Transcript Global NPL Markets: Progress Report May 25, 2016 1

Global NPL Markets:
Progress Report
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May 25, 2016
NPL Markets:
Remarkable Progress
Jack Rodman, Ernst & Young LLP
Managing Director, Asia Pacific Financial Solutions LLC
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May 25, 2016
Today’s Discussion…
• Asia is a role model for other markets!
• How much bad debt is in the world?
• Best markets to buy NPLs?
• How much money can buyers make?
• How do NPL buyers resolve the assets?
• NPL Market Overviews: China, Europe
• Lessons learned!
May 25, 2016
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Success in Asia
“…If Asian economies deal with their NPLs, they
will emerge as an engine of growth.”
-E&Y NPL Report: Asia 2002
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May 25, 2016
Asia’s NPL Turnaround
• More than US$1 trillion in NPLs removed from
the banking system
• Acknowledged and actively managed their NPL
problems
• Progress in implementing financial reforms:
global NPL standards, lending policies, and
other international best practices
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Asia’s Remarkable Progress
• The IMF predicts the world economy will grow by 4.1% in
2004, up from 3.2% in 2003.
• The largest economies in Asia will grow faster this year
than the US and Europe.
China
India
ASEAN (4)
Other Asia
World
U.S.
Germany
UK
Japan
2004 Est. 2003 2002 2001
7.5
7.5
8.0
7.5
5.9
5.6
4.7
4.2
4.4
4.1
4.3
2.9
4.2
2.3
4.8
0.8
4.1
3.2
3.0
2.4
3.9
2.6
2.4
0.3
1.5
0.0
0.2
0.8
2.4
1.7
1.9
2.1
1.4
2.0
0.2
0.4
Source: IMF, World Economic Outlook, September 2003
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But No Time for Complacency!!
• Asian banks still hold US$1 trillion in NPLs
• European banks hold at least US$300 billion in
NPLs and need to learn from Asia’s success
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NPLs Worldwide
“Asia’s success has demonstrated that NPLs are
manageable…if governments provide leadership,
resources, and support.”
-E&Y GLOBAL NPL Report: 2004
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May 25, 2016
Official NPL Estimates by Region
US $Billions
Official Gov't
NPL Statistic
in Financial
Institutions
Official Gov't
NPL Statistic
in AMCs
330
307
300
30
19
19
17
15
9
1046
112
107
NAP
NAP
NAP
5
5
45
NAP
274
Japan
China
Germany *
India
Taiwan
Thailand
Indonesia
Korea
Philippines
TOTAL
Source: Ernst & Young,, 1st Quarter 2004.
*German NPLs – figure is not an official gov’t estimate
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Gross NPL
Reductions in
Financial System
Since Asian
Financial Crisis
600
200
NAP
NAP
50
95
37
125
NAP
1,107
Russia
Where Are We?
Making Progress
S. Korea
Another Outbreak?
Japan
Germany
Full Speed
Early Advances
China
Czech
Republic
Gathering Momentum
Early Progress
Taiwan
India
Feast or
Famine
Initial Steps
Malaysia
Thailand
Progressing
Indonesia
Winding Down
Struggling
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Philippines
Waking Up
Highlights of Active NPL Regions
○
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Low/None
Medium
High
4 AMCs
Yes
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Czech Republic
CKA
No
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Germany
None
No
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India
ARC
No
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Indonesia
IBRA
Yes
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Japan
RCC, IRCJ
Yes
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Poland
None
No
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Russia
ARCO
No
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South Korea
KAMCO
Yes
◐
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Philippines
Banko
Sentral,
D. of Fin.
No
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None
No
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5 AMCs
Yes
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N0 25, 2016
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May
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China
Taiwan
Thailand
Turkey
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SDIF
Source: Ernst & Young,, 1st Quarter 2004.
