Comment: ECB review adds next course to NPL feast for hungry debt buyers

Investor appetite for non-performing property loans is at an all-time high. For evidence, look no further than the sale by the liquidator of €19bn of IBRC bad bank loans and the speed at which they were auctioned off, says Cushman & Wakefield. Those IBRC sales, of loans on properties in Ireland, the UK and Germany, have pushed the NPL sales volume up to €30bn already this year, probably not far off the equivalent direct asset sales volume. With a further €23.4bn of sales in the pipeline and €21bn planned, 2014 is shaping up to be easily the biggest year for such deals yet.

So far, activity has been highest in the UK, Ireland and Spain, and more is to come. With property markets recovering, IBRC’s liquidator is to try reselling the €2bn overhang it didn’t shift before, and NAMA may accelerate sales of its remaining income-producing loans and properties. Lloyds may have almost completed its NPL sales, but the new RBS Capital Resolution Group has £10bn-£11bn of loans to sell in the next three years and Ireland’s Permanent TSB has another £10bn.

This suggests lots of property will also come into the market for years to come, so let’s hope property markets keep recovering. It has been a different picture elsewhere in Europe, but there is a consensus that this is about to change. Cushman predicts more sales in the Netherlands, Germany, Spain and Italy. PwC, which attracted 500 people to a London NPLs conference last month, says one outcome of the European Central Bank’s asset quality review (AQR) will be lots more NPL disposals; it estimates that Europe’s banks have €2.4trn of surplus non-performing or stressed debt, perhaps 25% of which is real estate.

Nowhere has the AQR been more galvanising than in Italy. Required to submit to a detailed examination of their holdings, the country’s banks are scrambling to write down books they previously swore were correctly provisioned. UniCredit recently announced a big clear-out of its balance sheet, setting up an internal bad bank with €87bn of assets, two-thirds of them non-performing.

Nobody knows which banks will pass. At the end of the AQR, banks will be stress tested. The past two rounds were criticised as flops, but for the first time, eurozone banks will be tested using a standardised methodology, designed, PwC says, to get a level playing field as a prelude to a single European supervisory mechanism.

PwC expects Spanish banks to be okay,  having spent the past two years kitchen-sinking their portfolios and already selling; it is less sure about Germany. The head of one company working on real estate NPLs says it expects to focus on Italy and Germany for the next few years. Italian banks are in the same tough spot as UK, Irish and Spanish lenders were three years ago, he says. “Among Italian banks there was a complete lack of recognition of their problems. The AQR has scared them sh**less and the end is nigh. There’s going to be a flood.”