Resolving Europe’s non-performing loan (NPL) problem is a priority for the banks in order to pave a way to improving profitability across the sector, an official from the European Central Bank (ECB) said in a speech yesterday.
Sales of toxic assets have been slow with an estimate from Deloitte placing 2016 totals at €103 billion – less than 10 percent of the total stock of NPLs across Europe.
While overall NPL ratios at banks have fallen since a high of 8 percent in 2013 to 6 percent today, the problem has become highly concentrated in the last decade. ECB figures claim that the top high-NPL banking sectors have seen a rise to 23 percent recently compared with 5 percent a decade ago.
Attempts at clearing up balance sheets have resulted in a hit to listed banks’ return on equity, which last year saw Italian banks record a negative average. German banks saw a similar negative average bringing the total across the continent to 3 percent in 2016.
Key to responding effectively is a market-based solution driven by securitisiations and sales to asset management companies, but issues surrounding low levels of data remain a major obstacle. Wide bid-ask spreads can reach up to 40 percent for a fully collateralised loan, the ECB says.
Vítor Constâncio, vice-president of the ECB, said at the Risk & Supervision 2017 Conference in Italy: “Clearly, more needs to be done to fully unlock the potential of market-based solutions to the NPL issues.
“Reduction of that gap [bid-ask spreads] requires a comprehensive strategy. Determined structural reforms should play a prominent role in the action plan for national and European authorities, regardless of the actual solutions adopted by individual countries. For instance, debt enforcement procedures should be streamlined and their cost lowered,” he added.
The spotlight has been on Italy in recent months as its NPL pile is estimated to stand at €360 billion, but the country has made moves to improve enforcement procedures and the quality of information made available to investors, although Constâncio maintains this has been too slow.
“Despite a visible reduction in the system-wide NPL ratio in Italy, progress in reducing stocks of high NPLs to manageable levels remains insufficient,” he said.