Active NPL Markets
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NPL Buyers will go to markets
where there is…
– Strong and consistent deal flow
– Commitment to reduce NPLs
– Adherence to transparency
– Competition
– Reliance on market clearing prices
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NPL Market Groups
Current Status:
Tapering Off
Gearing Up
Investment
Potential (US$):
Less than 250
million
Indonesia
Thailand
Malaysia
Regions:
•Limited
Characteristics: potential
•Small market
size
Emerging
Mature
Up to 500 million
Up to 1 billion
Over 1 Billion
Russia
Czech Republic
Turkey
Philippines
Poland
China
India
Germany
Japan
Taiwan
Korea
•Fewer barriers to
entry
•Strong investor
interest
•Huge market
potential
•No dominant
players
•New NPL
legislation
•High barriers to
entry
•Larger deal sizes
•Mature markets
•Highly
competitive
•Existing NPL
legislation
•Opportunitistic
•Warrants further
study
•Next emerging
markets
•Significant
unknowns
•Mid size
markets
•Limited
competition
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NPL Market Groups – cont’d
NPL
Status
Emerging
Markets
Definition
• Large NPL problem
• Limited progress
beyond identification
of NPLs
• Minimal AMC
legislation(SPAV,
ARCIL, etc.)
• Efforts are new or
unproven over the
long-term
• Additional resources
needed
Examples
Annual Return
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Requirement
Established
NPL Markets
Normalized
Markets
• NPL market has developed over several years, and
is well established with experienced investors
• Pricing and valuation of NPLs is predicable based
on actual experience and there is low pricing
volatility
• Many established players in the market, high
barriers to entry
• Clearly understood legal system for enforcement of
creditor rights
• Capital available to finance NPL transactions
China
India
Philippines
Germany
Russia
Turkey
Czech Republic
Japan
Korea
Malaysia
Taiwan
Indonesia
Thailand
USA
France
Italy
Sweden
Mexico
Spain
25%-30% +
20%
Local Market
Rates
NPL Market Considerations
• Having a large supply of NPLs does not create
an active disposition market
• NPL markets are in various stages of
development
• NPL investors have different return
requirements
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How do buyers resolve NPLs?
Taiwan
Japan
5% 5% 5%
5%
25%
30%
50-70%
70%
China
5%
15%
15%
DPO/Voluntary
Disposition
Judicial
Foreclosure
65%
Other
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Restructuring
Securitization
NPL Market Overview: China
“…Deal flow will increase in 2004 and beyond,
driven by China’s need to open its banking market
in 2007 to foreign competition as part of WTO
commitments.”
-E&Y GLOBAL NPL Report: 2004
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Four State-Owned Commercial Banks
Trillion of RMB
Total Outstanding Loans in Four SOCBs
10.00
8.00
6.00
4.00
2.00
2001
2002
2003
NPL Ratio in Four SOCBs
40%
30%
20%
10%
0%
2001
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2002
2003
Annual NPL Dispositions by Four Asset
Management Companies (AMCs)
Transferred US $ 168.4 Billion
60
Billion of US$
50
Undisposed
US$ 107 B
40
30
20
10
Disposed
US$ 61.4 B
Cinda
Great Wall
Before 2001
2001
Huarong
2002
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2003
Orient
Remaining
Summary of Prominent NPL Transactions
Bid Date
Nov. 2001
Seller
Huarong AMC
Branch
Multiple
branches
May 2002
CCB
June 2003
Huarong AMC
Oct. 2003
Nov. 2003
ICBC
BOC
5 branches
Multiple
branches
Ningbo
Hong Kong
Dec. 2003
Huarong AMC
Wuhan
Dec. 2003
Huarong AMC
1st Qtr. 2004
ICBC
1st Qtr. 2004
CCB
2nd Qtr. 2004
BOC
Multiple
branches
3 branches
18
branches
Guangdong
Buyer(s)
Current Status
12.8
· Consortium lead by
Morgan Stanley
Open Auction
Closed
· Goldman Sachs
· Morgan Stanley
Negotiated
Pending Approval
· Citic Trust
Securitization
Closed
· CS First Boston
· Citigroup
· GE Capital & Morgan
Stanley
· Multiple; To be
determined
· Goldman Sachs
Securitization
Closed Auction
In Process
Closed
Closed Auction
Pending Approval
Open Auction
In Process
Negotiated
In Process
· To be determined
Open Auction
In Process
· To be determined
Closed Auction
Planned
Source: Ernst & Young,, 1st Quarter 2004.
