issue 4: a growing non core asset market - pwc€¦ · loan assets transacted during 2011 stood at...

European Portfolio Advisory Group

July 2012

Issue 4: A growing non core asset market

European outlook for non core and non performing loan portfolios

www.pwc.co.uk

Contents

Foreword ...............................................................................................................5

Executive summary ................................................................................................6

Highlights ..............................................................................................................8

NPLs by country 2008-11 .......................................................................................9

Germany .............................................................................................................10

UK ......................................................................................................................12

Spain ...................................................................................................................16

Ireland ................................................................................................................20

Italy ....................................................................................................................23

France .................................................................................................................26

Netherlands .........................................................................................................28

Greece .................................................................................................................31

Sweden ................................................................................................................33

Russia ..................................................................................................................34

Austria ................................................................................................................35

Denmark .............................................................................................................36

Poland .................................................................................................................37

Portugal ..............................................................................................................40

Turkey .................................................................................................................42

Ukraine ...............................................................................................................44

Hungary ..............................................................................................................46

Romania .............................................................................................................48

Czech Republic .....................................................................................................49

Slovakia ..............................................................................................................50

Finland ................................................................................................................51

Kazakhstan .........................................................................................................52

United Arabic Emirates (“UAE”) ...........................................................................53

European and global contacts ..............................................................................54

Foreword

Richard Thompson Chairman, European Portfolio Advisory Group

Welcome to our 4th annual European outlook for non core and non performing loan portfolios. In this document we explore the activity and outlook for the key European non core asset markets where the deleveraging process is just beginning.

Overall we expect activity levels to gradually increase over the rest of 2012 and 2013, following a strong start to the year.

Funding for non core asset sales is and will remain an issue but there is liquidity in the market if you know where to look.

We are working with a large number of financial institutions around Europe and our pipeline is the strongest it has ever been. We have advised on a significant number of deals this year and we expect a substantial number of transactions to come to the market in the coming months.

6 PwC • Issue 4: A growing non core asset market

We believe that the European deleveraging process is still at a very early stage. We strongly believe therefore that the market has significant room for growth and we estimate that non core loan portfolios with a face value in excess of EUR 50bn will be transacted by the end of 2012.

According to our latest estimates, total European non core loan assets amount to EUR 2.5trn with European NPLs exceeding EUR 1trn at the end of 2011, an increase of c.10% compared to 2010. Spain, Ireland and Italy were the largest economies experiencing a significant increase in NPLs from 2010 to 2011. Germany and the UK were the two large non core asset markets where asset quality appears to have stabilised with no further NPL increases reported.

With almost all major European governments implementing significant austerity and budget deficit reduction programmes, the likelihood of European asset quality improving in 2012 has decreased significantly.

Transaction levels for non core and non performing loan portfolio assets, have increased by 227% between 2010 and 2011 and have made a very strong start during 2012 with EUR 27bn of non core assets transacting between January and June 2012 (see Graph 1). However, the relative transaction sizes compared to the total volume of non core and non performing loan portfolio assets suggest that the deleveraging process is likely to be a very protracted one.

We estimate that investors are currently sitting on c.EUR 65bn of funds available to invest in loan assets coming out from the banks deleveraging process. Even after taking into account the effects of investor leverage, it is evident that banks who are successful in matching the right assets to the right investors and are willing to explore vendor financing options will have a significant advantage in achieving a successful sale.

Over the last 12 months, transaction levels in the non core loan portfolio and NPL market have increased significantly, with banks more actively looking to dispose non strategic or non performing parts of their loan portfolios. So has the “golden age” of investing in distressed debt finally started?

Executive summary

Graph 1: Non core asset transactions have increased by more than three fold between 2010 and 2011 and have made a strong start to 2012

2010 2011 2012 (6m)

France, EUR 11.1bn

Germany, EUR 4.3bn

UK, EUR 7.5bnUK, EUR 8.8bn

UK, EUR 3.6bn

Spain, EUR 4.0bn

Spain, EUR 3.7bn

Italy, EUR 1.9bn

Ireland, EUR 15.0bn

Portugal, EUR 4.2bn

Other, EUR 1.2bn

Other, EUR 4.0bn

Other, EUR 2.0bn

Switzerland, EUR 2.1bn

EUR 36.0 bn

EUR 26.6 bn

EUR 10.8 bn

Source: Press articles, company and other publicly available information

Issue 4: A growing non core asset market • PwC 7

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Market transactions (face value) Jan 2010 - Jun 2012 (EUR bn)

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Tier 4 Low market liquidity

Tier 2 Low market liquidity

Tier 3High market liquidity

Tier 1 High market liquidity(focus on international investors)

CEE

Turkey

Graph 2: International investors have focused on liquid markets with a significant amount of non core assets

Note: Liquid markets are defined as markets where loan transactions have exceeded EUR 4bn between January 2010 and June 2012


Based on our analysis using transaction data for the last three years, we estimate that Europe is currently a four tier market from a non core market perspective:

Tier 1 (Liquid markets with >EUR 80bn of NPLs): This tier includes the UK, Spain, Ireland, Germany and France. These represent markets that are currently the focus of international investors and are able to absorb multibillion Euro transactions.

Tier 2 (Illiquid markets with >EUR 80bn of NPLs): This category includes Italy which is one of the largest European markets although we are seeing some signs of increasing transactions after a long period of inactivity.

Tier 3 (Liquid markets with <EUR 80bn of NPLs): This category includes markets that, despite their moderate size, are characterised by a significant degree of liquidity. Portugal is one of the smaller European markets where transaction levels and average sizes of the portfolios transacted have remained significantly above expectations given the market size, EUR 12bn of NPLs in 2011.

Tier 4 (Illiquid markets with <EUR 80bn of NPLs): This includes moderate size markets (such as CEE, CIS countries, Greece) which, for a number of reasons (such as increased sovereign risk, dominance of local investors lacking significant firepower and lack of developed non core asset transaction framework), are characterised by relatively few transactions.


Germany: Experienced stabilisation in asset quality compared to 2010 on the back of a strong economic recovery. Taking into consideration the size of the market, non core asset transactions have remained at relatively low levels and we expect only a gradual increase driven mainly by non German institutions looking to exit the German market.

UK: Overall asset quality has stabilised compared to 2010. We expect the UK to be one of the key non core asset markets for the rest of 2012 and 2013 since it remains the most popular investment destination for international non core asset investors. The market is characterised by significant liquidity and depth, being able to absorb secured non core portfolio sizes in excess of EUR 1bn. Total non core loan assets transacted during 2011 stood at EUR 8.8bn, with Q1/Q2 2012 recording asset sales of EUR 3.6bn

Highlights

Ireland: Asset quality has continued to deteriorate, albeit at a slower rate than in 2010. Irish banks were one of the most active sellers of non core assets in 2010 and 2011, focusing mainly on assets outside Ireland. We expect the rest of 2012 and 2013 to see the first significant sales of Irish assets, the outcome of which will play a significant role in price setting and the success of the Irish banking deleveraging process.

CEE: The region remains dominated by local players who are now in the process of expanding their presence across the whole of CEE in order to leverage their experience and expanding capital base since, given their limited size, local markets may offer limited room for growth. Preferred asset classes remain retail NPLs.

Nordics: Covered for the first time in issue 4 of our publication, the Nordics are gradually becoming the focus of international investors given the regional political and economic stability. However the relative small market sizes and lack of a developed non core asset market will facilitate only selective transactions in the next 12-24 months.

Spain: Asset quality continued to deteriorate with NPLs recording an increase of 23% year on year as the property market continues to register price falls. 2011 has been one of the most active years for the Spanish non core asset market, driven primarily by increased regulatory pressure on banks to increase provisions and clean up their balance sheets. Total non core assets transacted during 2011 stood at EUR 5bn, driven primarily by sales of unsecured portfolios. We expect transaction volumes and number of sales to increase further in 2012.

Italy: The Italian market experienced the largest recorded increase in NPLs from all major western European economies in 2011, with NPLs increasing by 37% compared to 2011. The non core asset market appears to be coming back to life after a significant period of inactivity, with a number of transactions occurring in the second half of 2011 and first quarter of 2012.

NPLs by country 2008-11


2008 2009 2010 2011

Germany 142 204 196 196

United Kingdom 88 155 172 172

Spain 66 97 111 136

Ireland 15 88 109 119

Italy 42 59 78 107

Sub-total 353 603 666 730

France 51 77 87 88

Netherlands 32 58 52 52

Greece 12 19 27 40

Sweden 7 15 14 13

Russia 1 17 25 26

Austria 9 12 17 18

Denmark 8 13 16 17

Poland 9 12 15 15

Portugal 5 8 10 12

Turkey 7 10 10 8

Ukraine 2 6 8 7

Hungary 2 3 5 7

Romania 1 3 5 6

Czech Republic 3 4 5 6

Slovakia N/A N/A 2 2

Finland 1 1 1 1

Sub-total 150 258 299 318

Total 503 861 965 1,048

Kazakhstan 4 17 15 19

UAE 4 8 14 18

Estimated quantum of NPLs by country 2008-11 (EURbn)

Source: Various central banks, regulatory authorities, financial statements and PwC analysis


Credit and asset quality trendsThe overall loan volume of German monetary financial institutions (MFIs) remained relatively stable in 2011. Total lending volume of MFIs to non-banks marginally declined by 1.3% (EUR 53bn) from EUR 3,995bn in 2010 to EUR 3,942bn in 20111. In contrast, total lending volume of German MFIs to banks increased slightly by 0.1% (EUR 3bn) from EUR 2,840bn as of 31 December 2010 to EUR 2,843bn as of 31 December 20112.

Based on our estimates, NPLs in Germany could be as high as EUR 196bn in 2011. This estimate is based on an analysis of eight out of the top 10 German banks (measured by total assets), which disclosed NPL information via annual reports. Additionally, NPL volumes of two bad banks EAA and FMS WM would

1 Deutsche Bundesbank, Banking statistics February 2012, page 20

2 Deutsche Bundesbank, Banking statistics February 2012, page 16

further increase our NPL estimate. These two bad banks are not included in our estimate. We consider that the stabilisation in asset quality is attributed to the recent economic recovery in Germany.

Non core asset activity level

In 2011, portfolio transactions remained relatively low mainly due to:

• Government support, which allowed banks to run-off or restructure distressed assets instead of selling portfolios of non core assets; and

• the pricing gap between sellers and buyers.

Based on the few publicly known transactions, major portfolio deals have covered non-performing commercial real estate loan portfolios as well as smaller non-performing consumer loan portfolios.

Portfolio sizes traded in 2011 ranged from EUR 136m for smaller property loan portfolios to EUR 1.3bn face value for larger commercial real estate portfolios. The majority of traded portfolios in 2011 were sold by commercial banks including foreign banks as well as local financial institutions.

The investors currently most active in the broader European market are also those most active in Germany. These are large private equity funds and specialised distressed debt investors. There were, however, also much smaller transactions, which have been the target of small investors.

Debt fundingAvailability of debt funding for non core asset investors has declined in 2011. This was mainly due to factors such as the current Eurozone crisis, the overall negative economic outlook and increased capital and liquidity requirements for banks imposed by Basel III. Consequently, certain deals were completed with the use of vendor financing.

