Market update
Introduction
In our 2015 Deleveraging Report we anticipated increased activity in the loan portfolio market across Europe for 2016.
While the first months of 2016 had activity levels in line with our expectations across broader Europe, the uncertainty generated by the UK referendum on its EU membership had a considerable impact slowing UK loan portfolio and broader M&A activity both on the lead up to and since the Referendum on the 23rd of June.
Looking at the actual numbers, by the end of H1 2016, reported completed loan portfolio sales in Europe were €44.3bn with €67.8bn in ongoing transactions. Combined with as yet unannounced transactions for 2016 it is expected total transactions will reach c.€140bn. These numbers compare favourably to the total sales in 2015 of €104.3bn.
Across Europe, increased regulation, governmental reforms and higher capital requirements have added pressure on banks to divest. This pressure can be seen with increased loan sale activity levels in Italy and Spain.
Italy in particular has seen a significant increase in loan portfolio activity pushing completed and ongoing transaction levels to €52.1bn, driven by governmental reforms and the introduction of a State guarantee securitisation scheme. These reforms have meant that Italy is currently the most active country in Europe for loan portfolio transactions, challenging the UK & Irish markets which have been the historical sales leaders.
Whilst loan portfolio activity remains strong, there is still significant headway to be made in deleveraging terms as the non core volume in Europe is still estimated to be at least €2trn, with UK, Spain and Italy having the largest reported volumes at present.
Although the markets continue to digest the impact of Brexit and the recently released European wide bank stress test results, a busy end to the year is expected with well-capitalised buyers hoping to make up lost ground to invest in transactions across Europe.
European market overview H1 2016
Market overview
Deloitte prediction: Levels of activity are expected to pick up into Q4 across Europe following a mixed start to the year, with continued focus on Italy and Spain. Increased activity expected in Germany and potentially an increase in activity in the United Kingdom following the Brexit referendum. Volumes are expected to be c.€140bn for 2016.
There have been four key themes in the loan portfolio market in Europe during the first six months of 2016. Firstly the strong activity levels seen in Southern Europe, led notably by Italy and Spain, a single large transaction in the Netherlands, the impact of the pre and post Brexit referendum in the United Kingdom and the results of the European Banking Authority (EBA) stress test.
Whilst the large Propertize transaction in the Netherlands has now been awarded to the Lone Star led consortium, we expect the ongoing turmoil in the Italian banking landscape and the continuing uncertainty about a post Brexit UK economy will continue to dominate the second half of 2016.
Deal pipeline in Italy will continue to be driven by the pressing need of Italian banks to deleverage their non-performing loans. Recent legal changes designed at improving the efficiency of the Italian enforcement process should enable bidders to be more certain in their pricing and close the bid ask gap between sellers pricing expectations and buyers bids.
The implications of Brexit continue to evolve on a daily basis, but what is clear in the short term is that a number of loan transactions were temporarily put on hold.
Uncertainty around the UK economic environment and the future direction of interest rates will weigh on the market in the short term. A fall in the value of the pound may increase foreign investment in CRE property, although investors will be weary of committing foreign capital considering increased market volatility. However, in the long run UK property may remain a safe haven market. Market fundamentals remain robust and the CRE transaction infrastructure will continue to be strong, transparent and liquid.
Additionally, as revealed by the stress test results, certain European banks still need to work on strengthening their capital buffers. Overall, capital ratios were perhaps better than might have been expected, reinforcing greater steps towards bank resilience the sector as a whole has taken. The EBA stressed the "continued capital strengthening of EU banks" since the last stress test. EU banks in the sample raised more than €180bn in capital, increasing the capital ratio from 11.1% at end-2013 to 13.2% at end-2015.
Average weighted CET1 ratios on a transitional basis decreased from 13.2% at end-2015 to 9.4% by end-2018 in the adverse scenario. On a fully loaded basis, the average weighted CET1 ratio decreased from 12.6% to 9.2%. SSM (Single Supervisory Mechanism) banks in the sample on average did slightly worse, culminating in a CET1 ratio of 9.1% on a transitional basis and 8.9% on a fully loaded basis by end-2018.
Although overall the results were positive, a handful of banks stood out on the downside: Monte dei Paschi, and to a lesser degree Allied Irish Bank and Royal Bank of Scotland, which together accounted for the top three greatest falls in capital ratios.
Whilst the continued uncertainty is likely to create opportunity for buyers in certain markets, we still expect a further move towards performing assets as banks across Europe build on their ongoing long term restructuring and deleveraging efforts of the last number of years.
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