Portfolio Lead Advisory Services Weekly Digest - Edition 7

The Global Financial Crisis (GFC) represented an unprecedented shock to the global financial system. The tools and markets that have developed as a result will play a critical role in informing banks’ strategies in the COVID-19 pandemic. The non-performing loan (NPL) portfolio market in Europe has since developed significantly and serves as a critical deleveraging / de-risking tool.

In the previous issues of the Weekly Digest, we have discussed how both EU Bad Bank and European non-performing loan securitisations are crucial in supporting the resolution of problem loans. But what are the other tools available to banks? A selection of these include:

- Asset Management Platforms: In recent years, loan servicers have continued to bridge geographical and asset class specialisations to achieve consolidation. Historically a number of these were carved out from banks, independents or connected to fund investors. They present cost reduction, recovery improvement, and partnership opportunities, as well as a key facilitator of the NPL market. During the Eurozone Debt Crisis, a plethora of Spanish loan servicing platforms emerged in response to the country’s growing NPLs. More recently in Greece, Alpha Bank has announced the full acquisition of CEPAL as part of Project Galaxy, with a view to selling the loan servicer to international investors in H2 2020 to deleverage c.€10 billion of bad loans.

- Asset Quality Reviews (‘AQRs’): Banks are expecting a deterioration in asset quality and greater credit delinquencies as a result of the current crisis. Strategic AQRs have been widely used by the regulators as an essential tool to stress test a bank’s capital and impairment adequacy. However, the real benefit to any bank is the valuable management information and planning actions that can be undertaken to allow for the de-risking and realignment of the loan book. Please get in touch with the team directly for more information.

- Other Structures: Some resolution strategies can be more imaginative and complex in nature. In addition to platform carve-outs that include long term SLAs around current and future stock of NPLs, we are seeing increased engagement of investors with banks around structured solutions, including upside sharing.

The COVID-19 pandemic is expected to create a wave of NPLs globally. However, whilst the GFC was initially led by events in North America and Europe, the APAC banking system is now in a precarious position within the global financial landscape. S&P have previously estimated that the Asia-Pacific region will account for $518 billion (56%) of the $926 billion total increase in credit losses forecasted, of which $398 billion of losses will be from China alone.

In this context, Deloitte is sponsoring and co-ordinating an upcoming webinar, 'Navigating COVID-19: Fortifying Resilience in the Banking Sector'. The webinar will review how the COVID-19 pandemic has impacted the banking sector differently compared to past crises, what we can learn from recent history, and what strategic tools can be used to navigate through these challenging times.

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