Banks dump NPLs on the market to clear balance sheets

Portugal’s banks have dumped over €2Bn of toxic loans onto the market in a bid to wipe their balance sheets clean.

The move comes after it was announced last month that Brussels would help banks offload the rising tide of bad loans which it anticipates will increase even more with a pandemic-related wave of corporate distress.
A European Commission paper due to be published in December will discuss ideas, including boosting secondary markets for buying and selling non-performing loans (NPLs), and creating a network of national bad banks across the EU. It will also seek to tackle anomalies in the bank capital regime for distressed assets.  Europe is braced for a surge in insolvencies once national business support programmes lapse next year.
Brussels officials told the Financial Times that the commission wanted to avoid the mistakes made in the last financial crisis more than a decade ago, when a failure to quickly tackle NPLs impaired banks’ ability to bolster lending once the recovery gathered strength.
Over the past few months Portuguese banks placed around €2Bn of toxic assets on the market including NPLs and property. This had already been planned before the pandemic halted sales processes, but has restarted as the banks try and offload bad assets before they take on the additional expected credit defaults with the end of the moratoria.
Although the amounts are relatively low, the list of portfolios is extensive. For example, Santander Totta has just sold two portfolios (Pool 52 and Pool 53) worth €150 million.
BCP also has two portfolios on the market (Webb and Ellis) worth €750 million which have attracted the interest of eight International funds.
Novo Banco has divided its Nata 3 portfolio into three with €300 million of toxic credits and is selling its Carter and Wilkinson portfolios next year.
BPI has put its €400 million Project Lime on the market with non-collateral contracts.
A group of banks also has Project Zip for sale, a portfolio managed by Norfin and containing 4,400 cases worth €360 million which are about to be sold to one of three funds: Albatross, Tikehau or Cerberus.
In addition, banks can also sell off bad loans to debt collecting agencies.
“The banks in general are making the most of having comfortable capital ratios which gives them the space to put NPL portfolios for sale,” Manuel Macedo Santos, Head of Alantra Portugal, which has helped the banks in lots of problem assets sale operations over the years.
Since 2016, the Portuguese banking sector has been reducing its exposure to toxic assets. The ratio of credit default loans (NPLs) went from 17.9% in that year to 5.5% in the second quarter of this year.
At the same time, the banks have strengthened their capital ratios and today are in a better situation to face the crisis as various bankers, regulators and analysts have pointed out in recent weeks.
For the time being there has not been a significant increase in bad loans which is partly explained by the moratoria put in place by the government to cushion the initial shock.
However, these grace periods are camouflaging the real dimension of the crisis which has been affecting families and firms who no longer are in a position to pay their loans.
Without knowing the real size of the problem, what is known, however, is that Portugal is the third country in the EU with the most moratoria and the banks are very exposed (around 20% of credit is temporarily frozen) to sectors that have been hard hit by the pandemic, namely tourism and SMEs.
Analysts say that when the grace periods end, it will be only be a question of months before banks start suffering from an increase in credit defaults and NPLs.
“In Portugal, the lion’s share of NPLs has still to be resolved or is being resolved through these portfolios for sale, but there will be a new wave,” says António Nogeira Leite, an economist and former director of Caixa Geral de Depósitos.
“The moratoria are putting off the inevitable avalanche which is particularly acute in Portugal given the percentage of credit that is involved by this scheme,” he adds.
And while banks like Caixa, BPI and Santander have enough of a cushion to offset the problem, the situation for other banks that are already in a vulnerable position like Novo Banco and Montepio, with a high ratio of credit defaults, is more complicated.
Says Manuel Macedo Santos, “The problem of Montepio is the elephant in the room, since the bank has around €1.5Bn in problem assets and the ratios may not be sufficient to absorb more problems as ratings agencies have warned.
And not only this, analysts say that many banks do not have a sufficient level of provisions to deal with expected defaults and that the real situation may be much worse than the banks actually imagine.