Spain’s Banks Sold Toxic Assets Worth €50.8bn to Funds in 2017

23 April 2018 – La Vanguardia

Last year, Spain led the sale of defaulted mortgage portfolios in Europe, with the sale of loans with a nominal value of €50.758 billion (of the €104.0 billion that were sold in Europe in total), according to a study on problematic real estate debt compiled by the consultancy firm Evercore. In 2017, Santander, with the sale of Popular’s property to Blackstone for €30 billion, and BBVA, with the sale of a portfolio worth €13 billion to Cerberus, were ranked amongst the top five vendors in Europe. “It is likely that we will be leaders in the sale of foreclosed properties and defaulted mortgages again this year and next”, says Íñigo Laspiur, Director of Corporate Finance at the consultancy firm CBRE. “At the moment, portfolios worth more than €8 billion are up for sale in the market”.

During the first few years of the financial crisis, it was entities in Ireland and the United Kingdom that led the sale of foreclosed real estate assets in Europe, but now the Spanish and Italian banks have taken over the baton (the latter led the ranking for the first quarter of this year). “Regulation by the ECB, which has caused provisions to soar, and above all, accounting guidelines, which have forced banks to increase their capital requirements, are accelerating the sales of toxic assets”, said Laspiur. Moreover, these sales are being boosted by the recovery of the real estate market and by the high level of provisions that the banks have now recognised. “Most sales by the banking entities these days make money, or at least, don’t generate losses”.

Laspiur explains how this means that the funds are accepting higher prices for toxic Spanish property: whilst in 2013, when Sareb began its first block sales, they were demanding returns of 15% per annum to buy assets, now the yields have decreased to just 8% when they are purchasing mortgage loans backed by high-quality properties.

Given their large size, the sales of asset portfolios are in the hands of just a few entities. “Only Blackstone, Cerberus, Apollo and Lone Star are bidding for portfolios worth more than €5 billion, whilst firms such as Bain Capital, Oaktree and Deutsche Bank are also very active in smaller operations”, said Laspiur. This lack of competition allows the funds to buy properties at prices well below market rates. “It is not only a question of size” – he adds. “The funds assume the risk of managing the debt (by negotiating with the debtor or in court) to take ownership of the property. It is a sophisticated process that appeals to few companies”. Nevertheless, for the financial institutions, “the sale of foreclosed assets and defaulted loans in large batches allows them to accelerate their cleanups and free up resources because selling them one by one would take years”.

Laspiur says that 2017 marked a turning point in the strategy of the banks to divest property. “Before, they were undertaking small operations. For example, Sareb, the most active entity, has completed more than 30 sales, followed by Sabadell, CaixaBank and Bankia. Nevertheless, last year, Santander and BBVA both created vehicles (companies) to which they transferred their bad assets, and then they sold them, but they retained a minority stake in each case, which allowed them to deconsolidate the assets but hold onto some of the ownership rights in order to benefit from the price rises being seen in the real estate sector”, said Laspiur. “It is a very good formula, and I think we are going to see more operations of a similar ilk this year”. In his opinion, Sareb, CaixaBank and Sabadell are going to be the entities that will lead property sales this year.

Together, the financial institutions in the south of Europe now account for the bulk of the foreclosed properties and defaulted loans in Europe, according to data from the consultancy firm Evercore, which forecasts that operations worth around €80 billion will be closed this year, with Spain leading the ranking once again (at the moment, it accounts for 78% of the portfolios up for sale in Europe, according to the consultancy firm) (…).

Sareb, the European bad asset leader

The Spanish bad bank or Sareb is the largest owner of toxic assets in Europe, according to Evercore, with foreclosed assets amounting to €75 billion, ahead of the bad bank of Ireland (which has €27 billion) and the UK (€20 billion). The hardest hit banks are Italian (Intesa San Paolo, Unicredito, Atlante Fund and Monte dei Paschi) and Greek (Pireus and Alpha) (…).

