The new headquarters of the European Central Bank in Frankfurt. The ECB is encouraging commercial banks in the region to write down the value of their NPLs and sell them off so they can extend new credit and boost their economies.

Bloomberg/Vienna

Investors in bad loans can thank the European Central Bank for kick-starting a market in eastern Europe that PricewaterhouseCoopers says reached €160bn ($180bn) last year.
Sales of non-performing loans by the Romanian units of Erste Group Bank and Oesterreichische Volksbanken since July, spurred by the ECB’s asset quality review, are paving the way for more deals in the Black Sea country, where as much as half of the €13bn of bad debt may be sold, according to PwC. Heta Asset Resolution, an Austrian “bad bank,” sold its first debt from western Balkan countries in August.
The ECB, in tandem with local monetary authorities, is encouraging commercial banks in the region to write down the value of their NPLs and sell them off so they can extend new credit and boost their economies. Stricter accounting rules for bad loans mean the debt is written down to prices that are becoming more attractive to outside investors.
“The increased level of provisioning for bad loans is helping to create this market, making NPL sales possible,” said Bernhard Engel, a partner at PwC Austria in Vienna, who helped manage the deals for OeVAG and Erste, on Wednesday. “This market didn’t exist as recently as 18 months ago.”
OeVAG’s sale of €495mn of bad loans to Deutsche Bank, AnaCap Financial Partners, HIG Capital International Advisors and APS Holding SE is credited with having opened up the Romanian market. Erste’s Banca Comerciala Romana sold €400mn of NPLs in December.
Heta sold a €169mn portfolio of delinquent loans in Croatia, Serbia, Slovenia and Montenegro to Norway’s B2Holding. In Poland, where the NPL market is more developed, Citigroup’s unit in Warsaw sold 162mn zloty ($44mn) of impaired loans last quarter, according to the company’s website. Kruk SA, a debt collector based in Wroclaw, Poland, bought 443mn zloty of bad mortgage loans from Bank Zachodni WBK SA December 16.
Prices depend on the metrics of the portfolios, PwC’s Engel said. Unsecured consumer loans can be traded between 5% and 15% of face value, depending on how long they are already overdue. Mortgages are more likely in a region of 15% to 25%. Corporate loans and commercial real estate loans are priced case by case, he said.
Banks took a long time to cut the prices for distressed assets far enough to make them feasible for buyers, and eventually did so under pressure from the ECB’s stress test.
“We recently did a road show with an investor and talked to a group of banks in Romania,” Bryan Jardine, a partner at Austrian law firm Wolf Theiss’s Bucharest practice, said by phone. “If you would have talked to these same banks even 12 months ago, most of them wouldn’t have opened up and acknowledged that they actually have portfolios of NPLs and distressed real-estate assets.”
Investors, who make money by buying NPLs at a deep discount and hoping to collect a higher proportion of the loans, are growing frustrated by the competition for distressed assets in the euro region’s periphery, the area they focused on before.
“Many of the buyers have grazed the classical NPL markets in Spain or Ireland, but meanwhile what’s on offer there it’s pretty commoditised and priced very tightly,” Martin Ebner, a partner at Vienna-based Schoenherr, a law firm that’s advising on NPL sales in eastern Europe, said by e-mail on Wednesday. “People are looking for new leads. Central and eastern Europe is the logical next step.”
In Hungary, where about 10bn euros of loans are non-performing, Prime Minister Viktor Orban this week pledged to start cutting Europe’s highest bank tax as part of an agreement that may signal smoother ties with the financial industry.
“Hungary is interesting for investors but many still fear the legal risks,” PwC’s Engel said. “Everybody is lurking there. Once it’s kicked off, it could go really fast.”