Collateral valuesResidential property prices in Germany have picked up since 2010, mainly driven by favourable financing conditions. However, price movements are subject to significant regional variations with the most significant increase in prices recorded in urban areas. Furthermore, prices of newly constructed houses exceeded those of owner-occupied houses for resale.

The commercial real estate market in Germany, in contrast, appears largely relatively stable from a pricing perspective. The vacancy rate of office space declined, leading to an increase

GermanyAsset quality stabilises with government continuing to support bad banks

Graph 1: Germany - NPLs (EUR bn)

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Source: BaFin Annual Reports, PwC estimate


in prime rents after a period of stagnation in 20103.

Nevertheless, values for non-prime commercial properties especially in secondary or tertiary locations are significantly below their peak.

3 Deutsche Bundesbank, Financial Stability Review 2011, November 2011, page 50

Source: BaFin Annual Report 2009 and 2010, PwC estimate

Graph 2: German NPL Volume 2005 - 2011 (EUR bn)

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Table 1: Recent transactions:

Seller Buyer Asset type UPB (EUR m) Completion date

Bundesbank Not applicable

Commercial mortgage backed securities

238 In progress

Eurohypo US Bancorp / Blackstone / Wells Fargo

Mixed real estate performing portfolio

600 (EUR 570m purchase price)

Jun-2012

Bundesbank PIMCO Commercial real estate NPLs 1,275 Apr-2012

Bundesbank Lonestar CDO real estate portfolio 960 Apr-2012

Eurohypo Wells Fargo / Blackstone

Performing commercial real estate US loans

424 Apr-2012

Eurohypo US Bancorp Single property loan 136 Apr-2012

Deutsche Bank Lindorff Mixed NPL portfolio unsecured consumer loans and commercial loans)

(EUR 200m purchase price)

Mar-2012

Bundesbank Lonestar Real estate loan portfolio 430 (EUR 279m purchase price)

Jan-2012

Eurohypo Blackstone US residential mortgages 227 Jan-2012

Syndicate comprising of Eurohypo, Landesbank Hessen-Thüringen (Helaba), Berlin Hyp and Archon Capital Bank

Colony Capital LLC

Commercial real estate NPLs 370 Aug-2011


Market value for the rest of 2012We expect the factors that have so far limited the number of transactions in the German market (mainly government support for the bad banks) to continue in 2012, resulting in a very gradual increase in non core asset transactions. For that reason, we expect that transactions will be driven predominantly by non German financial institutions looking to exit the local market as part of an overall strategic rethinking of their operations.


Credit and asset quality trendsTotal lending in the UK decreased at an annual rate of 4.7% year on year in April 20121, a continuation of a trend seen in the aftermath of the credit crisis of 2008. The decline in lending was driven by a 4.8% year on year decline to other financial services firms and a 3.7% year on year decline in lending to non-financial companies over the same period. On the other hand total household lending grew marginally at 0.2%.

Overall asset quality has remained relatively stable, compared to 20102. However, certain asset classes have experienced significant deterioration; commercial real estate being the worst affected. While residential real estate values have remained relatively stable in 2011 and Q1 2012; commercial real estate prices are expected, according to many industry experts, to decline in 2012 and beyond as borrowers face continued challenges in refinancing their existing loans, especially for non prime properties. It is estimated that

1 Bank of England, Bankstats Apr 20122 Deutshe Bank: European Banks “Running the

numbers: The Question Bank”-5 September 2011.

between GBP 85bn and GBP 114bn of outstanding commercial real estate loans may not be refinancable on current market terms. This is more than a third of the GBP 280bn to GBP 292bn value of outstanding debt secured by UK commercial property at midyear 20113. As borrowers find it increasingly difficult to either service or refinance commercial real estate loans, we are seeing an increasing number of loan sale transactions involving this particular asset class.

Non core asset activity levels2011 has seen an increase in transaction levels. We estimate that cEUR 8.8bn of non core loan portfolio assets were transacted in the UK during 2011, an increase of c17% compared to the EUR 7.0bn-EUR 7.5bn transacted during 2010. Non core loan transactions for 1H 2012 stood at cEUR 3.6bn.

3 De Montfort University, “UK Commercial Property Lending Market – Mid Year 2011” – December 2011.

Typical portfolio sizes sold by UK banks in the UK and abroad have ranged from GBP 300m to GBP 1.5bn in unpaid principle balances, with only a few portfolios exceeding that amount.

This increase in transactions was mainly driven by Royal Bank of Scotland and Lloyds, who pursued a strategy of disposing a mix of larger (cGBP 1bn+ face value) and smaller (< GBP 300m face value) portfolios. On the unsecured side, the sale of the MBNA credit card portfolio was one of the largest transactions in that particular asset type.

The majority of the completed transactions involved private equity investors as buyers. Strategic buyers (such as other financial institutions looking to expand market share) have been less frequent market participants given the liquidity and capital constraints that many of them are facing.

Many investors have commented that tranching the larger portfolios into smaller pools could attract more market interest and further increase competitive tension during the sale. Furthermore, we are currently seeing investors discussing partnering or structuring options for some of the larger portfolios aimed at bridging the bid ask gap and lack of liquidity in the market.

UK Most liquid market with investor appetite remaining high

Graph 1: United Kingdom - NPLs (EUR bn)

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Source: Deutche Bank Report, PwC analysis


Debt fundingAs with the general lending climate throughout the broader UK environment, debt funding for non core asset investors has become more challenging and expensive over the past year. The financing structures of several high profile deals have had to be altered as conditions deteriorated, causing delays and putting deals at risk.

Completed deals have involved a larger element of equity compared to the pre-crisis levels (up to and exceeding 50% in some cases), with debt financing becoming significantly more scarce and expensive. Some of the largest acquisitions have involved vendor financing. We increasingly see the provision of vendor financing as one of the key factors in achieving a seller’s target price.

Collateral valuesWe consider that commercial real estate is one of the most vulnerable asset classes for the rest of 2012 and the first half of 2013.

Housing values in the UK were largely stable over 2011 and early 2012. Over the long term, residential values in the UK are expected to increase 6% over the five years to 20164. However, these modest increases predicted will be challenged primarily by weak economic growth and constrained access to mortgage finance.

4 Savills, “Residential Property Focus” – Q4 2011.

Market view for the rest of 2012, 2013We expect an increase in the number of transactions beyond Q2 2012. As UK banks increase their provisioning and capital levels (UK bank Tier I Capital Ratios were estimated to be over 12% in 20115), we see UK financial institutions becoming increasingly confident to proceed with further sales of more complex and illiquid non core assets. We expect average portfolio sizes to remain below EUR 1bn, given the challenges experienced by investors in raising finance.

Completing a sale remains a challenge with asset selection, thorough preparation for sale and selected investor targeting some of the key determinants of a successful transaction.

Investors continue to face challenges servicing portfolios, particularly in relation to SME loans. The addition of a servicing platform with the portfolio sale makes deals more attractive, especially for the new entrants to the UK non core asset market.

We see new players such as sovereign wealth funds, non-European financial institutions, insurance companies, and US investment funds looking to partner with established investors in order to help them overcome the financing gap and address the lack of expertise in sourcing and completing non core asset deals.

5 Deutche Bank: European Banks “Running the numbers: The Question Bank”-5 September 2011.


Source: Deutsche Bank

Graph 2: NPLs trend 2001-2011 (EUR bn)

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Source: Bank of England

Graph 3: Total UK Lending - Annual Growth Rate %

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Source: Nationwide Building Society, Halifax

Graph 4: UK Housing Price Index

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Table 1: Recent transactions


Lloyds Banking Group Not applicable Shipping loan portfolio 7,600 In-progress

Lloyds Banking Group Not applicable Corporate debt positions 1,390 In-progress

Lloyds Banking Group Not applicable UK property loans 720 In-progress

Lloyds Banking Group Kennedy Wilson Europe Irish property loans 360 (EUR 61m purchase price)

Jun-2012

Lloyds Banking Group Morgan Stanley Real Estate / Blackstone

Australian commercial real estate loans


Jun-2012

Lonestar Tristan and Ellandi Single property loan 51 (EUR 25m purchase price)

Jun-2012

Undisclosed global FI Aktiv Kapital Unsecured consumer loans 264 Apr-2012

Varde/MBNA Aktiv Kapital Unsecured consumer loans 545 Mar-2012

Lloyds Banking Group HSBC UAE commercial and retail business

434 Mar-2012

Lloyds Banking Group Sankaty Advisors (Bain Capital )

Leveraged loans 580 Mar-2012

Babson Capital Not disclosed Leveraged loans 150 Feb-2012

Barclays Bank Kotak Mahindra Indian NPL credit card loan portfolio

45 Feb-2012

Lloyds Banking Group Not disclosed Commercial real estate assets 208 (EUR 66m purchase price)

Jan-2012

Barclays Bank Standard Chartered Indian credit card portfolio 27 Jan-2012

Lloyds Banking Group Varde Partners Consumer loans Not disclosed Jan-2012

Lloyds Banking Group Lonestar Commercial real estate loans 1,050 Dec-2011

Royal Bank of Scotland Blackstone Sub-performing commercial real estate loans

1,622 Dec-2011

Lloyds Banking Group Telereal Trillium Commercial property assets (EUR 52m purchase price)

Dec-2011

Lloyds Banking Group Goldman Sachs/ Morgan Stanley

Distressed property loans 1,159 Nov-2011

HSBC Cofidis Hungarian consumer finance portfolio

20 Oct-2011

Royal Bank of Scotland Paragon Group Unsecured consumer loans (EUR 49m purchase price)

Oct-2011

Citigroup (Egg Banking) Yorkshire Building Society Mortgage book 500 Jul-2011

Lloyds Banking Group Haymarket Financial Leveraged/Corporate loans 100 Jul-2011

MBNA Barclays Bank Consumer credit card portfolio 150 Apr-2011

Royal Bank of Scotland Perella Weinberg Spanish mortgage portfolio 290 Mar-2011

Citigroup (Egg Banking) Barclays Bank Consumer credit card portfolio 2,667 Mar-2011

Barclays Bank Crexus Investment Corporation

Performing commercial real estate loans


Mar-2011

Lloyds Banking Group Cerberus Capital Management

Performing commercial real estate loans


Jan-2011



Credit and asset quality trendsTotal loans granted to individuals and companies in 2011 amounted to EUR 1,783bn, representing a 3.3% decrease compared to December 2010 (EUR 1,844bn1).

In 2011 NPLs of the banking sector increased by c30% compared to December 2010, due to the economic downturn and high unemployment rate, with the delinquency ratio standing at 7.8% as at December 20112.

In 2012 the delinquency ratio has continued to increase and stood at 8.4% in the first quarter of 2012

Non core asset activity levelsTransactions on NPL portfolios have increased considerably in 2011, with Spain being one of the most active markets in Europe. Since January 2011, at least 31 transactions (mainly unsecured portfolios) have closed with a total book value of over EUR 9bn.

