Real estate makes up third of debt pile that will take banks a decade to shift

New inflow of ‘bad’ loans almost offset debt shed last year, leaving total at €2.4trn, PwC reports

European banks face another 10 years of deleveraging to shed €2.4trn of ‘bad’ loans they are still holding, according to PwC.

“It would be reasonable to say that around a quarter to a third is commercial real estate lending,” said Richard Thompson, chairman  of PwC’s European Portfolio Advisory Group.

“The rest is retail, like personal mortgages, secured and unsecured lending, corporate loans and other lending like shipping.

“We think there is more to come. I would bet that when we update the analysis next year, up to a trillion more will have come into non-core. It’s to do with the fact that banks are at different stages of deleveraging and reshaping.”

Despite having shed €560bn of non-core loans last year, the volume that banks hold remains  largely unchanged.

PwC estimated the face value of ‘bad’ loans run off or sold was almost fully offset by €500bn of new ones added to the pool in 2012, leaving the total at €2.4trn, just €100bn less than at the start of last year.

The most active deleveraging has been in the UK, Germany and Spain, where there have been large loan portfolio sales, totalling €10bn in each.

“European banks are now becoming more transparent in relation to the size of non-core portfolios and deleveraging,” said Thompson.

“The €500bn of new non-core assets identified in 2012, compared to €600bn of loan deleveraging in that year, confirm our estimate that the European deleveraging process will last at least another
10 years and loan sales are bound to increase. “Loan portfolio transactions reached €46bn  in 2012 and we expect sales to increase to €60bn  in 2013,” he added.

“If we look at potential loan portfolio transactions, PwC estimates  that there is only €70bn-€80bn of equity funding available in the market. This means those banks that are first to market continue to have an advantage.”