Management of

non-performing loans
8 January 2020

Kontakt

Paweł Preuss | EY, Partner, Paweł Flak | EY, Associate Partner,

Financial Services Industry Leader Financial Services Industry
Tel.: +48 508 018 341 Tel.: +48 502 793 174
Mail: Pawel.Preuss@pl.ey.com Email: Pawel.Flak@pl.ey.com

Łukasz Sikora | EY, Associate Partner,
Transaction advisory for Financial Services
Industry Leader
Tel.: + 48 519 511 522
Email: Lukasz.Sikora@pl.ey.com
Magdalena Warpas | EY, Senior Manager,
Transaction advisory for Financial Services
Industry
Tel.: +48 500 136 632
Email: magdalena.warpas@pl.ey.com
Recent asset quality trends

EU NPL RATIO AND VOLUME NPL RATIO PER COUNTRY (%) NPL BY TYPE OF EXPOSURE (EUR bn)
1 152
1 175 EU average: 1 062
1 098 49,6
989 Jun-15: 6,0% 331 893
6,5 311
5,7 815 42,0 Jun-19: 3,0% 746
274
5,1 39,2 224 636
660 636 209 209
4,1 187 181
222 164
3,2 18,1 16,8 203
3,0 172 141
21,5 81 76 143
6,8 7,1 5,4 145 72 117
133 66 63
3,4 2,7 3,7 85 65
8,9 7,9 150 131 58
104 98 76
4,8 3,5 2,6
2014 2015 2016 2017 2018 2019.06 1,3 1,3 1,3 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
GR CY PT IT PL ES SK DE GB CZ
NPL ratio (%) NPL volumes (EUR bn) Jun-15 Jun-19 SME CRE Large Corp
Mortgages Consumer credits Other

► The asset quality of EU banks has
improved significantly in the past 4
years
► 2019 NPL ratio is the lowest since the
EBA introduced a harmonised definition
across European countries of NPLs in
2014
► On average, the NPL ratio has improved
by 75 bps each year
► NPL volumes have decreased by 50%
since 2015, but country dispersion
remains wide
Source: EBA report on NPLs. Progress made and challenges ahead
► Banks in countries with high NPL ratios at
the beginning of the period generally
reported the biggest improvements and
are the main driver of the decrease at the
EU level
► These countries were also subject to
supervisory attention from the outset,
especially from ECB supervision, and they
were required to comply with NPL
reduction strategies
► However, Greece, which has the highest
NPL ratio in the EU, has reported a
decrease of only 2.8 p.p. since June
2015
► SMEs, mortgages and CREs have been
the largest sub-segments by volume of
NPLs
► As of the second quarter of 2019, NPLs
to SMEs stood at EUR 181 billion (28.5%
of the total), mortgages at EUR 141
billion (22%) and NPLs to CREs at EUR
117 billion (18.4%)
► The largest percentage decrease was
reported by large corporates (60%
reduction), CRE
(47% reduction) and SMEs (45%
reduction)

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European Commission Action Plan on the reduction of non-performing loans
LEGISLATIVE PACKAGE TO COME INTO
FORCE
BRRD2, CRDV* and CRR2 [June 2021] -
substantial measures to reduce risks and
enhance the resilience of the EU banking
sector
GUIDELINES ON
LOAN ORIGINATION AND MONITORING
The guidelines are to improve institutions’
practices and associated governance
arrangements, processes and mechanisms in
relation to credit granting in order to ensure
robust and prudent standards for credit risk
taking, management and monitoring
[June 2020**]
*To be implemented in the national law
** expected date (consultation in process)
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STATUTORY PRUDENTIAL BACKSTOP
Common minimum levels for the amount of
prudential provisions banks need to set aside
to cover losses caused by future loans that
turn NPLs (any excess to be deducted from
own funds)
[April 2021]
PROPOSAL OF A REGULATION TOWARDS
CREDIT SERVICERS & CREDIT PURCHASERS;
EBA NPL TEMPLATES
This regulation will provide banks with an
efficient mechanism of out-of-court value
recovery from loans and will encourage the
development of secondary markets
[January 2021**].
The EBA NPL templates aimed at enhancing
the granularity, quality and comparability of
NPL data and facilitation of the exchange of
information between banks and investors
[June 2021] – effective date of entry intro force
GUIDELINES ON MANAGEMENT OF NON-
PERFORMING AND FORBORNE EXPOSURES
The guidelines are aimed primarily at
reducing NPEs on banks’ balance sheets by
ensuring that banks effectively manage NPEs
and forborne exposures (FBEs) [June 2019]
NPL Disclosures [December 2019],
NPL FINREP reporting [June 2020**]
EC BLUEPRINT
ON ASSET MANAGEMENT COMPANIES
The main aim of AMCs is to remove troubled
assets from banks' balance sheets and
reduce related uncertainty premia,
to accelerate the restructuring of banks with
high levels of distressed assets and stabilise
the national banking sectors
There are three main pillars that determined the overall reduction in NPLs…