Original story: La Vanguardia (by Rosa Salvador)

Translation: Carmel Drake

Bankia & Santander Lead Decrease In Mortgage Default Rate

12 September 2016 – El Economista

The economic recovery is substantially easing the burden of provisions that the banks are making against their non-performing loans. The volume of bad debts have been decreasing gradually over the last few months, thanks to the overall improvement in the financial circumstances of families and companies.

An important part of this respite is coming from the mortgage segment. Families now hold financing to acquire homes amounting to just over €525,000 million in total. Unemployment, which wrought havoc during the crisis, had increased the default rate to more than 6%. But that trend changed at the end of 2014. Since then, the default rate of these types of loans has decreased to 4.7%, on average. In other words, the volume of mortgages with delayed repayments has decreased to €25,000 million.

Not all of the banks have managed to benefit in the same way from the improvement in Spaniards’ fortunes. Bankia and Santander are the entities that have benefitted the most over the last year. Between June 2015 and June 2016, Bankia’s default rate decreased by almost a quarter, from 6.76% to 5.02%, and by nearly a half since its historical peak in 2014. Even so, the absolute percentage of the nationalised group still exceeds the system average.

The decrease in Bankia’s default rate has come at a time when the bank is significantly reducing the volume of loans it grants to acquire homes. In the case of Bankia, the cut in the volume of financing is similar to that recorded in the sector. It has decreased by 4.3% in twelve months (…).

Since 2012, the nationalised group’s strategy has involved rebalancing its credit portfolio, with a drop in mortgages and an increase in loans to SMEs and individuals.

In the case of Santander, the default rate has decreased by 0.81 percentage points to 4.59% over the last twelve months, allowing the bank to maintain a ratio that it slightly lower than that of its rivals. In 2013, the Cantabrian entity’s default rate (6.7%) exceeded the sector average. Since then, the decrease has been gradual.

The group chaired by Ana Botín has also reduced its portfolio of doubtful debts, whilst its volume of mortgages has decreased by 3.4%. In fact, of the major entities that have published their data so far, Santander and Bankia are the ones that have reported the most significant decrease in financing.

Three banks, BBVA, CaixaBank and Ibercaja, have gone against the trend in the sector, suffering slight increases in their respective default rates. The first has been hurt by the incorporation of Catalunya Banc in April 2015, which is leading to an increase in its impairments, even through the operation to acquire the entity excluded the most harmful mortgages. They were transferred to a fund owned by Blackstone with certain government guarantees provided by the public rescue fund (Frob).

Despite the increases, CaixaBank and Ibercaja have two of the lowest default rates in the sector. In both cases, the default rate of home loans to individuals fell below 4% at the end of June this year.

For most entities, the volume of loans are falling at rate of less than 2%, as a consequence of the boost in new business and the open war to secure clients. At Unicaja, the decrease has been less than 1%.

Market share

BBVA is still the leader of this segment, with more than €89,437 million loans granted to households to buy a home, representing a market share of 17% (…). It is followed by CaixaBank, with financing lines amounting to €88,557 million (17%) and Bankia with €62,200 million (12%). Santander is ranked fourth, accounting for less than 10% of the mortgage market. (…).

The main entities have a combined balance of foreclosed homes amounting to more than €17,000 million. The bank that holds the largest portfolio of foreclosed homes is BBVA, with almost €4,500 million. CaixaBank is ranked in second place, with more than €2,762 million, whilst Bankia, in third place, has €2,700 million. (…).

Original story: El Economista (by Fernando Tadeo)

Translation: Carmel Drake

Possible Postponement Of BdE’s New Provisioning Circular

1 March 2016 – Expansión

The entry into force of the new provisioning circular being prepared by the Bank of Spain, which is scheduled for 30 June, may have to be delayed. Spanish financial entities have been sending their comments about the circular to the regulator since January 22. The circular represents a modification to existing accounting standards regarding provisions, in light of the entry into force of the international standard IFRS 9, which will take effect from 2018.

