Is there really a market for NPLs in Germany?

Similarly, if banks have a plethora of non-performing loans and distressed assets on their books, but are in no rush to sell, is there a distressed market?
 
The participants who took part in the  2013 E&Y Survey:  Flocking to Europe published this week think so.  The overwhelming response pointed to Germany as the single most attractive investment market for non-performing loans in 2013 – a sentiment that draws on the number of bad loans German banks made at the peak of the market that they are now carrying on their books, coupled with the effects Basel III should have in forcing banks to divest of assets to up their core ratios.

 

While in theory this massive disposal of non-performing loans should take place, the reality looks quite different.

 

Ed Hammond voiced our thoughts succinctly in his Thursday article in the FT about Commerzbank’s potential disposition of £4 billion of real estate assets to Lone Star and Wells Fargo.  He quotes the PwC report that hedge funds have raised €60 billion in anticipation of a massive bank disposal of non-performing loans, but points out that European banks have been slower to dispose of such loans – especially non-performing ones – because the European Central Bank has injected massive amounts of liquidity into these banks, thus buying banks more time.
 

He could not have said it better.  Why sell your assets at a loss when it’s costing you next to nothing to keep them on your books?  You may as well wait for the market to turnaround and hope for a better price in the future.
 

The articles are timely as the hype about non-performing loans continues to make waves in the press.  Having just returned from Tuesday’s German GRI in Frankfurt, our main takeaway was that banks seem to think that life has gone back to normal.  They were even complaining about a tightening of margins due to higher competition.  Really, they should consider themselves lucky to be alive!  But their world view is being skewed by the inefficiency of government intervention, while buyers are still clinging on to the hope of stumbling upon a gold mine.

 

Back to the original point. A market is defined as “an open place…where buyers and sellers convene for the sale of goods.”  Convening means that two people need to come together!  Likewise, just because distressed assets exist, there is no market for them until buyers and sellers convene to determine a price.

 

For now, unless you are a substantial market player like Lone Star and cinch the odd megasized deal, those two remain worlds apart.  Unless, of course, the government lets the free market run its natural course.  Until that day comes, buyers need to stop hoping.

19th April 2013

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