4.3
13.3
1.0
14.9
1.8
22.2
2.3
4.2
6.0
TOTAL:
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Transaction
Type
Face
Value
(RMB
Billion)
82.8
NPL Market Overview: Europe
“…Europe’s different cultures, government
policies, banking practices, and economic systems
will require different approaches to resolving NPL
issues...”
-E&Y GLOBAL NPL Report: 2004
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Germany
• Most fragmented banking system in Europe with
US$7.9 trillion in assets and 2,700 banks
• No common standard for classifying NPLs in the
financial system
• Estimates range from US$186 billion to US$372 billion
or more
• Largest potential NPL market behind Japan and China
• Few deals transacted to date, although a significant
potential pipeline exists
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Germany
Transactions to date:
• Lone Star’s acquisition of US$279 million of loans
from the insolvent Gontard & Metallbank
• Lone Star’s acquisition of a US$558 million portfolio
from HRE
• Goldman’s acquisition of a US$217 million portfolio
from ING BHF
• Deutsche Bank’s acquisition of a US$633 million
portfolio of non-core credits from Dresdner
• Deutsche Bank’s acquisition of a US$136 million
portfolio from Deka bank
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Germany
Active NPL Buyers:
Cerberus Capital
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European First Movers
SWEDEN
ITALY
• First European country to
successfully address NPL
problem
• Created two governmentsponsored AMCs in 1992 to
acquire NPLs from Nordbanken
and Gota Bank
• Currently, Sweden exhibits
decreased exposure, strong
reserves, and low credit/market
risk
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• Securitization Law in 1999
created a 2 year window that
allowed banks to package,
securitize, and sell NPLs and
recognize the loss over 5 years
• Currently, Italian banks are
more diversified and are
characterized by improved
credit risk management
Eastern European “Hot Spots”
CZECH REPUBLIC
• In 2000, NPLs
represented 20% of all
outstanding loans
• In 2001, created AMC
(“CKA”)
• Sold US$1.4 billion in
2002 & US$2.3 billion in
2003 (US$6 billion
remaining)
• By 2003, NPLs decreased
to only 8.5% of
outstanding loans
(excluding CKA)
POLAND
TURKEY
• In 2002, NPLs accounted
for 21.4% of outstanding
loans, up from 10.9% four
years earlier
• In 2000 Turkey’s economy
collapsed causing NPLs to
reach nearly 21% of gross
loans, increasing to 32% or
approx. $8 billion in 2002.
• In 2003, a stabilizing
economy and write-off of
existing loans slowed the
deterioration
• No history of NPL
transactions, but
opportunity may exist in
near future
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• Program was established
to reform the banking
industry through
privitization and
operational improvements
• AMC (“SDIF”) established
but faced early trouble
when its first transaction
proved unsuccessful
What Have We Learned?
What Next?
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Advice to Banks/Sellers
• View the problem realistically…accept that
NPLs sell for substantially less than face-value
• Attack your NPLs using multiple resolution
strategies
• Welcome global investment
• Use financial advisors for transaction guidance,
transparency, and due diligence
• Close transactions at market-clearing prices
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Advice to Governments
• Create resolution-friendly NPL regulations
through strong political leadership
• Provide capital and bail out monies
• Support development of capital markets
• Adopt market clearing principles for NPL
dispositions
• Promote transparency
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Advice to Investors/Buyers
• Estimated US$1.3 trillion in NPLs await
resolution worldwide
• Represents investment opportunities for
investment banks, opportunity funds and other
global investors for years to come
• Use financial advisors for due diligence
support, local market intelligence, and as
intermediaries for negotiated purchases
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The Glass is Half Full
Keep up the momentum!
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E&Y’s Global NPL Report 2004
• Contact:
– E&Y National Product & Sales
– Phone: +1 800 726 7339
– Fax number: +1 216 241 1408
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