The principal drivers behind the increase in transactions are:

• increased regulatory pressure through an increase in core capital requirements from 8% to 10% for those groups or institutions that have not placed securities representing at least 20% of their share capital or voting rights with third parties and that have wholesale funding of more than 20%;

• the need for liquidity as wholesale markets shut off funding to large Spanish banks in the second half of the 2011; and

1 Bank of Spain, March 20122 Bank of Spain, March 2012

Source: Bank of Spain

Graph 2: Delinquency rate (EUR bn)

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SpainRegulatory reforms and high distress levels keep the pressure on banks

Graph 1: Spain - NPLs (EUR bn)

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• the 100% loss provisioning required, according to Bank of Spain regulations, of banks for unsecured doubtful accounts that are over 12 months past due.

The type of portfolios that traded were mainly secured loans, real estate owned (REO) assets and unsecured portfolios, with unsecured portfolios accounting for over 50% of the debt sold in 2011. The majority of unsecured portfolios that traded were made up of lending either to individual households or Small and Medium Enterprises (SME) debt.

Sellers in the Spanish NPL market are typically primary financial institutions, such as banks, along with utilities and telecom companies. However, it is expected in the coming months additional sellers will consider the disposal of retail, business and public entity debts.

The main buyers for the NPL portfolios sold to date have been international investors ranging from distressed debt funds to private equity and international debt servicing companies.

The newly elected Spanish government is implementing deep reforms in order to strengthen the balance sheets of Spanish financial institutions including stronger provisioning criteria. The government is currently in the process of implementing a new round of austerity cuts, as part of the 2012 budget.

During 2011 the Spanish Government passed a series of measures driven by the uncertainty in the financial markets regarding the value of construction and property development related assets, in the context of increased macro-economic and financial tensions in the euro area.

In February 2012, Royal Decree 2/2012 was approved in order to reduce the uncertainty of the Spanish financial sector. The two principal measures adopted were as follows:

Performing Assets: a generic provision requirement of 7% was established on performing loans to construction and property development companies (these loans amounted to EUR 123bn as of December 2011).

Non-performing assets: the Government required an increase in the level of provisions and an additional capital buffer for problematic loans related to land, housing, developments under construction and completed developments.

The total amount of these additional provisions required, together with the capital buffer, amounts to EUR 54bn for the entire financial system.

In May 2012, the second reform of the Spanish financial system (Royal Decree 18/2012) was approved, with the intention of dispelling doubts about the quality of the assets in the financial system. It stipulated further increase in the generic provisions for performing real estate assets to cover the risk of a hypothetical deterioration in asset quality. The decree establishes an increase in provisions to 30% on average (up from 7% in the previous reform) thereby increasing the volume of existing provisions by EUR 2bn. Additionally, the decree requires entities to transfer all of their foreclosed assets to an off balance sheet Asset Management Company (AMC) at fair value prior to the end of 2012. The decree requires that those financial entities that receive support from the Fund for Orderly Bank Restructuring (FROB) must dispose of 5% of these foreclosed assets per year and will have a maximum term of 3 years to deconsolidate the AMC (sale of 51% of equity).

In June, the Spanish Government requested Eurogroup aid for the recapitalization of the Spanish financial institutions amounting to EUR 10bn. The objective of this assistance is to meet the capital needs of those entities that do not reach the minimum requirements as a result of provisioning requirements.

Graph 3: NPLs - Individuals (EUR bn) as at March 2012


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Meanwhile, the Ministry of the Economy and Competitiveness together with the Bank of Spain asked for two independent consultants to estimate the capital needs of Spain’s 14 main banking groups under two specific scenarios (a base scenario and a stressed scenario). The consultants concluded that under severe macroeconomic pressure (the stressed scenario) capital needs for the Spanish banking sector as a whole would range from EUR 51bn-EUR 62bn. Additionally, Spain’s four largest audit firms, including PwC, are carrying out a detailed analysis of the banks’ loan portfolios assessing, among other matters, provisioning levels. The findings are due to be published by 31 July. The Bank of Spain will review and validate the results of this analysis and mandate, if applicable, the relevant additional capital needs and/or bank provisions.

We expect that increased core capital/loan loss provision requirements will drive new players to bring new portfolios to the market as potential asset sales are used as a way to quickly improve liquidity and strengthen capital ratios.

Debt fundingIn unsecured debt deals, there has been a strong reluctance to provide any vendor financing. However, in some cases profit sharing or deferred payment structures have been employed in order to bridge the price gap between seller and buyer. In the case of secured deals, vendor financing and retail financing is relevant in order to narrow the bid/ask gap and improve real estate future marketability.

Other sources of financing include US based credit facilities available to US distressed debt funds along with international investment banks; who instead of investing directly in these types of assets via equity, as was the case prior to the credit crisis, now prefer to take more senior debt positions.


Graph 4: NPLs - Corporates (EUR bn)

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Collateral valuesAccording to the Spanish National Statistics Institute (INE) as of March 2012 real estate prices have fallen by 10% since the fourth quarter of 2010 and by 22% since the first quarter of 20083. The main reasons for the decline in the price values are:

• the deterioration of the economy and high unemployment, which stands at approximately 25% in first quarter of 2012; and

• the increase in housing supply from the construction boom in recent years.

Overall, real estate transaction volumes have declined 76% between 2006 and 2011. Real estate market activity is at its lowest and new government measures will attempt to reactivate transactions. However, real estate prices are expected to decline further due to the huge stock of first and second homes currently owned by the banks, which are expected to come to the market gradually over 2012 and 2013. Spanish banks are currently one of the major suppliers of property in the Spanish market. We understand that in order to facilitate asset sales, financial institutions are currently offering 100% mortgages to prospective buyers of REOs.

3 Spanish National Statistics Institute

Market view for the rest of 2012, 2013The transaction volume of non core assets in the market in 2012 is expected to be far greater than those seen in 2011. A wider variety of assets is also expected to trade, including unsecured retail/SME debt, real estate assets, servicing platforms (currently a market under consolidation), other subsidiaries, single names/corporate restructuring and public administration debt.

NPLs will continue to increase in 2012. The Spanish economic downturn, both in terms of GDP and unemployment, has meant that the delinquency rate stood at 8.4% as at March 2012, which is the highest default level since 19944. Economic forecasts agree that during 2012 the increase in NPLs will even be greater, as the recession deepens.

4 Bank of Spain, November 2011



Confidential Confidential Unsecured consumer loans 624 Jun-12

Confidential Confidential Unsecured SMEs 176 Jun-12

Confidential Confidential Consumer loans 305 May-12

Confidential Confidential Consumer loans 1,100 Mar-12

Confidential Confidential Mortgage loans 90 Feb-12

Confidential Confidential Consumer loans 574 Feb-12

Confidential Confidential Mortgage loans 230 Feb-12

Lindorff Confidential Servicing Platform - Feb-12

Confidential Confidential Mortgage loans 170 Jan-12

Confidential Confidential SME loans 100 Jan-12

Confidential Confidential SME loans 240 Jan-12

Confidential Confidential Mortgage loans 150 Jan-12

La Caixa Confidential Consumer loans 900 Jan-12

Confidential Confidential Consumer loans 430 Dec-11

Confidential Confidential Consumer loans 300 Aug-11

Confidential Confidential Consumer loans 760 Aug-11

Bankinter DE Shaw SME loans 130 Jul-11

BNP Confidential Consumer loans 300 Jul-11

Bankia Confidential Performing consumer loans 200 Jun-11

Credifimo-Caja Sol Cerberus Mortgage loans 200 May-11

Santander Cerberus Mortgage and Corporate loans

260 Apr-11

MBNA Apollo Performing consumer loans 500 Mar-11

BBVA DE Shaw Consumer loans 300 Mar-11

Citigroup Aktiv Kapital Consumer loans 400 Feb-11

Unnim Aktua Mortgage loans 20 Feb-11

Santander Lindorff Consumer loans + Servicing Platform

350 Jan-11

Orange Confidential Consumer loans 260 Jan-11




Credit and asset quality trendsThe decrease in lending following the 2008 credit crisis continued in 2011 with overall lending to households and non financial corporations decreasing by 3.8% and 1.6% respectively compared to the previous year. Two of the most affected areas were mortgage (decrease of 2.5%) and consumption lending (decrease of 8%)1.

Asset quality deteriorated marginally in 2011 as the NPLs of the major Irish banks (including NAMA) increased by 18% year on year to cEUR 128bn. The major reason for the increase in NPL levels has been due to the continuing decrease in property prices.

The NPLs constituted c25% of the total loans of the major Irish banks (excluding NAMA) with a provision coverage ratio of c56% as at December 20112.

1 Central Bank of Ireland2 Financial Reports, PwC analysis

Non core asset activity levelsThe Irish non core asset market has been one of the most active markets in Europe during 2011, experiencing a significant increase in non core asset transactions. The uptick in activity is a direct result of Irish financial institutions planning to divest EUR 73bn of assets, from January 2011 to December 2013, under the Financial Measures Programme3. NAMA is also in the process of divesting loans it previously acquired from these Irish banks.

Deal sizes have varied widely with assets being sold ranging from EUR 100m to in excess of EUR 5bn. The types of assets that have been put to market and subsequently sold have been diverse both in type and performance.

3 Central Bank of Ireland

In total more than EUR 14bn of non core Irish owned assets were traded in 2011, making Irish financial institutions the most active sellers in the European market.

Market activity has mainly been restricted to non Irish assets, given the lower market liquidity in the Irish market and the higher discounts required by investors. Assets traded in 2011 and in early 2012 ranged from project finance loans to commercial real estate assets and smaller retail loans. Larger non-performing commercial and residential real estate loans have also traded4.

The loan portfolios have sought interest and been bought by a mix of private equity type investors as well as strategic investors, mostly US based. The private equity investors include Kennedy Wilson, Lone Star, Urbicus and Varde Partners. Strategic buyers such as SMBC, Wells Fargo, Nationwide, JP Morgan and GE have also acquired portfolios5.

4 News articles, PwC analysis5 News articles, PwC analysis

IrelandIrish banks are on path to achieve their deleveraging target

Graph 1: Ireland - NPLs (EUR bn)

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20

40

60

80

100

120

140

2008 2009 2010 2011

Source: Finanacial Reports, PwC analysis


Debt fundingExternal debt financing has been scarce and we believe that most assets were purchased predominantly through own funds available to major US private equity players, global banks and more strategic acquirers (such as Nationwide and Wells Fargo).

We expect that Irish banks looking to dispose of Irish portfolios and assets will need to give serious consideration to the provision of vendor financing given the scarcity of finance for these types of assets and the high discounts required by investors.

Collateral valuesProperty prices in Ireland continued to deteriorate with residential property index declining by 14% year on year in 2011 as compared to a 10% decline in 20106. Similarly commercial property values posted a year on year decline of 10% in 2010 and 20117.

