Portfolio
Advisory Group
European NPL Barometer
www.pwc.com/financialservices
1 Portfolio Advisory Group
The PwC NPL Barometer
The abundant availability of credit in Europe over the past decade fuelled a significant increase in lending across all asset classes and eventually led to the financial crisis and with the collapse of Lehman Brothers in September 2008.
As a result of the financial crisis, a number of European governments are currently undertaking significant austerity measures, in their efforts to eliminate their budget deficits. There has been extensive coverage of the Greek and Irish Government bailouts along with the recent application by the Portuguese Government for financial assistance by the International Monetary Fund (“IMF”) and the European Commission. With Portugal now seeking funding there is further uncertainty over European financial stability.
The number of non performing loans (“NPLs”) has increased significantly, as the ability of both consumers and corporates to repay their debts has been hampered. This has however been tempered, to an extent, by the effects of a generally low interest rate environment.
The PwC NPL Barometer
The PwC NPL Barometer is an analysis of the level of NPLs and provisions across key Western European financial markets. Our analysis covers
approximately 75 % of banks in these markets and uses this as an estimate for the total European market. It is based on publicly available financial data from the following markets (total of 43 banks):
Belgium • Germany • Ireland • Italy • Portugal • Spain • United Kingdom •
The objective of our analysis is to identify key trends in NPLs and provision coverage across each of the countries within our scope.
The definition of reported NPLs varies by bank and region. We have •
selected the most appropriate data available in each region. The
• NPL ratio represents reported NPLs over standardised gross loans.
The
• provision coverage ratio represents the reported allowance for
loan losses for all loans over gross reported NPLs.
Standardised gross loans
• includes, loans to banks, loans given to
customers and financial leases. It excludes loans held for sale.
Our analysis is intended to give a broad picture of the key market trends across major European countries.
It does not take into account those loans that may have been modified •
or restructured and hence may not need to be classified as an NPL from an accounting perspective. Inclusion of these loans may increase the size of NPL volume further.
Data for international banks has been consolidated in the country of •
origin. Therefore subsidiary bank data is included in the consolidated statements of the parent.
All data is shown in Euros and where applicable has been converted at •
historic rates.
Government institutions and national banks have been excluded from •
this analysis.
3 Portfolio Advisory Group
What does the NPL Barometer mean?
Our NPL Barometer plots the provision coverage ratio against the NPL ratio for a particular region. Depending on the level of NPLs and provision coverage, a region will sit in a certain quadrant of the chart.
The chart opposite presents an illustrative overview of the quadrants: Quadrant A – low level of NPLs which are relatively well
•
provisioned for;
Quadrant B – high levels of NPLs which are relatively well •
provisioned for;
Quadrant C – low level of NPLs which may not be relatively well •
provisioned for; and
Quadrant D – high levels of NPLs which may not be relatively well •
provisioned for.
For the purpose of this analysis we define ‘low NPLs’ as anything less than 5% of total loans. We consider provision coverage greater than 50% to be ‘well provisioned’.
The NPL Barometer over time analyses the key movements to identify how the growth or decline in NPLs compares to the provision
coverage ratio. 1. NPL Barometer quadrants
A
High NPL ratio Provision coverage ratio
50% Low Low 5% High
C
B
D
Europe 30 Jun 2010 Europe 31 Dec 2007 €160bn €508bn 0% 50% 100% 150% 0% 5% 10% 15% P ro vi si on c o ve ra g e ra ti o NPL ratio
The European NPL landscape – then and now
In scope NPLs in our country analysis stood at over €160bn in 2007. The comparative at June 2010 figure is now estimated at over €500bn which represents an increase of over 200% compared to 2007.
Prior to the financial crisis NPLs in 2007 represented 2% of total lending and provision coverage stood at 84%.
By June 2010, NPLs stood at approximately 5% of total lending. The provisioning coverage fell to 50% at December 2007 (a 40% reduction since 2007).
This implies that even though NPLs have more than doubled since 2007, provisions have not increased at the same rate.
European banking profitability may remain under pressure even after NPLs have peaked (expected to be 2010 – 2011 for most markets) as the current level of provisioning has not increased at the same rate as the growth in NPLs.
* Representing approximately 75% of the European market
5 Portfolio Advisory Group Italy Spain UK Belgium Portugal UK 0% 50% 100% 150% 200% 250% 0% 5% 10% 15% 20% P ro vi si o n c o ve ra g e ra ti o NPL ratio Germany Ireland Ireland Italy UK Germany Spain Belgium 0% 50% 100% 150% 200% 250% 0% 5% 10% 15% 20% P ro vi si o n c o ve ra g e ra ti o NPL ratio Portugal
Since the crisis the trend is a shift towards the bottom
of Quadrant C and Quadrant D
4. European NPL Barometer – 2010 by region 3. European NPL Barometer – 2007 by region
Since 2007 the general trend has been one of increasing NPL ratios but with a relatively lower provision coverage ratio.