“We think that the Bank of Spain will accept the postponement of the entry into force (of this new circular), until at least September”, explained a senior manager at one unlisted bank. One of the main difficulties involved with fulfilling the initially-planned timeframe is that “significant software development is required for the application of the new standard”. Sources at another three listed banks share this opinion.

The sector expects minimal impact from the entry into force of the circular. The Bank of Spain estimates that the provision level for the sector as a whole will not change much, according to one source. But some entities may need to significantly increase their provisioning levels, depending on what their portfolios are like. “With this circular – an intermediate step, ahead of the introduction of IFRS 9 – the Bank of Spain is preventing entities from leaving the adjustments required by the new standard until the last minute”, according to the Finance Director of one bank. We expect the coverage requirements to be tightened, especially for consumer credit and foreclosed assets.

The entities are worried because it will be mandatory for them to update the appraisals of their loan guarantees, which may affect the loan to value ratios of some mortgage loans, and therefore the provisioning requirement, depending on the age of each portfolio. The new standard will require the elimination of the ‘substandard’ credit category, which exists only in Spain, and the creation of categories of loans that will have to be provisioned because they display certain characteristics, beyond the individual circumstances of each one.

Original story: Expansión (by Michela Romani)

Translation: Carmel Drake

The Top 7 Banks Reduce Their Exposure To Toxic RE Assets

3 March 2015 – El País

In 2014, loans to property developers and the overall volume of unpaid debt held by the top 7 banks decreased significantly, whereas the number of homes and plots of land they held increased.

Spain’s real estate bubble was largely a credit bubble. The excess amounts committed during the boom years subsequently gave way to a severe economic and financial crisis that forced Spain to ask its European partners to come to the rescue, to clean up the majority of its savings banks. The large banks were not immune from these excesses, but their higher levels of diversification, their capacity to attract private capital and their more professional management limited the damage (they suffered). All of this meant that even the healthy entities have had to undertake long and expensive clean up processes, which are still on-going for the most part. As part of this process, Spain’s listed banks managed to reduce their overall volume of problem real estate assets for the first time in 2014, according to data from their recently published annual reports.

The seven banks that form part of the IBEX 35 index (Santander, BBVA, CaixaBank, Bankia, Sabadell, Popular and Bankinter) closed last year with non-performing and substandard loans to property developers and unpaid homes, plots of land and other real estate assets amounting to €125,000 million. That balance represented a reduction of €7,000 million compared with the previous year. These are gross figures. If we look at the volume of provisions, the volume of as yet uncovered toxic risk decreased to just under €65,000 million, having decreased by €4,000 million in one year.

Overall, the reduction in toxic assets was exclusively driven by loans, since the real estate assets held by the banks (homes, developments, plots of land and shares held in real estate companies) continued to increase despite the fact that the entities have also been stepping on the accelerator in terms of sales. The banks are still seizing, foreclosing and receiving deeds in lieu of payment, for more properties than they are managing to sell.

A large proportion of the debt from the bubble is completing its cycle in this way. The banks have increasingly less exposure in terms of loans to property developers; the amount held by these seven entities decreased from €85,179 million to €68,086 million during the year. Furthermore, the volume of loans to property developers classified as normal, or up to date, also decreased. Now, only €18,000 million of these loans are considered as healthy, i.e. a quarter of the total. A large proportion of the loans went from being healthy to substandard or non-performing. And from there, to being written off (when loans are removed from the balance sheet and 100% of the losses arising from non-payment are provisioned) or to being classified as foreclosed properties (due to the foreclosure of the property or the handing over of deeds in lieu of payment). In 2013, only the volume of healthy loans decreased; doubtful and foreclosed debt increased, i.e. the volume of toxic assets grew. In 2014, the volume of non-performing loans decreased so significantly that, although the number of properties increased, the overall volume of “potentially problematic” real estate assets (as defined by the Bank of Spain) decreased for the first time. Until now, the only reduction in toxic assets (or rather transfer) happened when the banks transferred much of their developer exposure to Sareb, the bad bank.

