FINANCE: The conclusion of the European Central Bank’s Asset Quality Review is likely to trigger a wave of real estate loan and asset sales.
European bank’s were found to be holding €136bn (£107bn) of non-performing loans – up 18% on the individual bank’s own estimates – and 25 banks emerged from the comprehensive assessment with a capital shortfall.
The results of the review, announced yesterday, found that Italy’s institutions fared worst, with nine banks failing the AQR, followed by Greece and Cyprus on three, Belgium and Slovenia on two, and Portugal, Austria, Ireland, France, Germany and Spain each with one.
The total shortfall of the 25 banks was €24.6bn. However, many of these failures were technical ones because banks raised money from investors after the December 2013 cut-off.
The eight most severely affected banks – half of which were Italian – had a capital shortfall of €6.35bn.
They were: Italy’s Monte dei Paschi di Siena (€2.11bn); Portuguese Banco Comercial Português (€1.15bn), Austrian Voksbanken-Verbund (€0.86bn), the Irish Permanent TSB (€0.85bn), Italy’s Banca Carige (€0.81bn); and Italy’s Banca Popolare di Vicenza (€0.22bn); Cyprian Hellenic Bank (€0.18bn), and Italy’s Banca Popolare di Milano (€0.17bn).
These banks will now need to restructure their balance sheets or raise addition capital in order to rectify the situation.
Neil Blake, head of EMEA Research at global real estate advisor CBRE, said: “The benefit of the AQR is that the true extent of banks’ nonperforming loans is now out in the open and banks can now consider selling off parts of their loan books in order to meet the capital shortfall.
“Before the AQR, selling off loan books would have meant admitting that they were not properly valued in the bank’s accounts. On the back of this, and ongoing improvements to real estate values, we can expect to see an increase in loan sales over the next year.”
He added, “This has already started to happen in some cases, notably Irish bank Permanent TSB, which has an identified €850m capital shortfall according to the ECB.
“Encouraged by a big pick-up in Irish property values so far this year, they have already announced they intend to sell off two of their loan books.
“Similarly, Banco Commercial Portugues has started to take advantage of the property market upturn with increased property sales and further direct or loan book sales, which are a likely way of plugging the capital gap.
“Although the recovery in property values seen in Ireland has not been repeated in Italy, values have at least shown signs of levelling off, and Italian banks still look likely to try to sell off some of their non-performing loan books rather than to issue new capital to plug the gap.
“Hitherto, they have tended to only sell off low value unsecured non-performing loan books and, now that the AQR has cleared the air, this looks set to change.”
The ECB exercise has been criticised for not including a wider range of potential downsides such as deflation in the eurozone and the potential impact of sanctions on Russia.
Its response is that they reflect the concerns that were current when the tests were devised and that the GDP falls in the stress test scenario are still sufficient to reflect a very severe downside.
