Daily Briefing Weekend Edition

German NPL Buys Seen Slowing

By Bonnie Sinnock

Investors have bought at least €45 billion ($70 billion) of nonperforming loans from German banks since 2003, but the market has been slow through March of this year, according a European nonperforming loan report by Ernst & Young's office here. "The boom in the nonperforming loan market enjoyed since 2003 in Germany ran out of steam in 2007. After a record-breaking 2006 (at least 21 deals worth an aggregate €14.4 billion [$22.3 billion]), German banks sold only €6.5 billion [$10.1 billion] of loans in 2007," E&Y said. "But German banks are still holding nonperforming loans that some have estimated to total €200 billion [$310 billion] on their books."

E&Y added that, "Since 2003, at least 17 banks and one insurance company have sold credit portfolios of nonperforming loans on the German market. Between 2003 and 2007, deals worth at least €45 billion [$70 billion] were closed." "Trade in nonperforming loans has been suffering as a result of several factors, including the impact of the global credit crunch on NPL portfolio prices and banks' hesitance to offer new portfolios on the market," said Daniel Mair, partner at Ernst & Young.

Mr. Mair said he is confident that the German NPL market will pick up again. "German banks are still carrying nonperforming loans with a volume of some €200 billion [$310 billion] on their books. This is why we think that the number of transactions will pick up again when banks realize that a quick fix of the NPL problem is the best strategy," he said. However, E&Y said, "figures are unlikely to return to the record level of 2006."

The high level of nonperforming loans in German bank portfolios has stemmed from a weak economy and a "rising number of insolvencies" that "have been causing more and more debtors to default since the mid-'90s. "At the same time, the value of loan collateral has been falling. Loans raised to finance real estate in eastern Germany and secured by property are posing major problems: After the real estate market in the east of Germany crashed, these properties have significantly dropped in value," E&Y said.

In the boom years, banks generated large sums of money from the sale of their NPL portfolios, according to Florian Wirsching, partner at Ernst & Young. But more recently, "competition among buyers has declined as many investors have withdrawn from the market - leading to falling prices," E&Y said. "The past few years saw several very large deals with volumes of more than €2 billion [$3 billion], but in the future smaller-scale transactions (€300 million to €500 million [$465 million to $775 million]) will prevail."