Bringing the periphery countries back into the centre of the action
Opinion 4 minute read

Bringing the periphery countries back into the centre of the action

29 June 2018

Many commentators attribute the Eurozone crisis to imbalances between core group countries such as Germany, and the so-called peripheral countries, including Greece, Italy, Portugal, Spain and Ireland. But there are signs that these economies are beginning to pick up.

In June 2018, the European Central Bank (ECB) announced its intention to end quantitative easing (QE) bond purchases, saying that it will reduce monthly asset purchases from €30bn to €15bn from September to December 2018. This is already being heralded as a landmark moment in the Eurozone’s recovery.

The question is, with the easing of QE are we likely to see the peripherals integrated back into the asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) markets?

The recent 2018 Global ABS Conference in Barcelona attracted nearly 4,000 delegates from Europe and beyond, making it comfortably the year’s largest European structured finance gathering. I took part in a panel session, comprising banks, asset managers and a ratings agency, that looked at developments in peripheral securitisation markets, including non-performing loan (NPL) securitisations.

The discussions highlighted that whilst the outlook is certainly improving, there are still problems and issues that need ironing out. But it’s clear that the peripheral countries can offer relatively good risk-adjusted returns, and there is appetite in the market for their paper, which wasn’t the case a few years ago.

A cause for investor optimism

According to the panel representative from Fitch, Ireland is arguably looking the strongest at present, but there are also encouraging signs elsewhere, particularly in Spain and Portugal.

Unemployment in Ireland has fallen to 6%, the lowest rate since 2008, whilst the properties of many who bought at the peak of the housing bubble are now emerging from negative equity. The country’s improving economy and rising house prices have impacted householder behaviour and increased investor confidence.

When householders have more certainty, they begin to engage with the banks again and take a closer look at their mortgages. As such, NPL ratios are starting to decrease slowly and arrears rates are improving.

The Irish banks are proactively acting on their portfolios and particularly targeting regulated investors so that they are already well placed as the ECB slows down its bond buyback programme. Allied Irish Bank (AIB), for example, insisted that the buyer of its €3.7bn NPL portfolio must be a regulated entity, whilst Permanent TSB and Ulster Bank are also in the process of selling NPL loan books.

There is also continued opportunity in Spain, which has seen improvement in the housing market and increased demand. In March 2018, Fitch affirmed the ratings of five Spanish mortgage covered bond programmes and one public sector programme issued by the country’s banks. In tandem, Global Banking and Finance Review reports that capital and quality of assets have significantly improved for the majority of Spanish banks.

There have recently been more placements of ABS issuances in Portugal, and more ABS emanating from Italy and Greece as NPL financing strategies. This is part of a wider trend where the peripheral countries are looking more strategically at capital market structures, getting deals away across various asset classes, including receivables and credit card debt.

A word of caution

European NPL sales have risen sharply, with €157bn of portfolios traded last year. This positive swing in investor confidence shouldn’t hide the fact that there’s still a considerable problem with banks having too high a proportion of NPL on their books. This can be a major destabiliser, making banks more susceptible to economic downturns.

According to figures from the ECB, the proportion of loans on European banks’ books classed as non-performing dropped from 7.5% in 2015 to less than 5% at the end of 2017. But digging deeper, there is a huge disparity across the region. In Greece, the NPL ratio is still around 45% whilst in Germany it’s less than 2%.

It’s no surprise that NPLs are more prevalent in the weaker economies, such as Greece and Italy. And Italy is certainly one to watch in light of recent political events. The country’s new government officially took over in June 2018 following a period of near-crisis that hit Europe’s financial markets, with investors subjected to fresh worries about the future of the Eurozone.

It’s worth examining the differing scale of the problem in different countries through a historical lens. Italy has focused on relationship banking over the past couple of hundred years, and some of the loans first went into default 30 or 40 years ago. It’s therefore a multi-generational issue that’s more complex than in, say, Ireland or Spain, which have traditionally focused on property and development banking which is relatively more easily fixable.

You should have a full understanding of these issues when considering investments in the peripheral countries. With private equity (PE) firms and investment banks targeting European NPLs, it’s clear that institutions are looking to get involved early in the cycle. However, there’s myriad factors to consider, and this is where working with a partner who understands the local landscape is crucial.

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Written by

Kevin Butler

Managing Director Ireland and the United Kingdom
Kevin

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