Improving real estate values and the Asset Quality Review (AQR) will lead to increased property loan sales, CBRE has said in its response to the publication on Sunday of the European Central Bank's Comprehensive Assessment of EU banks.
Improving real estate values and the Asset Quality Review (AQR) will lead to increased property loan sales, CBRE has said in its response to the publication on Sunday of the European Central Bank's Comprehensive Assessment of EU banks.
'The benefit of the AQR is that the true extent of banks’ non-performing 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,' said Dr Neil Blake, head of EMEA Research at global real estate advisor CBRE. 'Before the AQR, selling off loan books would have meant admitting that they were not properly valued in the banks' 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.'
The AQR - which along with the 'stress test' formed part of the Comprehensive Assessment (see technical note below) - reported €136 bn of non-performing loans, up 18% on the individual banks’ own estimates. Despite that, only 25 of the 130 banks examined failed the stress test in the ECB’s Comprehensive Assessment.
Of these 25, 17 were judged to have taken sufficient action in recent months to redress the situation, leaving just eight with additional capital to raise. Of these, four were Italian banks, one Austrian, one Portuguese and one Irish. These banks will now need to re-structure their balance sheets or raise additional capital in order to rectify the situation.
Some of the banks which have failed the stress test have already started to restructure their balance sheets, Blake added. A case in point is Irish bank Permanent TSB, which has an identified €850 mln 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,' Blake said.
'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.
RECOVERY IN PROPERTY VALUES
Although the recovery in property values seen in Ireland has not been repeated in Italy, values have at least shown signs of levelling off, Blake noted. 'Italian banks still look likely to try and 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. 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. The ECB response is that the assessments 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, a view that Blake of CBRE believes is 'quite reasonable'.
TECHNICAL NOTE
The ECB’s Comprehensive Assessment comprised: i) the results of the Asset Quality Review and its impact on the key Common Equity Tier 1 Ratio (ECT1) as of December 2013 ii) the results of a baseline” economic scenario on the projected CET1 for 2016 and the results of a 'stressed' economic scenario of CET1 in 2016. Banks had to achieve a CET1 of 8% or above in the AQR and the baseline or 5.5% in the stress scenario to pass the test. All of the banks which failed, failed the stress test and some also failed in the baseline and the reassessed December 2013 estimates.