6 News articles, PwC analysis7 News articles, PwC analysis

(10%)

(5%)

0%

5%

10%

15%

20%

25%

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

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-09

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10

Apr

-10

Jul-

10

Oct

-10

Jan-

11

Apr

-11

Jul-

11

Oct

-11

Total Lending to HouseholdsTotal Lending to Non-financial corporations

Source: Central Bank of Ireland

Graph 2: Changes in lending to households and non-financial corporations

60

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120

140

Jan-

08

Ap

r-08

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08

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-08

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-10

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11

Ap

r-11

Jul-

11

Oct

-11

Source: Central Statistics Office

Graph 3: CSO Residential Property Price Index



Allied Irish Bank Not applicable Property loans 675 In-progress

Allied Irish Bank Not applicable SME/real estate loans 480 In-progress

Ulster Bank Not applicable Commercial real estate loans 1,000 In-progress

Allied Irish Bank Bank of America Merill Lynch

Leveraged and corporate loans 300 Jul-2012

Bank of Ireland PensionDanmark UK infrastructure project finance loans 270 (EUR 255m purchase price)

Jul-2012

GE Money Pepper Irish residential mortgage business 600 Jun-2012

Bank of Ireland Aviva Special PFI UK infrastructure project finance loans 200 (EUR 162m purchase price)

Jun-2012

NAMA Morgan Stanley REI Property and development project loans 220 Mar-2012

Bank of America Apollo Credit card portfolio 650 Mar-2012

NAMA Pears Group/Development Securities

Development assets 120 Mar-2012

Allied Irish Bank Swedbank Mortgage portfolio Latvia Not disclosed Mar-2012

NAMA Orion capital management

Property loans to Cyril Dennis 600 (EUR 326m purchase price)

Dec-2011

Bank of Ireland Sumitomo Mitsui Banking Corporation

Project finance loans 590 Nov-2011

NAMA John Caudwell Car park (EUR 174m purchase price)

Oct-2011

Bank of Ireland Kennedy Wilson & Institutional Investors

UK commercial real estate loans 1500 (EUR 1,215m purchase price)

Oct-2011

Bank of Ireland Mortgage Works/Nationwide

UK residential property loans 1350 (EUR 1,240 purchase price)

Oct-2011

Bank of Ireland GE Energy Financial Services

Project finance loans 700 Oct-2011

Allied Irish Bank Blackstone and Wells Fargo

US commercial real estate loans 460 Oct-2011

NAMA Maybourne Finance Ltd

Hotel loans (EUR 800m purchase price)

Sep-2011

Anglo Irish Bank Lonestar, Wells Fargo and JP Morgan

US commercial real estate loans 7,200 Aug-2011

Bank of Ireland Wells Fargo US commercial real estate loans 1,000 Aug-2011

Anglo Irish Bank Elliot Associates/Urbicus

Scottish property loans 348 Jun-2011

Market view for the rest of 2012, 2013In 2012, we expect to see a continuation of the banks’ efforts to deleverage which will help maintain the upward trend in transactions experienced during 2011. There are transactions with a total UPB of greater than EUR 2.5bn which are currently either in progress or about to be brought to the market.

We expect to see continued interest in these assets, especially by US private equity players that have available funds for investment in case suitable opportunities arise. A substantial increase in supply could lower prices of these portfolios and help in reducing the bid-ask gap.




Credit and asset quality trendsTotal lending by Italian banks increased by 3.6% in the period from December 2010 to December 2011. Short term lending (up to 1 year) grew at a rate of 5.4% while medium and long term lending grew at 3% only. Corporate lending increased 3.1% over the year while lending to households increased by 4.3%. Real estate lending grew by 4.4%. Overall, banks have continued to tighten underwriting criteria, with many corporate borrowers concerned over their ability to access credit. Property lending has been adversely affected as well with the application of stricter loan-to-value (LTV) requirements, which have restricted new lending significantly1.

1 ABI Monthly Outlook – February 2012 – Synopsis

In December 2011, total gross NPLs in the Italian banking system exceeded EUR 100bn, reaching EUR 107bn (an increase of 37% compared to December 2010). At the same time, loan provisioning increased to 44% from 40% over the same period. The significant deterioration in asset quality is mainly attributed to worsening economic conditions in Italy, exacerbated by the austerity programme implemented by the current government2.

Non core asset activity levelsIn 2011, various banks started to actively look into their options for maximizing value from NPL portfolios.


In the first half of 2011, three competitive bid processes commenced, involving a variety of portfolios: UBI Banca (EUR 0.8bn), Intesa SP (EUR 4bn) and Banca delle Marche (EUR 1 bn)3.

However, the escalation of the Italian sovereign debt crisis affected the disposal processes adversely. This was mainly due to the increasing return expectations of investors driven by the increasing country risk premium for Italian assets, resulting in a significant increase in the price gap between buyers and sellers.

3 Press release, Financial statement notes

ItalySignificant increase in NPLs as economic conditions worsen

Graph 1: Italy - NPLs (EUR bn)

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20

40

60

80

100

120

2008 2009 2010 2011

Source: ABI Italian Banking Association


Despite the sovereign crisis, all of the three banks managed to complete the sale of a portion of the original portfolios, comprising mainly unsecured well provisioned loans. UBI Banca sold a portfolio of EUR 0.1bn in H1 2011, while Banca delle Marche and Intesa SP sold EUR 0.3bn and EUR 1.6bn in Q1 2012, respectively. UBI and Banca delle Marche mainly sold unsecured portfolios whereas Intesa SP sold a mix of secured and unsecured portfolios4.

In addition to the above, other sales of small NPLs, highly provisioned unsecured portfolios closed over the past year in the Italian market. This was driven mainly by the need of financial institutions to reduce NPL levels while at the same time minimise losses.

4 Press release, Financial statement notes

Debt fundingThe three disposal processes started in 2011 attracted the interest of different international investors together with local small funds, financial boutiques and servicers. The limited sizes of the portfolios finally sold by UBI Banca and Banca delle Marche pushed the deal towards local players who financed the deal solely through equity. On the other hand, the more recent and sizable Intesa SP NPL portfolio was sold to international investors, using leveraged structures. The buyers have not been publicly disclosed except for FBS, which bought the portfolio from Banca delle Marche5.

5 Press release

The funding market conditions, which deteriorated significantly since the summer 2011, are now improving as a result of the new technocratic Italian Government and the measures adopted by the Euro leaders to address EU sovereign debt crisis. Moreover, the ECB LTRO facility in addition to Italian state guarantees on new bank bonds, helped stabilise liquidity and funding in the short and medium term. We believe that, going forward, this could facilitate the application of vendor financing or deferred payment structures in non core asset transactions.

Collateral values In the last 10 years, the Italian real estate market has not experienced a real estate bubble.

In 2011, despite underwriting criteria continuing to tighten and despite the liquidity shortage, the Italian real estate turnover recorded a marginal increase (2011 year on year change expected to close, on average, at +1.7%) with this positive trend expected to continue in 2012 (year on year change estimated at 2.0%)6.

In terms of price changes, the real estate market in 2011 remained relatively stable compared to the previous year. In 2012 the real estate market is expected to record a marginal growth from a pricing perspective (residential expected year on year price change at +1%; offices at +1% and commercial at +1.4%)7.


7 European Outlook 2012 - Scenari Immobiliari

0%

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7%

Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11

Source: ABI monthly outlook

Graph 2: Loan growth analysis


Market view for the rest of 2012, 2013As a result of the economic downturn in 2012 we expect NPLs to continue to grow with banks considering the various options available for enhancing their balance sheet situation and improving liquidity.

At the same time, the recent measures (such as the labour and structural reforms) undertaken by the technocratic government have strengthened confidence in the Italian economy and increased the appetite of international investors for investments in the Italian non core assets.

We believe that this will lead to the increase of NPL deals starting from H2 2012. Furthermore, in order to bridge the bid ask gap, financial institutions and investors are currently exploring structured solutions such as partnership or other profit sharing arrangements.

0.0%

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3.5%

Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11


Graph 3: Net NPL/total asset

Graph 4: Gross NPL (EUR bn) and coverage rate



Intesa SP Not disclosed Mixed secured and unsecured loans

1,640 (EUR 270m purchase price)

Q1 -2012

Banca delle Marche

FBS Mainly unsecured loans 305 Q1 -2012

UBI Banca Not disclosed Unsecured loans 130 Q2 - 2011

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Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar 11 Jun-11 Sep-11 Dec-11

Gross NPL Provision coverage




Credit and asset quality trendsTotal loans remained broadly stable compared to 2010, increasing marginally by 1.17% in 20111. Even though banks have confirmed they are still willing to continue extending credits to consumers, SMEs, and corporate borrowers, they have tightened underwriting criteria significantly, especially in relation to borrowers in perceived “high risk” activities such as real estate, Leveraged Buy Outs (“LBOs”) and shipping.

Overall asset quality has decreased only marginally, with NPLs increasing by only 1% to EUR 88bn in 2011, compared to EUR 87bn as at the same period in 2010

1 Source: Capital IQ

Non core asset activity levelsFrench banks have been relatively inactive in 2011 in relation to non core asset sales. However, a significant increase in transactions has been experienced during the first quarter of 2012 when French banks traded assets in excess of EUR 8bn, focused mainly on non French exposures (predominantly USD exposures).

We believe that this is mainly attributed to the EBA announcement that all key Eurozone banks will need to meet 9% Tier 1 capital buffer ratio by 30 June 2012. As part of this process, we expect loan portfolio sales to accelerate during the second half of the year and 2013.

The majority of the sellers to date have been major French financial institutions, which have been transparent in relation to their deleveraging targets. On the other hand there have been limited announcements in relation to the regional and mutual banks.

As a result of the above, international investors are now becoming more interested in the French market after a long period of inactivity.

Debt fundingAvailability of funding for investors is expected to decrease in 2012 especially for portfolio sizes in excess of EUR 300m given the limited liquidity and funding for French banks.

Source: Financial Reports, PwC analysis

Graph 1: France - NPLs (EUR bn)

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40

60

80

100

2008 2009 2010 2011

FranceActivity peaks driven by French banks disposing non French assets


Market view for the rest of 2012, 2013It is expected that most of the major French Banking institutions have already met the 9% Tier 1 capital buffer ratio expected by the EBA as at 30 June 2012. As a consequence, we

expect that asset sales will continue to increase albeit at a marginal rate focusing on non French assets (US, UK, other European countries). Due to political pressures, French banking institutions are still reluctant to launch sales process in France.




Societe Generale Citigroup Shipping loans (EUR 1,000m purchase price)

Jun-2012

Societe Generale AXA Real Estate Performing real estate loans 1,200 Jun-2012

BNP Paribas Wells Fargo American energy lending business

8,300 Apr-2012

Societe Generale Lone Star Mainly unsecured loans 200 Apr-2012

Societe Generale Wells Fargo Property loans 454 Nov-2011

BNP Paribas Not disclosed Spanish unsecured loans 300 Jul-2011


Credit and asset quality trendsTotal loan levels on a consolidated level have increased marginally by 2.6% to EUR 1,921bn in 20111.

Many banks are trying to reduce their residential mortgage portfolios.

NPL levels for both corporate and households have remained relatively stable over 2011 and currently total EUR 52bn. NPLs as percentage of total loans stood at 2.7%, a decrease from the peak in 2009 when they reached 3.2%2.

Non core asset activity levelsThere were no large, complex portfolio sales. While banks have generally tried to decrease their exposures to residential mortgages, it has proven difficult to find buyers for such portfolios. We understand that local and foreign lenders are currently exploring options in relation to mortgage and corporate portfolios.

