
Banks’ phase of deleveraging non-core legacy debt is at “the end of the beginning”, not at “the beginning of the end”, agreed panellists at Real Estate Capital’s Europe forum 2015.
Based on an estimated £40 trillion of assets European banks have to de-lever, Ahmed Hamdani, managing director at HIG International Advisors, believed the sale of distressed debt still has a lot further to go.

“Banks are under regulatory pressure to shrink and political pressure to expand. How you square a circle is by selling stuff that doesn’t have jobs attached to it. The biggest chunk is real estate but not very much of it has happened [in the scheme of things],” he said, speaking at a session on distressed debt: NPL and work out strategies. “To use a cricketing analogy, we’re at lunch on day 2 of a test match.”
However, he noted that “European bank deleveraging has picked up in earnest over the past 12 months…whether by Italian banks, UK or German banks selling foreign exposure, or Austrian banks selling eastern European exposure”.
“Things are changing rapidly”, he said. “Even a year ago a lot of banks said ‘we have no bad loans; we’re provisioned’. They didn’t realise all the stuff they had; the AQR process moved them on.”
Citi’s Russell Gould called 2011 the “genesis of the NPL market”.
The director of commercial real estate finance EMEA at the bank, said “a lot of the clean-up has happened in the UK and Ireland” but following Nationwide’s sale of the Project Carlisle UK loan book to Cerberus late last year that would “probably be it for [the UK market]”, while a succession of four of five granular Irish loan books indicated that “the process [in Ireland was] running out of steam”.
As the wind down begins in certain core jurisdictions, panellists said portfolios are becoming more diverse.
“Almost all NPL portfolios are now comprised of or include non commercial real estate assets”, said Hamdani, including some SME, corporate, leasing and residential loans as well as land plots and incomplete developments.
“We’re now seeing different types of portfolios and geographies being brought to the market” agreed Gould, pointing to Dutch bad bank Propertize’s exploration of its entire real estate lending platform which has €4.3bn of net loan exposures.
“At some point Italy and Greece will open up”, he added.
Gould saw another two to three years of active NPL portfolio trading, although “not all will get financed”.
Banks have taken comfort from improved market conditions in which to sell assets. Said Jose Holgado, head of commercial real estate at German bad bank FMS Wertmanagement, which in June sold the €635m Project Gaudi NPL portfolio in Spain to Oaktree: “Today the market [in Spain] is very liquid…and we got a good price. Three years ago the timing would have been wrong”.
FMS has now wound down around two-thirds of its €27.2bn predominantly commercial real estate loans and plans to “make use of high liquidity in the market over the next 18-24 months”, he said.
Hamdani acknowledged that “a lot of money has been raised by big funds with a finite amount of time to deploy capital” while large portfolios in “deep” markets like the UK, Spain and Germany now offer IRRs of 10-12% compared to up to 20%.
“We’re seeing a disconnect between big [aggressively priced] portfolios versus small portfolios and the returns that can be targeted,” he said.
“If you’re looking to deploy €20-50m the field thins out because it isn’t worth a lot of people’s time. It’s still complicated to analyse those portfolios but pricing is more interesting and you can have a bilateral discussion with banks.
“There are 5,500 banks in Europe and not everyone has a billion to sell; they leak it out.”