taking out of balance damaged assets due to supervisory and regulatory imperative. “The banks’ balance sheets and delinquency levels are stable and controlled. We have a delinquency rate of 3.4%, but financial institutions are focused on optimizing capital consumption driven by Basel IV,” notes the expert. .
The provision requirements that banks support for healthy or up-to-date financing that have been restructured or refinanced have put another type of alienable asset on the market: re-performing loans (RPLs), with the capacity to also attract less investors. assets in other portfolios. Santander has just closed the last transaction like this, with a portfolio of 90 million gross nominal value, acquired by Balbec Capital. This American fund is standing out, in fact, as one of the largest investors in this new type of assets since it closed with similar operations with Banco Sabadell, Cajamar and Abanca for a nominal value of more than 600 million.
Of the 4,712 million in portfolios for sale on the market or pending to close their transfer, 10% of the amount corresponds to this type of RPLs, an asset that only years ago was testimonial or did not exist. Real estate, in turn, barely represents 6% of the transactions opened today and the forecast is that they will represent 5% in sales for the year as a whole. When the financial crisis broke out, they were the dominant asset in the balance sheet cleaning exercise because billion-dollar portfolios were drained by almost all banks, along with their real estate subsidiaries and servicers.
The greatest activity is currently concentrated in the debt portfolio with defaults: 76% of the total is unsecured financing, largely linked to consumer loans and cards; and another 11% with collateral, such as mortgages.
Along with the type of assets, the maturation and development of the market has also brought changes in the operators. Almost all banks continue to bring assets to the market, although in smaller volumes and packaged in more specialized or less diverse assets because they have internalized the exercise as something routine to keep the ratio of damaged assets on the balance sheet low and to leave its management in the hands of experts. management. However, secondary transactions or between investors and funds other than the banks originating the asset have gained weight. Still, big players capitalize on transactions. Last year, 77.72% of sales were made by five big players: Sareb (it got rid of an exposure of 3,000 million euros), Santander (2,928 million), Blackstone (2,000 million), Deutsche Bank (1,380 million) and CaixaBank, with joint operations for a volume of 1,204 million.
210,000 million drained in a decade
Banks and funds have carried out operations with unproductive assets for a value that will be close to 209,840 million in a decade if this year’s forecasts are met (194,340 million between 2015 and 2023). Almost half were resolved between 2017 and 2018, pressured by the accelerated deterioration of bad debts after the outbreak of the financial crisis, which would lead most banks to remove the brick from their balance sheets in alliance with large funds and servicers. The operations carried out in 2023 were still more than half of those closed in all of Europe.
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