Both SNS Bank and DSB Bank (in bankruptcy) have sold parts of their mortgage portfolios. DSB Bank has sold parts of its portfolios in earlier years as part of the bankruptcy and liquidation proceedings. At the same time SNS bank has recently come under market pressure and is looking to strengthen its capital base3.Typical sizes of portfolios sold varied between EUR 80m and EUR 900m.

1 Source: De Nederlandsche Bank (DNB)2 Source: De Nederlandsche Bank (DNB)3 Source: SNS press release, Novapars press

release, Reuters

NetherlandsLimited transactions as pricing gap remains high

Graph 1: Netherlands - NPLs (EUR bn)

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60

70

2008 2009 2010 2011

Source: DNB

Source: De Nederlandsche Bank

Graph 2: Netherlands - Loans and receivables (EUR bn)

1,740

1,790

1,840

1,890

1,940

2008 2009 2010 2011


Local investors have been the most active ones to date in the market. These are, in most cases, independent financial investment firms that focus on the acquisition of performing and non-performing, consumer and mortgage loan portfolios in the Benelux and Germany.

Debt fundingIn general, banks have been much more cautious about lending and we believe are unlikely to finance non core asset deals.

Source: De Nederlandsche Bank

Graph 3: Netherlands - NPL / Total loans (%)

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1.0%

1.5%

2.0%

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2008 2009 2010

Source: Kadaster (Land registry), House price index

Graph 4: Netherlands - House price index (2005 = 100)

95

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105

110

115

2008 2009 2010 2011


Collateral valuesResidential property prices in the Netherlands have decreased by 4% in 20114. This represents a continued decline in house prices after decreasing in both 2009 and 2010. The financing market tightened further in 2011 with the risk appetite of the existing property lenders continuing to reduce. In addition, commercial real estate - especially office buildings - has shown increasing rates of vacancy. As of January 2012 approximately 14% (or 6,795,000 m2) of the total available office space stood vacant5. This implies pressure on commercial real estate values, which are expected to fall further in 2012.

4 Source: Kadaster (Land registry), House price index

5 Source: Real estate agency DTZ Zadelhoff

Market view for the rest of 2012, 2013We expect that banks will continue to have a preference for mainly running off non core portfolios and only selling selected parts of their loan book in order to avoid reporting large losses. This is because the potential losses from a large non core asset sale are likely to outweigh any benefits from capital release.



Uni-Invest (Opera Uni)

Patron Capital / TPG Capital

Defaulted CMBS 365 Apr-2012

Confidential Novapars Capital Residential mortgages (EUR 80m purchase price)

Sep-2011

DSB Bank Novapars Capital Mortgages and consumer credit


Jun-2011

SNS Bank SNS Reaal First loss pieces of mortgage securitisation


Dec-2010



Credit and asset quality trendsTotal loans to the private sector in 2011 decreased by approximately 3.6%1 from 2010 levels, mainly as a result of restricted supply from the banks.

On the demand side, the decline in households’ borrowing is the direct result of the significant decreases in disposable income. This is evidenced by the already high NPL ratio in consumer loans and the extensive restructurings of retail loan portfolios by the banks. Particularly with regards to mortgage loans, demand has been low, as potential property buyers anticipate greater adjustment in property prices.

On the supply side, banks’ limited access to funding, uncertainty over the final amount of their recapitalisation needs arising from the Greek debt restructuring and general uncertainty over the prospects of the Greek economy, have resulted in a significant tightening of lending criteria.

Asset quality has significantly deteriorated in 2011, with gross non-performing loans surging from 10.5% in December 2010 to 15.9% of total gross loans2. Consumer loans’ NPL ratio reached 28.9% in December 2011, while mortgage and corporate NPL ratios stood at 15.0% and 14.1%3 respectively. Contributing factors to the disposable income deterioration include increased GDP contractions (approximately 6.9% year on year in 2011) and high unemployment levels (unemployment reached 17.7% in 2011 vs. 12.5% in 2010)4.

1 Bank of Greece, Apr 20122 Bank of Greece, June 20123 Bank of Greece, June 20124 ELSTAT

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Graph 1: Greece - NPLs (EUR bn)

GreeceDeteriorating economic conditions and uncertainty keeps investors away

Source: Bank of Greece

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2008 2009 2010 2011

Mortgages Consumer Corporate Total

Graph 2: NPL as a % of total loans by category



Non core asset activity levelsBanks’ deleveraging has been focused mainly on non core foreign assets. In the last two years banks focused on the disposal of foreign subsidiaries, rather than on the disposal of NPLs of non core portfolios. The main reasons behind reduced appetite for deals in Greece include:

• the increased sovereign risk and economic instability in Greece; and

• the significant price gap between buyers and sellers, making potential transactions prohibitively expensive for banks, especially given the existing recapitalisation plan arising from the Private Sector Involvement (“PSI”) in the Greek sovereign debt restructuring.

Collateral valuesResidential property prices across the country continued their downward trend in 2011. In the Attiki and Thessaloniki areas, property values declined approximately 6.5% compared to 2010, while prices in other Greek urban regions dropped by c4%5.

5 Bank of Greece, April 2012

Market view for the rest of 2012, 2013Following their recapitalisation, Greek financial institutions are expected to undertake significant deleveraging steps over the rest of 2012 and 2013. The consolidated core Tier 1 minimum regulatory capital requirement for Greek banks has been set at 9% by end-September 2012 and 10% from June 2013 onwards6. We expect that this will force banks to restructure their balance sheets through the disposal of non core assets that carry an increased risk weight and higher regulatory capital requirements.

There is limited visibility on how the loan portfolio market will perform in 2012. Any market developments will depend on the banks’ shareholding structure following the recapitalisation and the macroeconomic environment, as the economy is expected to enter in a sixth year of recession in 2013. On the positive side, the conclusion of the loan quality assessment by Blackrock should provide investors with a clearer view regarding the quality of loan portfolios in Greece.

6 Law 4046/2012 (Government Gazette nr. Α’ 28/2012)

Blackrock estimated system-wide loan losses over a three year horizon in the range of EUR 30-EUR 35 bn (before provisioning and future profits)7, out of which, reportedly, approximately EUR 18bn have already been provided for.

So far, balance sheet deleveraging is focused on the disposal of banking and non banking subsidiaries and investments -both domestic and internationally based (realising EUR 950m in sales of foreign loan portfolios8).

The banking industry in Greece is expected to be affected in the medium term by the revised bank resolution framework. This framework provides various intervention techniques, including the transfer of assets and liabilities and the creation of an Interim Credit Institution (“ICI”). The Hellenic Financial Stability Fund (“HFSF”), which according to the new legislation will provide capital into ICIs, is required to dispose any bank holding within a period of two years from the time of recapitalisation (although this deadline may be extended for an additional two years for the sake of financial stability). Proton bank was the first bank to be resolved, setting up an ICI in October 2011.

7 IMF Country Report No.12/57, March 2012 8 IMF Country Report No.12/57, March 2012

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2008 2009 2010 2011

Gross loans Gross NPLs / Gross loans

Graph 3: NPL development in the Greek market (EUR bn)



Credit and asset quality trendsOverall bank lending in Sweden declined nearly 1% from December 2010 to June 20111. Gross NPLs as a percentage of total lending decreased from 1.8% in December 2010 to 1.6% in June 20112.

1 PwC estimates and bank information2 PwC estimates and bank information

Non core asset activity levels and market overview.Sweden is a relatively new market in relation to non core asset sales, given that Swedish banks have not been significantly affected by the Eurozone crisis. Even though we are not aware of any significant transactions occurring during 2011 and the first quarter of 2012, it is currently becoming the focus of many international investors.

In certain cases, Swedish banks have been looking to expand their exposures to core markets by acquiring portfolios from Western European banks looking to exit these particular markets. At the same time they are focusing on disposing holdings in markets that are no longer considered core.



Swedbank Delta Bank JSC Retail portfolio 170 May-2012

Source: Press release

SwedenRelative new market now becoming the focus of NPL

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2008 2009 2010 2011

Graph 1: Sweden - NPLs (EUR bn)



Credit and asset quality trendsAs at 1 January 2012 the total amount of outstanding loans by Russian banks loans was EUR 540bn (RUR 22,500bn), representing a 26% increase compared to the total loan balance as at 31 December 20101. This growth was mainly driven by an increase in retail lending of 45% (from EUR 90bn or RUR 3,649bn as at 31 December 2010 to EUR 131bn or RUR 5,439bn as at 31 December 2011). Corporate loan portfolios have also grown by 21% in 2011 (from EUR 337bn or RUR 13,569bn as at 31 December 2010 to EUR 409bn or RUR 17,061bn as at 31 December 2011) largely due to significant increase in lending to companies operating in the energy & gas and telecommunication sectors.

The overall increase in banks’ lending activity in 2011 was driven by increasing domestic demand for retail credit, rising oil prices, as well as liquidity support provided by the Central Bank of Russia.

1 Central Bank of Russia

Overdue loan portfolios increased by 4% to EUR 26bn (RUR 1,098bn) between 31 December 2010 (EUR 25bn or RUR 1,017bn)2 and 31 December 2011. Due to the significant increase in loan portfolios (while provision levels remained stable), the overall delinquency rate decreased from 5.9% as at 31 December 2010 to 4.9% as at 31 December 2011. The delinquency rate on retail loans declined from 7.6% as at 31 December 2010 to 5.3% as at 31 December 2011.

Non core asset activity levelsNPL transactions increased by 31% from EUR 1.4bn (RUR 60.2bn) in 2010 to EUR 1.9bn (RUR 78.7bn) in 20113.

The main driver behind transactions level in 2011 is the increased interest of banks in NPL portfolio sales rather than outsourcing to collection agencies services.

2 Central Bank of Russia3 Sequioia Credit Consolidation

Similar to most of the CEE markets, most of the transactions related to retail NPL portfolios with average transaction sizes of EUR 50m to EUR 75m. The very low volume in corporate portfolio transactions can be explained by the wide price gap between buyers and sellers and unwillingness from some of the banks to make public the poor quality of their portfolios.

Transactions during 2011 were predominantly completed by local collection agencies financed mostly through equity.

Collateral valuesProperty prices remained largely flat in 2011 with no expectations for significant price increases in 2012.

Market view for the rest of 2012, 2013We expect the number of NPL transactions to increase by c30% during the rest of 2012 and early 2013, which is in line with forecast growth in retail lending, as the Russian non core asset market continues to mature. However the lack of established regulatory framework for NPL acquisitions is an impediment to the market reaching its full potential.

RussiaTransactions remain limited with focus on retail portfolios

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Graph 1: Russia - NPLs (EUR bn)



Non core asset activity levelsThe Austrian banking sector is currently focused on meeting the EBA’s target of a 9% core Tier 1 ratio by 30 June 2012 mostly by restricting lending in the CEE market rather than cutting lending significantly in their local Austrian market. Going forward it is expected that any lending in CEE will be financed solely by local deposits rather than by wholesale funding or their own capital.

During the past year (2011), the Austrian market has seen a limited number of non core asset transactions. In 2011 ÖVAG sold its stake in Volksbanken International, comprising CEE network banks, to Russian Sberbank for a purchase price of up to EUR 645m. This transaction has been the largest 2011 announced Austrian transaction2.

Market view for the rest of 2012, 2013We expect that non core asset transactions will remain relatively stable in 2012, focusing on selected loan portfolios outside Austria and, most likely in CEE.

