23 April 2018

Financial Times: EU banks rush to ‘have cake and eat it’ with bad loan sales

Analysts say the opportunity for banks to “have their cake and eat it” by taking extra provisions on bad loans without having to raise extra capital has spurred more lenders to start selling non-performing loans particularly in Italy and Greece.

An acceleration of bad loan sales is good news for European regulators, which have been intensifying pressure on banks to clean up their balance sheets to free capacity for new loans and to put them in better shape to cope with any future crisis.

However, the size of provisions at some banks — particularly in Italy and Spain — has surprised officials at the European Central Bank, who worry they are “front-loading” losses to benefit from the favourable capital treatment, said people familiar with the matter.

Many Southern European banks — including Intesa — have taken advantage of the introduction of new accounting rules to defer the impact on capital from the extra provisions they need to take on the bad debts they plan to sell. This lifts a big hurdle that has previously stopped many lenders from cleaning up their balance sheets.

The new rule is known as IFRS 9 and it requires banks to make provisions on their balance sheets for expected losses in the future, rather than losses they have already had. These can include expected losses on planned sales of bad loans. Italian banks have taken more than €10.7bn of provisions on expected losses from planned bad loan sales, while Greek and Cypriot lenders have taken €3.5bn, according to research by Autonomous.

Manus Costello, analyst at Autonomous, in a recent report, said: “We think an unexpected wrinkle in the first time adoption of IFRS 9 has provided some high NPL banks (especially in Italy and Greece) with a ‘have your cake and eat it’ opportunity to improve their NPL coverage while not weakening their regulatory phased-in common equity tier one ratios.”

To avoid banks taking an upfront hit to capital from the accounting rule changes, EU regulators permitted them to allow a five-year phase-in period for the capital impact.

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