MAIN DRIVERS OF THE REDUCTION IN NPL LEVELS DURING THE PAST FEW YEARS (%)
3 MAIN PILLARS of NPLs REDUCTION
Banks’ and Analysts’ RAQ, Autumn 2019
Banks Analysts

1 Clear policy stance of the EBA

and the supervisory
Accommodative macroenvironment 55 community, and the Council of
(e.g. positive economic growth, decreasing the EU’s action plan
unemployment) 47

Investors' appetite (including due to low

18 2 Banks’ efforts to improve NPL
management capabilities, by
interest environment and search for yield) enhancing NPL strategies in
69
monitoring and restructuring,
Development of secondary markets for NPLs by investing in information
(e.g. market entrance of servicers, 26 technology and by
establishment of NPL transaction platforms and strengthening governance
introduction/update in securitisation laws or 48
schemes)

Efficiency of banks' NPL workout units and

applied strategies for NPL reduction
31
75
3 Positive economic growth,
lower unemployment, low
interest rates and positive
development in real estate
Changes to the legal framework (e.g. improved markets in the EU during the
3 past 4 years
insolvency and foreclosure procedures) and
judicial system (e.g. out of court procedures, 8
more judges)

Source: EBA report on NPLs. Progress made and challenges ahead

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… and two dominating strategies for NPL reduction among banks

MAIN DRIVERS OF THE REDUCTION IN NPL LEVELS DURING THE PAST FEW YEARS (%)
• Countries with higher NPL ratios
Banks’ and Analysts’ RAQ, Autumn 2019
have active NPL portfolio sales
Countries with NPL ratio below weighted average EU NPL ratio high on their agenda (73%),
Countries with NPL ratio above weighted average EU NPL ratio followed by their hold and
forbearance strategies (69%)
Hold and forbearance based strategies 83 • This reflects both the investors’
(i.e. holding NPLs and applying suitable workout
appetite for these portfolios and
strategies and forbearance options) 69
the supervisory pressure to reduce
legacy assets within set timeframes
42 • Conversely, banks with lower NPL
Active portfolio reductions:
ratios do not have a priority to sell
sales (e.g. NPL portfolio transactions) 73 NPL portfolios and they are
seeking to cure NPLs either
through internal work-out
1 strategies or through legal
Active portfolio reductions: NPL securitisation proceedings
15
• This also reflects the ability and
flexibility of these banks, due to
Change of type of exposure or collateral 14 their lower NPL ratios, to wait and
(e.g. foreclosure, debt to equity / debt to asset hold on to their non-performing
swaps, collateral substitution) 12 assets

44
Legal options (e.g. insolvency proceedings, out-
of-court solutions) 23

Source: EBA report on NPLs. Progress made and challenges ahead

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National Asset Managements Companies (AMCs)

European Union experience shows the examples that the AMCs have already contributed to addressing financial stability
concerns in countries with high levels of non-performing loans (NPLs) and to the elimination of a significant impediment to the
flow of new credit to the economy. Additionally, AMCs can also act as a catalyst to develop secondary markets for distressed
debt.