2 Mergermarket

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Graph 1: Austria - NPLs (EUR bn)

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2008 2009 2010 2011

Erste Group Bank Austria RZB

Graph 2: NPL ratio of selected Austrian banks

Credit and asset quality trendsTotal credit in the Austrian market increased 1.1% over the first half of 20111. This followed a 2.4% annual increase in 2010.

1 OeNB, Finanzmarktstabilitätsbericht 22 S126

At the same time credit quality deteriorated with total NPLs increasing by 4% in 2011 over the prior year for Erste Group, Bank Austria and RZB.

Source: Financial Reports

AustriaBanks concentrating on the Austrian market as looking to decrease CEE exposures

Source: OeNB, Finanzmarktstabilitätsbericht 22 S126


Credit and asset quality trendsTotal loans outstanding for commercial banks declined from EUR 202bn in 2009 to EUR 168bn by end of 2011, driven primarily by a decrease in corporate lending. However loans from mortgage banks have been growing steadily from EUR 296bn to EUR 323bn over the same period. The development within Tier 1 banks is primarily driven by repo lending no longer being recorded on the books1

NPL levels have increased marginally by 6.25% to EUR 17bn in 2011 from EUR 16bn in 2010. The trend is to a large extent negatively affected by write downs in the assets managed by the Financial Stability Fund where the asset quality is particularly poor. There is however significant variations between NPL levels among different banks with some struggling with material increases in vulnerable and non-performing loans2.

1 Danish Central Bank2 Finanstilsynet, Pengeinstitutternes

regnskaber 1. halvår 2011, Halvårsartikel 2011 for pengeinstitutter

Non core asset activity levelsDuring 2011, some limited activity has occurred within real estate portfolios with banks and mortgage institutions trying to slim down their balance sheets in order to focus on core business. Most recently, the Financial Stability Fund took over FIH Erhvervsbank’s real estate portfolio with a clause that FIH would cover any losses Financial Stability incurs on the portfolio.

Improved asset pricing during Q1-Q2 2011 along with increased equity values faded during 2011, as the Eurozone crisis became the investors’ main focus of attention.

The key loan assets that have traded relate to prime real estate (central Copenhagen), infrastructure, and healthcare.

DenmarkNPL levels increase marginally with transaction focus mainly on mortgage portfolios

Sellers have predominantly been local banks along with mortgage institutions. Buyers have typically been international real estate private equity funds, other major financial institutions and, in certain cases, high net worth individuals.

Debt fundingDebt funding depends on the type of buyer. Although it remains available to major financial institutions looking to invest in non core assets, it has not been available to other investors.

Collateral valuesProperty prices are now beginning to stabilise after 3 years of price falls, supported by historically low finance costs since demand for property has been driven to a great extent by the very low interest rates on mortgages. There are however very large geographical differences between the demand for property in the bigger cities and the outskirts of Denmark, which are still recording significant price falls3

Market view for the rest of 2012, 2013We expect that non core asset sales will remain relatively stable for the rest of 2012 and 2013, as Danish financial institutions wait for the Eurozone crisis to stabilise prior to proceeding with significant non core asset sales.

3 Sadolin & Albæk, Property market reports 2010 and 2011

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2

4

6

8

10

12

14

16

18

2008 2009 2010 2011

Graph 1: Denmark - NPLs (EUR bn)



Credit and asset quality trendsLending growth has been marginally positive1 as of April 2012 compared to 2010. The most significant growth has been in the SME and corporate loan sector with a 26% and 15% increase respectively compared to December 2010. The residential and housing loans in PLN have experienced growth of 29% compared to 2010 but foreign exchange denominated mortgages remained stable (with a shift from CHF to EUR). On the other hand, consumer loans experienced a decrease of 5% compared to December 2010.

Foreign exchange structure was not changed, with c1/3 of the loans outstanding at April 2011 consisted of foreign exchange denominated contracts which were impacted in 2011 by PLN-fx volatility (in the period December 2010 to April 2011 PLN depreciated by 16% against CHF and 11% against EUR). This volatility resulted in an increase in NPLs, especially in CHF denominated mortgages.

1 Polish Financial Supervision Authority Reports

Levels of NPLs have decreased marginally at April 2012 mostly due to improvement in SME and corporate portfolios (from 14.6% at December 2010 to 12.4% at April 2012 and from 9.4% to 7.8% respectively). On the other hand, non-performing household consumer loans and mortgages increased by 1% to 18.3% and by 0.7% to 2.5% respectively over the same period

Non core asset activity levelsIn 2011/12 there was an increase in transaction levels as compared to 2010.

In 2011 Polish financial institutions have been predominantly focused on selling their retail portfolios. In the first half of 2011, there were only limited sales of corporate portfolios. Over the last 3-5 years more banks used the sale of non core loans as an effective way of dealing with NPLs.

PolandHigh transaction activity focused on small retail portfolios

Graph 1: Poland - NPLs (EUR bn)The most active seller in the Polish market in 2011 was PKO BP - the largest bank in Poland. Other sellers include banks such as BZ WBK or Kredyt Bank. In addition the telecoms and IT industry have been very active in selling receivables.

On the investor side, the local investor market has also shown steady demand for such assets.

Debt fundingThe majority of completed transactions involved securitization funds, which are a part of specialized debt collection companies.

Financing for deals has typically included the issuance of asset backed securities or debenture bonds as well as revolving loans. The receivables market has seen interest from national and overseas professional investors. Some of the firms are listed on Warsaw Stock Exchange.

Availability of funding for investors appears likely to decrease in 2011 due to lower liquidity in the market.

Collateral valuesPrices of real estate experienced a marginal decrease in 2011 and this trend has continued in 2012. According to Central Statistical Office of Poland, price per square meter for residential properties decreased by c14%2 . This was driven mainly by excessive supply of flats and other residential properties available in the market and stricter underwriting criteria applied by the banks for housing and property lending.

2 Central Statistical Office of Poland (GUS)

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2

4

6

8

10

12

14

16

2008 2009 2010 2011 Apr-2012

Source: KNF Reports, IBnGR


Market view for the rest of 2012, 2013We expect the NPL market to grow further over the next 2-3 years despite the bid ask gap and uncertainty over collateral prices and financing shortage. Banks and other creditors will be more willing to sell their portfolios, as they recognize benefits from such transactions and investors are able to realise their targeted returns. However, we do not expect average transaction sizes to increase significantly given the limited presence of international investors.

0%

4%

8%

12%

16%

2009 2010 2011 April 2012

Large SME

Graph 3: Non-performing loan ratios for enterprises (%)

0%

20%

40%

60%

80%

Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11

Households EnterprisesNon-financial sector

Graph 4: NPL Provisions per loan type (%)

0%

4%

8%

12%

16%

20%

2009 2010 2011 April 2012

Credit card lending Other consumer loans Housing loans Other

Graph 2: Non-performing loan ratios for main types of loans to households (%)

Source: Polish Financial Supervision Authority Reports





Seller Buyer UPB (EUR m) Completion date

Eurobank KRUK S.A. 28 (EUR 3m purchase price) Jun-2012

BPH GE Capital S.A. Fast Finance S.A. 17 (EUR 2m purchase price) Jun-2012

Electronic media company P.R.E.S.C.O. 12 (EUR 2m purchase price) May-2012

BNP Paribas Bank Polska S.A.

P.R.E.S.C.O. 5 (EUR 1m purchase price) Jun-2012

Idea Bank S.A. Gremi Solutions S.A. 2 (EUR 0.1m purchase price) Jun-2012

PKO BP SA KRUK S.A. 63 (EUR 5m purchase price) Apr-2011

PKO BP SA Ultimo 4 (EUR 1m purchase price) Apr-2012

PKO BP SA Intrum Justitia 163 (EUR 34m purchase price) Apr-2012

PKO BP SA Kredyt Inkaso 126 (EUR 29m purchase price) Dec-2011

PKO BP SA Kredyt Inkaso 122 (EUR 5m purchase price) Dec-2011

BZ WBK SA KRUK S.A. 55 (EUR 11m purchase price) Dec-2011

Bank P.R.E.S.C.O. 20 (EUR 2m purchase price) Dec-2011

Financial institution EGB Investments SA 3 Dec-2011

Krakowski Bank Spółdzielczy Cash Flow S.A. 3 Nov-2011

Santander Bank S.A. KRUK S.A. 130 Nov-2011

Telecom company P.R.E.S.C.O. GROUP S.A. 2 Nov-2011

PKO BP SA Kredyt Inkaso 232 (EUR 28m purchase price) Oct-2011

PKO BP SA P.R.E.S.C.O. GROUP S.A. 8 Oct-2011

Eurobank S.A. P.R.E.S.C.O. GROUP S.A. 25 (EUR 2m purchase price) Oct-2011

Insurance services company EGB Investments SA 1 Sep-2011

PKO BP SA KRUK S.A. 83 (EUR 17m purchase price) Sep-2011

PKO BP SA BEST II NS FIZ 13 Sep-2011

Telecom company EGB Investments SA 1 Jul-2011

BRE Bank S.A. KRUK S.A. 145 (EUR 23m purchase price) Jun-2011

Telecom company EGB Investments SA 1 Jun-2011

Insurance services company EGB Investments SA 1 Jun-2011

PKO BP SA KRUK S.A. 130 Jun-2011

IT company EGB Investments SA 1 May-2011

IT company EGB Investments SA 5 Apr-2011

Kredyt Bank SA BEST S.A. 280 Apr-2011

IT company EGB Investments SA 1 Mar-2011

Source: Press articles, Company and other publicly available information


PortugalServicing market and legal enforcement remains a concern as deleverage accelerates

Credit and asset quality trendsAs at December 2011, loans granted by the financial sector to companies (non-financial corporations), decreased by 3% compared to December 2010. Loans to households decreased by 2% over the same period, with the most significant credit reduction observed on consumer loans, which experienced a decrease of 7.2% in December 2011 compared to the same period in 20101.

NPL increased by 20% to EUR 12bn as at the end of 2011. The deterioration in the overall credit quality has mostly derived from the SME and consumer loans. As at December 2011, overdue SME loans stood at 8.1% comparing to 5.4% in December 2010. As at December 2011, consumer overdue loans stood at 10.5% compared to 8.5% in December 20102.

We believe that this is a direct result of the economic downturn registered in 2011 and the significant rise of the unemployment rate. According to the Bank of Portugal, the unemployment rate in Q4 of 2011 increased to 14%

1 Bank of Portugal2 Bank of Portugal

which was significantly higher than the 11.1% recorded in the same period of 2010. At the same time, GDP for the year ended 30 September 2011 dropped 1.7% compared to the previous year.

Non core asset activity levelsThe key driver behind the recent portfolio transactions has been the need of national banks to “deleverage” their balance sheets, as a result of the increasing capital requirements imposed by local regulators and international authorities.

Portfolio sales recorded to date comprised mostly of performing, syndicated project finance loans granted to UK, USA, and Latin American borrowers. These portfolios are known to have been traded in Q1 and Q2 2011 to several investors (sold in tranches) located in South America and Asia.

In addition to the above, there has been a significant increase in the sale of unsecured portfolios.

