Banks stepping up on the sale of real estate inherited from the crisis

The heavy real estate digestion is finally reaching its final stage. Spanish Banks accelerated last year in their balances clean-up, to try to get rid once and for all of the nefarious effects of real estate. Thus most of the sector got rid in 2017 over 50 billion in NPLs, default loans, properties and awarded lands, twice as much since the 27.431 billion sold between 2012 and 2016 according to Afi (Analistas Financieros Internacionales). This year looks like it will be just as active in that field, as the system still supports non-performing real estate assets worth 127 billion.

Only five of the large banks in Spain -Santander, BBVA, Caixabank, Bankia and Sabadell – gathered at the closing of 2017 about 105 billion, according to data gathered by the advisors Alvarez & Marsal in a specific report on Real estate exposure in the Spanish banks. Of them, over 58 billion are loans and about 47 billion are physical assets (see graph). To that, we have to add around 21 more billion in the hands of smaller groups like Liberbank, Unicaja, Ibercaja, Kutxabank, and Abanca among others.

“Sales, both in default portfolios, as awarded, have been happening for a while and they’re more and more intense. This is due to the assets provisions, that is, with less net value, because prices are a bit better after the start of the recovery”, says Mr. Carmelo Tajadura, economist, and financial expert.

Data is eloquent. The large banks reduced in the past 12 months its bad debts and awarded assets by 36%, when only a year before that figure had dropped only 6%, thanks mainly to the sale of enormous asset portfolios by Santander and BBVA. Thus, the non-performing assets ratio dropped from 14.3% to 11.4% of the balance. In 2018, without a doubt, sales will continue for the same reasons. Also the ECB is urging to reduce NPLs. And sales are essential to try and improve the margins and the capital ratios.

Another key indicator is the good economic performance. “The improvement of the Spanish economy and the macroeconomic previsions has caused an increase in the trust of international investors in Spanish banks, and as we could observe since 2017, most of the portfolios of non-performing assets are being purchased by hedge funds like Blackstone or Cerberus”, ensure Afi analysts in their report.

An example of that is the bank led by Mrs. Ana Botín, that suddenly dropped 30 billion in assets inherited from Popular, placing them in a joint venture with Blackstone in which the fund will have a majority share of 51%. BBVA settled an almost identical operation with Cerberus, the transfer to another firm of 13 billion in properties and land, although the operation won’t be closed until the second half of 2018.

Both operations have raised pressure over the rest of entities, that according to financial sector sources, are forced to take measures during this year. Those sources point at Caixabank being the bank on which all eyes are set. It is right now the largest non-performing assets hoarder: 27.198 billion. According to several reports, it’s already hired KPMG as advisors to help them reduce their stock.

Against the “private bad banks” strategy from Santander and BBVA, Sabadell has maintained the strategy of managing its own real estate firm, Solvia. Last year, taking into account absorbing Popular and BMN raised the net exposition of both Santander and Bankia respectively, the Catalonian bank was the best at reducing non-performing assets, by 22%, up to 15.2 billion.

Furthermore, some data from the annual accounts from the entity forecast a heated 2018 in NPLs and assets. The bank provisioned an extra 900 million that, along with the adoption of the accounting regulation IFRS 9, elevated the coverage of the Non-performing assets from 49.8% to 54.7%. “This makes us more flexible” said its president, José Oliu, as he introduced those results.

In the end, having an elevated coverage ratio is what allows banks to get rid of these assets without incurring into additional losses and so being able to perform that clean-up. It is, precisely what Popular couldn’t do, not having done the necessary provisions. The average coverage of non-performing assets of the five great banks of Spain already reaches 51% of the distressed exposition. It’s also worth remembering that the large funds that are purchasing these assets demand discounts over the face value, close to 60% to get a profit on them.

The balance clean-up does not only depend on the provisions done, but also on the portfolios made. For instance, according to Alvarez & Marsal, the banks has dealt already with most of the defaults in the large companies loan portfolio, with 23 billion of distressed loans left. But distressed loans to SMEs, harder to manage, still amount to 50 billion and carry a default rate of 15.4%.

Then, will it be harder for entities selling the last of Non-performing assets due to their poor quality? “Yes, but with nuances. It’s true that what is sold first has an easier way out. But also, that the net value of the asset is dropping by the provisions, and that the market is recovering. The worst assets require more provisions, but, once that is provisioned, they are in condition to be sold at a low price”, points out Mr. Tajadura.

Source: ABC. Translation by Miguel Vinuesa Magnet.

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