Spain 
Italy 
Greece 
CGD Hires KPMG to Sell 1.8 Billion Euros of Bad Debts
27 November 2017
The bank led by Paulo Macedo continues to try to clean up the bad debts on its balance sheet. CGD just chose KPMG to help sell €1.8 billion in mortgage, corporate and real estate debts.
The Caixa Geral de Depósitos (CGD) is in the market to sell distressed debt. The bank led by Paulo Macedo chose KPMG to help dispose of 1.8 billion euros in mortgage, corporate and real estate loans in a deal to be carried out between this year and the end of next year, ECO reported. The sale is part of the financial institution’s strategy to decrease the burden of non-performing loans, which still weigh on the bank’s profitability.
CGD wants to sell €200 million in mortgage credit, €200 million in real estate and €1.4 billion in corporate credit as part of a process of reducing risk-weighted assets to ease the pressure on its capital ratios. KPMG will advise CGD on the sale, according to ECO. CGD declined to comment.
This transaction is in addition to others that the Caixa Geral de Depósitos has carried out. In July, Caixa sold 476 million euros in bad debts to the private equity fund Bain Capital Credit. The financial institution sold “mostly real estate loans bilaterally guaranteed by small and medium enterprises and some large companies,” to Bain, in the fund’s first foray into Portuguese banking.
Clean, clean, clean…
The effort to clean up the non-performing loans on CGD’s balance sheet is not a recent phenomenon. Last year, under the state bank’s recapitalisation program, the financial institution recognised losses of 3.017 billion euros on such assets. That recognition led the bank to post its worst results ever: losses of 1.8595 billion euros.
But there is still work to be done. The 1.8 billion euros of bad debts that Caixa wants to sell now represent roughly 38% of the total amount of outstanding non-performing loans, around 4.7 billion euros. If the net value of the bad debts is considered, the value drops significantly, since a good part of these have already been provisioned. Up to September, provisions stood somewhere near 400 million euros.
“[CGD sold], mostly, real estate loans bilaterally guaranteed by small and medium-sized companies and some large companies.”
Paulo Macedo, CEO of CGD, in statements after the sale of the 476-million-euro portfolio of bad debts to Bain Capital
Given the low net amount of loans in default, these 1.8 billion have already been considered as lost by CGD. Therefore, any amount that CGD may obtain from the sale of these loans will have a positive impact on the bank’s results. In these transactions, the bank applies typically high discounts, between 50% in the case of mortgage credit and 75% in real estate.
Bad debts still weigh (heavily)
Although the banks are managing to reduce this “burden”, bad debts are still a severe headache. In all, Eurozone banks hold close to one trillion euros in non-performing loans. Italian, Greek, Spanish and Cypriot banks are the most affected. And in Portugal, according to data from the Bank of Portugal for September, 13.45% of all credit granted to companies was in default. This proportion drops to 4.14% after adding loans to families into the mix.
At the same time as banks are seeking to solve past problems, they are confronted with the need to guard against new loans entering default. The European Central Bank has called on Eurozone banks to set aside more money to cover non-performing loans – a move that has already been criticised by MEPs who believe Mario Draghi’s bank is overstepping its mandate. Beginning on January 1, 2018, European banks will have a maximum of two years to set aside the equivalent of 100% of new non-performing loans. Within seven years, the banks will have to be able to cover all of the outstanding bad debt (both existing and new).
A platform designed to help
The problems stemming from non-performing loans will not just be resolved through the sale of debt portfolios, primarily corporate debt – which accounts for the most significant part of the NPLs. One of the proposed solutions has been the creation of a platform that will allow the three banks with highest levels of credits in default: CGD, Novo Banco and BCP, to sit at the same table. These three financial institutions have already signed a memorandum of understanding to put the mechanism in place, something that should happen by the end of this year.
The expectation, as ECO reported, is to shrink to a third the average time necessary to restructure these credits, reducing it to six months. And the results should be visible by the end of the first quarter of 2018.
But the ECB would still need to validate changes by reclassifying the restructured debts promptly, removing the label of non-performing loans which lead the debts to continue to weigh on the banks’ ratios. Removing this impediment to the process of restructuring the debt will make it easier for banks to find lasting solutions for these companies.
Original Story: Economia Online – Rita Atalaia & António Costa
Translation: Richard Turner