Sizes for the non core asset portfolios sold varied from EUR 1bn – 2bn for some of the performing portfolios to EUR 50m – 200m for the unsecured portfolios.

Banco Espírito Santo and Millenium BCP were the most active sellers during 2011. There have been limited sales from non financial institutions. These portfolios were traded in tranches and sold to various investors located in South America and Asia.

Collateral valuesDespite limited liquidity, residential real estate prices have only dropped by 0.8% in 2011. However further property price drops are expected in 2012, mainly as a result of the prolonged economic uncertainty and the austerity programme implemented by the Portuguese government.

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2

4

6

8

10

12

14

2008 2009 2010 2011

Graph 1: Portugal - NPLs (EUR bn)

Source: Bank of Portugal




Banco Espírito Santo

Tranches split by several banks (Asia and Latin America mostly)

Performing (international) loans - Project Finance

2,600 Q1 - 2011

Millenium BCP Not disclosed Performing (international) loans - Project Finance

1,600 Q2 - 2011

Market view for the rest of 2012, 2013Portuguese Banks are expected to continue deleveraging their balance sheets during 2012 as a result of various factors, but most notably

• the increasing capital requirements from banking regulators;

• rising funding costs stemming from increased reliance on wholesale funding; and

• liquidity constrains.

We expect that the deleverage process will be completed through a combination of NPL portfolio sales along with sales of non strategic financial investment/participations such as non Portuguese subsidiaries of the major financial institutions.

While servicing capability is still a concern for investors, the external servicing market has increased significantly over the last couple of years. Concerns over the legal enforcement process remains, in our view, one of the main constraints for successful portfolio trades. Enforcement timing remains well above European norms, contributing to a widening of the bid ask gap between buyers and sellers.



TurkeySignificant decrease in NPL levels and an uptick in lending

Credit and asset quality ratingsSupported by strong domestic demand and low interest rates, Turkey experienced total lending growth of nearly 9% in 20111. However, the local regulator (CBRT) put a limit on loan growth in order to slow the overall economy.

Even though total loan volume increased by 9% in 2011 compared to 2010, NPLs decreased by 20% in 2011 with the NPL ratio declining to 3.8%2 (cEUR 8bn).

1 BRSA2 BRSA and PwC estimates

Non core asset activity levelsNon core and NPL transaction levels have continued to increase in 2011, as demonstrated by the total assets managed by the various local collection agencies, summarised in the table opposite.

Market view for the rest of 2012, 2013The Turkish local non core asset market is established with a major number of local players specialising in the acquisition of NPLs. Given that the Turkish NPL ratio has consistently floated in a range between 3% and 5% from 2008 to 2011 we are of the view that transaction levels will remain relatively stable going forward.

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8

10

12

2008 2009 2010 2011

Graph 1: Turkey - NPLs (EUR bn)

Source: BRSA, PwC analysis




Denizbank Girişim Asset Management Consumer loans 14 Apr-2012

Isbank Efes Asset Management Consumer / Corporate loans 79 Dec-2011

Yapı Kredi LBT Asset Management Consumer loans 104 Nov-2011

Denizbank Standard Asset Management & Efes Asset Management

Consumer / Corporate loans 48 Oct-2011

Finansbank LBT Asset Management Corporate loans 103 Feb-2011

Denizbank Girişim Asset Management Consumer / Corporate loans 40 Apr-2011

Şekerbank Girişim Asset Management Consumer / Corporate loans 52 Mar-2011


29 38 54 99 118

167 172 182

257 279

6 5 3

5 5

6 7 10

10 8

21.3%

13.0%

6.4%5.0%

3.9% 3.6% 3.8% 5.6% 3.8% 2.8%0%

5%

10%

15%

20%

25%

-

50

100

150

200

250

300

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Loans Total Gross NPL Total Gross NPL / Loans Total

Graph 2: Turkey - NPL & Loan (EUR bn)

Source: BRSA


UkraineFall in property prices drives banks to focus on unsecured retail loan transactions

Credit and asset quality ratingsIn 2011, total lending increased 9.7% compared to 20101 . After a temporary freeze, almost all Ukrainian banks renewed their lending activities, in both corporate and household markets for both secured and unsecured.

Despite the increase in lending, the level of NPLs has decreased by 5.3% in 20112. The key driver has been the improvement of risk management at the banks and more effective debt collection procedures.

Non core asset activity levelsDuring 2011, Ukrainian banks focused predominantly on selling their retail NPLs, largely through bilateral non public transactions. We estimate that 80-90% of NPLs for sale are non-performing consumer unsecured portfolios.

1 National Bank of Ukraine2 National Bank of Ukraine

Non core sales will be driven by :

• strategic repositioning by sellers (for instance, several banking groups have left the retail lending market and some multinational banks announced plans to exit Ukraine);

• repositioning of financial institution balance sheets in order to improve credit ratings and release internal resources from debt collection activities; and

• favourable changes in taxation.

The main sellers of non core assets have been the large Ukrainian banks with foreign capital. The main driver for these sellers is to comply with tighter regulatory and tax rules. Buyers of the majority of the completed non core transactions have involved local collection agencies with significant presence in Ukraine.

Collateral valuesProperty prices fell by 7.5% on average since 2010 in both residential and commercial property, due primarily to the depreciation in the local currency.

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2008 2009 2010 2011

Graph 1: Ukraine - NPL (EUR bn)

Source: National Bank of Ukraine


Market view for the rest of 2012, 2013We expect sales of consumer NPLs to continue strongly for 2012 and 2013, as an established way for the banks to decrease their NPL ratio. We gradually expect banks to start bringing consumer residential mortgage portfolios into the market; however that will depend on the property market stabilising.

Source: Natioal Bank of Ukraine

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

60

62

64

66

68

70

72

74

76

2009 2010 2011Total loans NPLs as % of total loans

9.7% 9.7%

11.2%

Graph 2: Ukraine - Loans and delinquency rate (EUR bn)


HungaryDepreciation of HUF one of the main reasons behind increase in NPLs

Credit and asset quality trendsTotal lending of the Hungarian banking sector has remained relatively stable, increasing by 3% over the eleven months to November 20111. However, the two opposing factors that have influenced total loan growth in Hungary are:

• the local currency (HUF), which has depreciated 15% against the Swiss Franc and has resulted in an increase in the principal outstanding on Swiss Franc denominated lending; and

• the generally restrained lending activity by Hungarian banks.

1 Hungarian Financial Supervisory Authority (HFSA)

0%

5%

10%

15%

20%

25%

0

2

4

6

8

10

12

2008 2009 2010 September 2011

Special watch loans

Below average loans

Doubtful loans

Bad loans

Total bad, doubtful, below average and special watch loans / Total loans (%)

Graph 2: Hungary-Loans (HUF bn)

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8

2008 2009 2010 2011

Graph 1: Hungary - NPLs (EUR bn)

Source: Hungarian Financial Supervisory Authority (HFSA)

Source: Hungarian Financial Supervisory Authority (HFSA)


NPLs have increased by 40% over 2011, primarily driven by deterioration in the asset quality of residential mortgage loans. The depreciation of HUF against the Swiss Franc (CHF) was the main reason behind this deterioration, as loan repayments in CHF denominated loans increased significantly adversely affecting affordability2.

Non core asset activity levelsKey drivers behind transactions across the Hungarian market are the increased NPL levels, reduced lending and regulatory pressure. Regulatory issues include:

• the bank tax (based on the amount of total balance sheet assets) levied on the financial institutions, which has increased the cost of holding non core assets; and

2 Hungarian Financial Supervisory Authority (HFSA)

• the option for debt repayment at fixed exchange rates for FX mortgage loan debtors.

In Hungary, debt management and collection companies are the typical buyers of NPL portfolios from banks and other financial institutions. Similar to the rest of the Eastern Europe, transactions are financed mainly through own funds and with limited use of debt. Details of these transactions are not usually public.

One loan sale transaction which was published in 2011 was the sale by HSBC Credit Zrt. of its retail loan portfolio to the Hungarian branch of Cofidis. The deal value of this transaction was EUR 14.8m3.

3 HVG, ProfitLine

Collateral valuesThe property prices and the volume of property transactions remained stable in 2011, increasing only 1.5% for the year to September 20114.

Market view for the rest of 2012, 2013We expect a slight increase in NPL transaction volumes, mainly as the banks gradually attempt to decrease the size of their balance sheets.

4 FHB House Price Index



HSBC Credit Zrt. Cofidis Retail loan portfolio (EUR 15m purchase price)

Dec-2011

Source: Press release


RomaniaForeign banks exploring exit options

Credit and asset quality trendsTotal nominal loan growth of the banking sector in 2011 was 4.7% for the year. However, taking into account inflationary pressures, in real terms credit shrunk in the second half of 2011 by 3% compared to the prior year1.

The largest growth in NPLs was the retail credit segment. Its deterioration began in the second half of 2010 and was primarily driven by a contraction in disposable income as public sector employees took, on average, a 25%2 cut in their salaries, as a result of the government’s effort to decrease the budget deficit. Unemployment growth was also a major contributor to inability of borrowers to service the debt.

1 NBR “Financial Stability Report 2011”2 NBR “Financial Stability Report 2011”

Non core asset activity levelsRomania has seen medium levels of activity over the last 12 months, driven mainly by unsecured retail loans where pricing gaps between sellers and buyers have been minimal. This was because banks’ provisioning levels were, on average, higher than secured loans and expected recoveries closely reflected investor expectations. In contrast, pricing gaps in retail mortgage NPLs are now only beginning to close as banks are willing to accept structured exit strategies that avoid immediate or full de-recognition at prices which are below their expectations.

Local affiliates of Western European banks have been the most active in sales of NPL portfolios.

The size of portfolios sold usually ranged from EUR 50m – EUR 100m during 2011, similar to what was recorded in 2010. Given that the nature of transacted NPL portfolios is retail unsecured, investors are willing to acquire portfolios that contain a relatively low average individual UPB to ensure a higher recovery.

The majority of investors that have acquired distressed assets were local affiliates of international collection agencies, given availability of special servicing remains scarce. In most cases transactions are completed via an international vehicle with limited or no use of debt.

Collateral valuesResidential property prices have marginally decreased by 2.4% compared to 2010. We expect marginal price falls to continue for the rest of 2012 and early 2013.

Market view for the rest of 2012, 2013We expect a gradual increase in non core asset activity levels including residential mortgages and secured corporate NPLs, as Western and Southern European banks decide to decrease their presence in the region. We expect sellers to offer part of their servicing platform along with their portfolios, given the lack of servicing infrastructure.

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3

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5

6

7

2008 2009 2010 2011

Graph 1: Romania - NPLs (EUR bn)

Source: NBR “Financial Stability Report 2011”


Czech RepublicLimited transaction activity with local collection agencies dominating the market

Credit and asset quality trendsTotal lending in the Czech Republic increased by EUR c5bn, or 5.8%, to cEUR 92bn as at the end of 2011.NPLs grew from an average of 3.4% of all loans in 2005-08 to 5.2% in 2009 and 6.2% in 2010, mainly as a result of the economic recession and Eurozone crisis. At the end of 2011 the NPL share of total loans declined by 2% to 6% and in the first four months of 2012 the NPL share stabilized at 5.9%1.