A centralised AMC is a very effective AMCs help to bridge the intertemporal

measure when impaired assets affect a large
part of the domestic banking system and
mainly cover loans secured by commercial
real estate and large corporate exposures.
Any transfer of NPLs by a bank to a publicly-
supported AMC is subject to two EU
regulatory frameworks:
• The bank resolution framework
• The State aid framework
• AMC’s should not operate as a for-profit
THE FINANCIAL
enterprise and should remain a light
operation, with limited numbers of Staff
• Best practice internal controls must be in
place
• AMCs should be transparent to the public
with well-defined disclosure requirements
valuation gap which is necessary to adopt
structural reforms that take hold and hence
improve the price of NPLs in secondary
markets
Valuation options: book value, real
economic value, estimated market value –
transfer price between REV and EMV
AMCS CAN
OFFER
A VARIETY OF
POTENTIAL
BENEFITS TO
AMCs procure expertise, can benefit from
economies of scale, creditor coordination
SYSTEM
and they provide relief to affected banks
that are struggling to manage their NPLs
and aid them to re-focus on lending to viable
firms and households.

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In a number of countries there are ongoing initiatives
to assist the final clean-up of legacy assets

3 MAIN TYPES OF COUNTRY SPECIFIC

Asset management companies EXAMPLES
Guarantee schemes
ACTIONS
Coordination platforms

1 ASSET MANEGEMENT COMPANIES

The establishment of AMCs in Ireland (NAMA), Spain Ireland
(SAREB) and Slovenia (DUTB) acted as catalysts for their
banks to decrease radically their NPLs but also for the
development of secondary NPL markets.

Slovenia
2 GUARANTEE SCHEMES
In Italy, the introduction of the GACS scheme by the
Portugal
government in 2016 has been instrumental in the reduction
in NPLs. Coordination
platforms
In October 2019, the EC approved a Greek asset protection
scheme. The scheme, called ‘Hercules’ is similar to the
Greece
Italian GACS scheme and aims to further support the
reduction of NPLs. ‚Hercules’
Scheme
Spain

3 COORDINATION PLATFORMS
Other national initiatives that aim to tackle NPLs swiftly are
Italy
the coordination platforms established in Portugal and in
Greece. GACS
In Portugal the coordination platform aims to integrate
negotiations with the debtor on behalf of multiple creditors.
Cyprus
There is a similar initiative in Greece, where banks have
'Estia' Scheme
formed a committee to discuss common exposures to large
corporates.

Source: EBA report on NPLs. Progress made and challenges ahead

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Spanish AMC Case study: Sareb

WHAT IS SAREB? KEY FIGURES SAREB ASSETS PORTFOLIO

2012 - 6M 2019

Sareb was founded in 2012, Evolution of the portfolio*, EUR bn

as part of the Memorandum of
Understanding (MoU) signed
between the Spanish and 11,3 11,1
11,2
international authorities to EUR 25,396m 11,9
12,3
assist the restructuring and 12,2
Income 12,4 12,8
recapitalisation of the Spanish 39,4 37,7 34,1
banking sector. 31,2 27,8 25,0 21,9 20,8
Sareb at the moment of
origination received 200,000
EUR 15,021m 2012 2013 2014 2015 2016 2017 2018 06.2019
Repayment of debt
assets valued at EUR 51bn of (30%)
*Sareb acquired the assets from Spain’s main financial entities at an
which 80% was developer loans average discount of 53%.
and 20% was properties.

Shareholders: 55% private 98,493 Composition of the portfolio, %

investors (incl. Spanish and Properties
Real estate assets Financial assets
foreign banks, insurance Sold
companies, electricity company)
78 77 75
45% Fund for Orderly Bank 72 69 69
67
62
Restructuring
38
31 33 31
23 25 28
22

