Irish and Spanish banks coping well with bad loans

Irish and Spanish banks are managing to reduce their stocks of non-performing loans (NPLs) at a quicker rate than their counterparts in Italy and Portugal.

But Ireland’s “slow judicial system” is presenting a challenge to banks seeking to repossess and sell assets.

The information is contained in a report from Standard & Poor’s, which says that between them, the four countries accounted for around half of the entire European stock of NPLs at the end of last year.

The S&P research expects Irish and Spanish NPL stocks to decline to about 11% of their loan portfolios by the end of 2018, as a result of strong GDP growth.

However, Italy’s NPLs will remain elevated above 16%, as will Portugal’s at 21%.

S&P estimates that in Ireland, at the end of 2016, NPLs were down to one third of their 2013 peak and represented about 16% of the gross domestic loan book – down from 22% at the end of 2015, and 37% at the end of 2013.

In Spain, NPLs dropped by 30% from their 2013 peak to about 15% of gross system-wide loans at the end of 2016.

However, in Italy only a “marginal contraction” of its 19% of NPLs is expected by the end of 2018, and Portugal’s NPL stocks actually rose last year, reaching about. 21% of gross loans.

S&P also views a rebound in the property markets both here and in Spain as helping in tackling NPLs.

The report states: “The Irish and Spanish property markets have recently returned to being a credit support after their peak-to-trough fall during the 2008-2011 crisis of more than 50% and 40%, respectively.

“Their property market recoveries started earlier and at a more sustained pace than in Italy and Portugal, where property-value declines have been less pronounced (at about 30% and 24% from their peak, although it was quite relevant in the absence of a real estate bubble).

Though in its assessment, S&P said asset quality problems in Ireland are “unlike other countries… concentrated in the residential mortgage sector, accounting for about one-half of the total stock of domestic NPLs”.

The research added that the stock of NPLs in residential mortgages here “is expected to remain sizeable given Ireland’s slow judicial system, which tends to discourage foreclosure”.

S&P also pointed out that the “high volume of cases moving through the Irish judicial system and the timelines associated with the repossession proceedings for residential property are a key challenge for Irish banks and their ability to repossess and sell collateral in an efficient manner”.

The report also underlines the benefit of setting up a bad bank both here and in Spain to manage NPLs. 

It said: “They helped to initiate the beginning of a secondary market of distressed assets in these two countries.

“Since the inception of the bad banks, the volumes of asset sales increased in Ireland and Spain, while in Italy and Portugal they remained limited”.