In terms of properties, the largest increase related to plots of land, the asset that it is hardest to market. The banks have made provisions against almost 60% of the original value (of the plots of land they hold), but some plots have lost even more of their value and the entities are still reluctant to sell at a loss. There is barely any demand, transactions are relatively scarce and the banks are still seizing land from property developers unable to repay their loans. Thus, the volume of land in the hands of the seven IBEX 35 banks closed 2014 at a record high of €28,127 million, up €2,500 million compared with the end of 2013. Given the difficulties the banks are facing to find developers to purchase this land for construction, they are starting to adopt formulas that allow them to share the risk with the developers in exchange for providing the land.

The number of homes coming from from unpaid mortgages is also increasing. Specifically, the volume increased by €1,000 million last year, to €14,161 million. In this case, the increase was largely due to a delay in foreclosures. Procedures to seize homes that began at the height of the crisis are only now reaching their conclusion, even though the mortgage default rate seems to have already hit its peak.

The picture is also very different between the entities. Bankinter holds the badge of honour; it was the only one of the seven entities that avoided the temptation of the housing bubble. Its exposure to the sector was extremely low and it has hardly any doubtful debts or foreclosed properties. Next in line is Bankia, although in this case, the clean up of its balance sheet is less impressive: since it was achieved through the transfer of the bulk of its toxic assets to Sareb and the acceleration of the provisions against those assets that remained on its balance sheet.

Of the major banks, the entity that has done the most to clean up its real estate exposure is Santander. Its toxic property assets now account for only 15.3% of its lending to the private sector in Spain and just 1.5% of its consolidated assets. One step below are CaixaBank and BBVA. The entity chaired by Isidro Fainé has the highest level of provisions and the bank led by Francisco González benefits greatly from the international diversification of its business.

Sabadell is a special case. It appears to have high exposure to toxic assets, but a significant portion is covered through an asset protection scheme (that it acquired) when it purchased CAM. The entity with the most work left to do on the clean up front is Popular. Even though it has boosted the sales of homes, it has the highest volume of toxic assets and the lowest level of coverage of any of the seven entities.

Original story: El País

Translation: Carmel Drake

Sabadell Puts €250m NPL Portfolio Up For Sale

29 January 2015 – Expansión

Opportunistic funds / “Project Cadi” includes non-performing loans that the entity once granted to real estate developers

Banco Sabadell is making progress in its strategy to reduce the volume of foreclosed assets and bad debt on its books. The financial group led by Josep Oliu, which today releases its results for 2014, has just put an NPL portfolio worth €250 million up for sale.

According to market sources, the so-called Project Cadi includes non-performing loans that were once granted to real estate developers. Through Solvia, Sabadell is taking a very active role in packaging these types of loans, in the face of strong buyer interest from opportunistic funds that are now active in the Spanish market. At the beginning of the month, the bank already disposed of another portfolio worth €435 million (Project Tritón), which included 630 non-performing loans to small- and medium-sized developers, as well as 700 foreclosed assets in Valencia, Andalucía, Cataluña and the Balearic Islands. This sale was put together through a bond issue, acquired by Deutsche Bank and Hipoges. Sabadell may already be sounding out the market with a view to selling other portfolios over the next few months.

This type of transaction reflects the confidence that funds have in the recovery of the real estate market in Spain. In parallel, banks are interested in this kind of transaction because they lighten their balance sheets and allow them to generate income from assets that are no longer productive and that have already been provisioned. According to sector sources, these transactions are closed with discounts of around 75%, which means that the funds are paying the financial institutions 25% of the nominal value of the loans.

The largest transaction of this kind in Spain was closed in 2014 by Blackstone, which acquired a €6,392 million mortgage portfolio from Catalunya Banc. Lone Star and JP Morgan also bought loans from Eurohypo amounting to €4,500 million. Other funds that have acquired portfolios include Aiqon, Lindorff, Cerberus and Starwood.

Original story: Expansión (by S. Saborit and J. Zuloaga)

Translation: Carmel Drake