2012 2013 2014 2015 2016 2017 2018 06.2019

Source: Sareb. Activity report first half year 2019

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Irish AMC Case study: NAMA

WHAT IS NAMA? KEY FIGURES SAREB ASSETS PORTFOLIO

2009 - 2018

The National Asset Evolution of the portfolio, EUR bn

Management Agency was
Loan portofio Cumulative cash generation 44,0
established in 2009 as one of 40,7
a number of initiatives taken by 38,1
the Government to address the EUR 5,247m 32,7
serious crisis in Irish banking Net income
28,0
which had become increasingly 25,6
22,8 23,6
evident over the course of 2008 19,6
15,1
and early 2009 13,4
EUR 10,6
7,8
NAMA at the moment of 40,970m 6,1
3,9 3,2
origination received over EUR Total cash 1,0 1,9
74bn of assets from five generated, of
2010 2011 2012 2013 2014 2015 2016 2017 2018
participating institutions. which EUR37bn is
asset disposal
Shareholders at the moment of receipts NAMA portfolio by sector, 2018, (%)
origination: 51% private
investors (incl. Irish Life
Investment Managers, New EUR 30,720m 4%
Repayment of debt 36% 30% 17% 8%
Ireland Assurance, Clients of 5%
Allied Irish Banks Investment
Managers), 49% State
treasury 100%
13,400
Number of residental Land Development Residential Office Retail Other
units directly or
indirectly facilitated by
NAMA
Source: NAMA Annual report for 2018

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Guarantee scheme case studies: Italy and Greece

GARANZIA CARTOLARIZZAZIONE ‚HERCULES’ SCHEME

SOFFERENZE (GACS)

1 SCHEME APPROVED IN 2016

State guarantee scheme designed to assist Italian
1 SCHEME APPROVED IN 2016
State guarantee scheme designed to assist Greek banks
banks in securitizing and facilitating the removal of in securitizing and facilitating the removal of NPLs
NPLs from banks' balance sheets from banks' balance sheets

2 MECHANIZM
SPV shall buy NPLs from the relevant bank and
2 MECHANIZM
Hercules is a voluntary scheme and will last for 18
issue asset backed securities („ABS”) months, although its duration could be extended.
SPV shall buy NPLs from the relevant bank and
issue asset backed securities („ABS”)

3 SCOPE
The GACS shall cover exclusively the senior
tranches
3 SCOPE
The Scheme shall cover exclusively the senior
tranches
4 PURPOSE OF GACS
The main purposes of the GACS should be: “The Hellenic Financial Stability Fund, which
1) to increase the credit worthiness of the senior holds stakes in Greek banks, has proposed the
ABS,
2) reduce the funding cost of the SPV and set-up of an asset protection scheme called
3) incentivise banks to sell NPLs ‘Hercules’, similar to the Italian GACS scheme.”

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NPL in Polish banking sector

NPL RATIO AND VOLUME NPL RATIO PER TYPE OF BANK (%) NPL BY TYPE OF EXPOSURE (PLN bn)

31,7 31,8 32,0 31,6

30,4 30,6
9,1 31,6 31,7 31,9 31,6 30,6
8,9 8,8 30,4
8,5
8,1 7,8
7,6 8,1 12,3 11,9 11,9 12,4
7,0 6,8 6,8 10,5 11,6
6,7 7,5
7,1 7,1 6,8 6,8 6,7
4,5 3,5 3,4 3,5 4,0 3,5
5,8 6,0 5,3 4,7 4,6
5,5
4,7 5,5 5,6 5,9 5,6 5,8
4,7 5,0 4,9 5,1 4,8 5,0
2014 2015 2016 2017 2018 2019.10 2014 2015 2016 2017 2018 2019.10 2014 2015 2016 2017 2018 2019.10

Commercial banks Cooperative banks

NPL ratio (%) NPL volumes (PLN bn) SME Mortgages (retail) Other (retail)
Large corpo Consumer

► NPL volumes remained flat during 2014 –
2017 and has increased starting from
2018
► Currently ca. 10% of total NPLs volume is
attributable to cooperative banks
► Polish NPLs accounts for c. 1% of total
EU NPL stock
► Banking sector NPL ratio has been
decreasing since 2014*
► NPL ratio of cooperative banks has been
increasing since 2014 with overal value
of 8.8% as at Oct 2019
► NPL ratio for corporate mortgages was
higher than maker average and amounted
to 10% as at 2019.10
► NPL volume of housing loans for
developers and loans for office real
estates amounted to PLN 0.6bn and PLN
0.8bn respectively (ie. 2.0% and 2.5% of
total NPL volumes)
► NPL ratio for housing loans for
developers and loans for office real
estates amounted to 15% and 7%
respectively

* Banking sector NPL ratio based on PFSA data amounted to 6.7% as at Jun2018 (vs. 4.8% based on EBA data)

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