Non core asset activitiy levelsTransaction activity in 2011 has been very limited and has been dominated by recurring (usually quarterly or six monthly) smaller (<EUR 2m of unpaid principal balance) portfolio sizes. Low nominal unpaid balances combined with relatively high enforcement costs (such as legal fees) make the sale option a very attractive value realisation option for banks with limited special servicing resources.

1 Czech National Bank

As a result, the largest market participants were replaced by smaller, local collection agencies that have gained significant market share over the last couple of years. There are currently c60 legal firms and specialized collection agencies operating in the non core asset arena, with the majority market share concentrated in the top 20. There are also new regional incomers from the CEE region that are currently looking to establish their business on the Czech market. Most deals have been financed primarily with equity since debt financing has been very limited.

The primary sellers of NPL portfolios have been financial institutions (bank, leasing companies, consumer/sales finance). In addition there has also been activity from public passenger transportation companies, utility providers, and telecommunication operators.

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3

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5

6

7

2008 2009 2010 2011

Graph 1: Czech Republic - NPLs (EUR bn)

Source: Czech National Bank

Collateral valuesCore Czech real estate markets:

• Land and residential development prices are, on average, recovering very slowly following significant falls in the aftermath of the credit crisis in 2008, however significant variations exist depending on the location and type of the property.

• The recovery in the commercial real estate sector is expected to be even more protracted than the residential with new developments almost grounding to a halt in the last two years.

Market view for the rest of 2012, 2013We expect transaction levels and portfolio sizes to increase for the rest of 2012 and 2013, as new CEE investors enter the market. In order to support larger transactions, certain financial institutions are currently considering offering vendor financing.


SlovakiaNew market attracts major CEE investors looking to expand

Credit and asset quality trendsAt the end of 2009 total lending declined by almost a quarter. Since 2009, lending has slowly recovered, increasing 2.7% in 2010 and 4% in 20111.

In 2010 the gross volume of NPLs grew by 0.7% to 5.3% of total loans outstanding. However in 2011 the NPL share fell by 0.1% to 5.2%.This was largely driven by improved collections on bad loans2.

Non core asset activitiy levelsDuring 2011 and early 2012, there have been very few transactions due to the price expectation gap and the lack of significant tax advantages to selling non-performing loan portfolios. Smaller, local companies (such as legal firms, specialized collection agencies, factoring agencies, etc.) have taken over the market, increasing their market share significantly.

Transactions have been financed predominantly through equity.

1 National bank of Slovakia2 National bank of Slovakia, PwC analysis

There are currently new regional NPL investors from the Central and Eastern European regions that are looking to establish operations in the Slovak market.

Collateral valuesSince the property boom ended in 2008, residential prices have returned to 2007 levels with further falls expected in the next couple of years, albeit at a slower rate compared to 2010 and 2011.

Market view for the rest of 2012, 2013We expect transaction levels to remain relative stable for the rest of 2012 and early 2013. Given the limited size of the NPL market, we expect local players to continue to dominate the market with other CEE based investors having a limited impact.

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0.2

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0.6

0.8

1.0

1.2

1.4

2010 2011

Retail Wholesale Other

Graph 2: Slovakia - NPLs (EUR bn)

Source: National Bank of Slovakia

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0.5

1.0

1.5

2.0

2.5

2010 2011

Graph 1: Slovakia - NPLs (EUR bn)

Source: National Bank of Slovakia


Market view for the rest of 2012, 2013Given the small volume of NPLs we expect to see very limited transactions targeted towards the retail non performing loan portfolio sector.

FinlandSmall volume of NPLs restricts transaction levels

Credit and asset quality trendsLoan levels increased by 13.5%1 in Q3 2011 compared to the same period in 2010 mainly driven by increased foreign lending. This is, to a large extent, due to Nordic banks consolidating their repo deals through Finland. Lending to other sectors increased marginally over the same period, generally showing an increase in the range of 2 – 4%.

The overall NPL ratio has remained stable at 0.6%2 in 2010 and Q3 2011. Even though the overall NPL ratio is low compared to other continental European countries, it is still much higher than the pre-recession levels in Finland.

Non core asset activity levelsWe are not aware of any non core asset transactions occurring in 2011. This follows a period of slow activity in 2010 with sellers including the leasing arm of an automotive manufacturer and a venture capital firm.

1 Finnish Financial Supervisory Authority’s statistics

2 Finnish Financial Supervisory Authority’s statistics

Collateral valuesHouse prices of old housing co-operatives in Finland have generally remained stable in 2010-2011. In Helsinki metropolitan area house prices have slightly increased (2010: EUR 3.169 per sqm and 2011: EUR 3.347 per sqm)3.

3 Statistics Finland

Source: Finnish Financial Supervisory Authority

27%

1%2%

45%

25%Companies and housing co-operatives

Financial and insurance companies

Public sector and NGOs

Households

Foreign

Graph 2: Loans breakdown of Finish banking 2011 - Total EUR 234 bn

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0.6

0.8

1.0

1.2

2008 2009 2010 2011

Graph 1: Finland - NPLs (EUR bn)

Source: Finnish Financial Supervisory Authority


KazakhstanUnfavourable tax regime and unfamiliarity of investors with the market restricts transactions

Credit and asset quality trendsGross lending increased by 17.3% between 2010 and 2011, reversing a previous trend of annual falls. However loans outstanding in 2011 were still 23% below the 2008 pre crisis levels1.

Asset quality has deteriorated further in 2011 with NPLs increasing from 33% of gross loans in 2010 to 34% in 20112. Based on our discussions with major financial institutions, we expect NPL levels to continue to increase for the next couple of years.

1 National Bank of Kazakhstan2 National Bank of Kazakhstan

Non core asset activity levelsExcluding some intra-group /related party transactions, there have been very few NPL sales. Where sales have taken place they have usually involved the sale of consumer loans to local collection agencies.

Collateral valuesFollowing a major property price adjustment in Kazakhstan between 2008 and 2010, residential prices have begun to stabilise in 2011. However, transaction volumes in commercial real estate have remained significantly below pre crisis levels3.

Market view for the rest of 2012, 2013The current tax regime in Kazakhstan is relatively unfavourable to NPL transactions. However banks are under increasing regulatory pressure to act and new tax provisions that are currently being discussed should drive an increase in non core asset transactions.

Given that the market is also rather unknown to international investors, partnering with established local partners will be a key first step in order to improve liquidity and increase transaction sizes in the market.

3 CBRE RE market research

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10

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40

50

60

2008 2009 2010 2011

Graph 2: Gross loans (EUR bn)

Source: National Bank of Kazakhstan

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4

8

12

16

20

2008 2009 2010 2011

Graph 1: Kazakhstan - NPL (EUR bn)

Source: National Bank of Kazakhstan


United Arabic Emirates (“UAE”)Transaction activity remains limited as property market remains depressed

Credit and asset quality trendsIn 2008 credit in UAE experienced significant growth of 47.5%, with around 40% of the advances to real estate, trade and construction sectors. However, since then credit growth has slowed down considerably, growing by less than 5% in 2009, 2010 and 20111.

The delinquency ratio in 2011 stood at 11% of gross loans, increasing from 6% in 2009 and 9% in 20102. NPLs increased considerably in 2010 with one of the reasons being that renegotiated loans of Dubai World were recorded as impaired.

1 Kamco Research April 2011, Central bank of UAE

2 Banks financial statements, Capital IQ

Non core asset activity levelsThe UAE and the Middle East remain an emerging market in relation to non core asset sales. Transaction levels in the Middle East have increased marginally during 2011 and early 2012, albeit from a very low base. The ample state support and liquidity provided to banks have limited the need for non-core disposals.

In addition, the breadth of opportunities currently available in Europe continues to limit interest from international investors, allowing local players, mostly major local financial institutions, to dominate the market.

Collateral valuesThe property market remained stagnant in 2011 as real estate mortgage loans decreased by 1% from 2010, totalling AED 161.5bn (EUR 36bn). In 2009 and 2010 real estate mortgage loans have shown a moderate growth of 13% and 15% respectively, as compared to the boom periods of 2007 and 2008 when growth rates of more than 100% were seen3.

Market view for the rest of 2012, 2013Limited data in respect of underlying exposures and potential crystallisation of losses in excess of provisioning levels is likely to prolong banks’ reluctance to sell, limiting further increases in non core asset transactions. On the demand side, the lack of established legal enforcement precedents or processes and continued global and regional political uncertainty is likely to limit significant increases to non core asset transactions in the rest of 2012 and early 2013.

3 Central bank of the UAE Statistical Bulletin December 2011


IBQ Islamic Banking Qatar Islamic Bank Corporate loans and deposits

Not disclosed Dec-2011

Source: Press articles

0

4

8

12

16

20

2008 2009 2010 2011

Graph 1: UAE - NPL (EUR bn)



Central TeamRichard Thompson +44 20 7213 [email protected]

Jaime Bergaz+34 915 684 [email protected]

Jens Roennberg+49 69 9585 [email protected]

Antonella Pagano+39 8064 [email protected]

Robert Boulding+44 20 7804 [email protected]

Chris Mutch+44 20 7804 [email protected]

Jonathan Wheatley+44 (0) 20 7213 [email protected]

Panos Mizios+44 20 7804 [email protected]

AustriaJens Roennberg+49 69 9585 [email protected]

Czech Republic and SlovakiaPetr Smutny+420 251 151 [email protected]

DenmarkBent Jørgensen+45 3945 [email protected]

FranceHervé Demoy+33 1 56 57 70 [email protected]

GermanyChristopher Sur+49 69 9585 [email protected]

GreeceEmil Yiannopoulos+30 21 0687 [email protected]

HungaryMiklos Fekete+36 1461 [email protected]

IrelandAidan Walsh+353 1 792 [email protected]

ItalyAntonella Pagano+39 8064 [email protected]

PolandBrian O’Brien+ 48 22 523 4485 [email protected]

PortugalLuis Boquinhas+35 12 1359 [email protected]

RomaniaCristian Ravasila+40 212 253 [email protected]

RussiaTim Nicolle+74 952 325 [email protected]

Slovenia and CroatiaLuka Vesnaver+38 61 5836 [email protected]

SpainJaime Bergaz+34 915 684 [email protected]

SwedenPer Storbacka +46 85 553 [email protected]

TurkeyAykut Tasel+90 212 355 [email protected]

UkraineVladimir Demushkin +380 (44) 490 67 [email protected]

United Kingdom Robert Boulding

+44 20 7804 [email protected]

North AmericaMitchell Roschelle+1 646 471 [email protected] Jeff Nasser +1 267 330 1382 [email protected]

Asia PacificMichael McCreadie+61 38 603 [email protected]

Latin AmericaMarcia Yagui+55 11 3674 [email protected]

Middle EastIan Schneider+971 430 [email protected]

European and global contacts

Across Europe and the UK we have experienced partners and directors to assist you with your non-core asset and NPL related needs. Through this group both buyers and sellers of non-core assets and NPLs can receive consistent and seamless service across the world, integrated with country-specific knowledge and expertise.

PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

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www.pwc.co.uk

issue 4: a growing non core asset market - pwc€¦ · loan assets transacted during 2011 stood at...

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