Of Special Interest


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27th July 2012

European banks carrying €1.5tr of non-performing loans

KPMG Portfolio Solutions Group estimate that European banks are carrying €1.5tr (£1.2tr $1.8tr ¥142tr Y11.6tr) of Non Performing Loan (NPL). Banks had been expected to dispose of significant NPL portfolios this year and have not yet done so. KPMG believe the combination of a poor market for such sales combined with very large amounts of cheap funds from the European Central Bank have encouraged the banks to carry the NPL.

Graham Martin, Head of the Portfolio Solutions Group and corporate finance partner at KPMG, commented: “A confluence of factors has restricted the much anticipated flow of transactions in the loan portfolio market. Perhaps the most powerful factor in delaying much-needed deleveraging by European banks has been the European Central Bank’s injection of more than €1 trillion of long-term refinancing operations (LTROs) in December 2011 and February 2012. The International Monetary Fund says that European banks need to shrink their balance sheets by $2.5 trillion, 75 percent of which is likely to come from asset sales. However the ECB’s three-year money has largely been used by banks to strengthen their balance sheets through profitable carry trades, reducing the pressure on them to sell non-core assets at non desirous prices.”

Nick Colman, director in the Portfolio Solutions Group at KPMG in Germany added: “There is a general view that cheap ECB money has reduced the urgency of asset sales in the short term. In terms of which types of loans are being affected, we are seeing delays in disposals of very large portfolios of long dated residential mortgages and project finance loans which are not necessarily heavily loss-making for the banks. However, we are still seeing a lot of activity in stressed and non-performing portfolios which are expensive from a capital perspective – such as commercial real estate - where value leakage for the bank is a key concern.”

Basel III is expected to bring pressure on bank to reduce the Risk Weighted assets and hence to sell some of this NPL.