There has been a consistent movement in all major markets (with the exception of Portugal) toward the bottom right of Quadrant C or even Quadrant D.
Ireland shows the most extreme movement moving to Quadrant D with a Irish NPLs increasing from 1% in 2007 to 20% in 2010. The implication for Ireland is that with a relatively low provision coverage ratio and a need to deleverage, there could be significant pressure on profitability going forward.
Spain has moved from Quadrant A in 2007 to Quadrant C in 2010, highlighting the previous Banco de Espana policy that required banks to increase their provisions even as the level of NPLs remained stable. While regulation has changed in Spain requiring banks to provision against delinquent loans over a shorter period, this has been offset by the sharp increase in NPLs which has pushed Spain into Quadrant C.
The German and UK markets, the largest in Europe, have seen similar movements to the bottom right of Quadrant C, highlighting that NPL levels have increased faster than provisioning levels.
Our data suggests that Portugal is one of the few markets in Europe where NPLs have remained relatively stable over the 2007 to 2010 period. However, this partly reflects that Portugal has not experienced a property bubble to the same extent of other European neighbours. At the same time we understand there is also significant loan restructuring
and modifications occurring, which have reclassified NPLs into performing loans.
The Irish NPL ratio has seen the largest shift
over this period
7 Portfolio Advisory Group
Appendix
Regional breakdown
31 Dec 2007 30 Jun 2010 0% 20% 40% 60% 80% 100% 0% 5% 10% P ro vi si on c o ve ra ge r at io NPL ratio
Regional breakdown
5. The United Kingdom 2007 – 201031 Dec 2007 30 Jun 2010 0% 50% 100% 150% 200% 250% 0% 5% 10% P ro vi si on c o ve ra g e ra ti o 8. Spain 2007 – 2010 P ro vi si on c ov er ag e ra ti o NPL ratio 31 Dec 2007 30 Jun 2010 0% 20% 40% 60% 80% 100% 0% 5% 10% 6. Germany 2007 – 2010 31 Dec 2007 30 Jun 2010 40% 60% 80% 100% 120% 140% 0% 5% 10% P ro vi si o n co ve ra ge r at io 7. Italy 2007 – 2010
9 Portfolio Advisory Group
Regional breakdown
31 Dec 2007 30 Jun 2010 40% 60% 80% 100% 120% 0% 2% 4% P ro vi si o n co ve ra ge r at io NPL ratio 11. Belgium 2007 – 2010 31 Dec 2007 30 Jun 2010 0% 20% 40% 60% 80% 0% 5% 10% 15% 20% 25% P ro vi si on c ov er ag e ra tio NPL ratio 9. Ireland 2007 – 2010 31 Dec 2007 30 Jun 2010 0% 50% 100% 150% 200% 0% 5% 10% 15% 20% P ro vi si on c o ve ra ge r at io NPL ratio 10. Portugal 2007 – 2010Central Team Richard Thompson +44 20 7213 1185 [email protected] Jaime Bergaz +34 915 684 589 [email protected] Jens Roennberg +49 69 9585 2226 [email protected] Antonella Pagano +39 8064 6337 [email protected] Robert Boulding +44 20 7804 5236 [email protected]
Czech Republic and Slovakia
Petr Smutny +420 251 151 215 [email protected] Denmark Bent Jørgensen +45 3945 9259 [email protected] France Chuck Evans +33 1 56 57 85 23 [email protected]
Germany and Austria
Jens Roennberg +49 69 9585 2226 [email protected] Greece Emil Yiannopoulos +30 21 0687 4640 [email protected] Hungary Miklos Fekete 36 1461 9242 [email protected] Ireland Aidan Walsh +353 1 792 6255 [email protected] Italy Antonella Pagano +39 8064 6337 [email protected] Poland Janusz Sekowski +482 2 523 4476 [email protected] Portugal Luis Boquinhas +35 12 1359 9239 [email protected] Romania Marius Zidaru +40 212 253 930 [email protected] Russia Tim Nicolle +74 952 325 589 [email protected]
Slovenia and Croatia
Philippe Bozier +38 615 836 068 [email protected] Spain Jaime Bergaz +34 915 684 589 [email protected] Sweden Per Storbacka +46 85 553 3132 [email protected] Turkey Orhan Cem [email protected] +90 21 2376 5320 United Kingdom Robert Boulding +44 20 7804 5236 [email protected] Asia Pacific Michael McCreadie +61 38 603 3083 [email protected] Latin America Marcia Yagui +55 11 3674 3748 [email protected] Middle East Ian Schneider +971 430 43122 [email protected]
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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Design: ML3-2011-04-07-1008-EP
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