Eurobank Ergasias’ Sale of Nonperforming Loans Is Credit Positive
Last Thursday, Eurobank Ergasias S.A. (Caa3 stable, caa23 ), announced the sale of a €1.5 billion portfolio of nonperforming unsecured consumer loans to Intrum Justitia AB (Ba2 positive), a leading European debt purchaser. The sale is credit positive for Eurobank because it reduces by around €620 million its on-balancesheet-reported stock of nonperforming exposures (NPEs), and helps the bank meet its 2017 NPE reduction targets. Additionally, the transaction provides the potential for the bank to earn fees through its servicer subsidiary and has no effect on its income statement and regulatory capital. This is the first sale of its kind in Greece, and paves the way for other Greek banks to use such sales as a means to reduce their high level of problem loans. Of the €1.5 billion of nonperforming unsecured consumer loans sold to Intrum, only around €620 million are actually recorded on Eurobank’s balance sheet. The remainder are loans that the bank already has written-off. Although the price for the sale of these loans equaled approximately 3% of the overall due amount, the transaction does not negatively affect the bank’s profitability and capital base because the €620 million on-balance-sheet problem loans were already highly provisioned. We expect that the pricing of this transaction will set the benchmark for similar deals on unsecured problematic retail loans that will take place at other Greek banks. Eurobank’s fully owned subsidiary Financial Planning Services SA, a licensed Greek NPE servicer, will continue servicing these loans, and aims to expand its scope beyond Eurobank’s problem loans. Accordingly, the bank stands to benefit from any potential recoveries of these problem loans through fees and commissions from Intrum. Concurrently, through this deal Eurobank achieves around 30% of the NPE reduction target set for 2017, based on its commitment to the European Central Bank’s Single Supervisory Mechanism and the Bank of Greece. All Greek banks, including Eurobank, are striving to manage their high level of NPEs, which derive from Greece’s deep and prolonged recession. In particular, Eurobank had around €22.1 billion of NPEs outstanding as of June 2017, comprising a high 44.1% of its gross loans. As shown in the exhibit below, the formation/flow of NPEs has been negative since September 2016, reducing the bank’s NPE stock. We expect this trend to continue in the second half of the year: we estimate a pro forma NPE ratio of around 43.4% as of June 2017, taking into account the Intrum transaction. We also expect that the bank will be able to meet its target of reducing its NPEs in Greece to around €18.8 billion by December 2017, alleviating some of the significant asset quality pressure it faces.
Last Thursday, Eurobank Ergasias S.A. (Caa3 stable, caa23 ), announced the sale of a €1.5 billion portfolio of nonperforming unsecured consumer loans to Intrum Justitia AB (Ba2 positive), a leading European debt purchaser. The sale is credit positive for Eurobank because it reduces by around €620 million its on-balancesheet-reported stock of nonperforming exposures (NPEs), and helps the bank meet its 2017 NPE reduction targets. Additionally, the transaction provides the potential for the bank to earn fees through its servicer subsidiary and has no effect on its income statement and regulatory capital. This is the first sale of its kind in Greece, and paves the way for other Greek banks to use such sales as a means to reduce their high level of problem loans. Of the €1.5 billion of nonperforming unsecured consumer loans sold to Intrum, only around €620 million are actually recorded on Eurobank’s balance sheet. The remainder are loans that the bank already has written-off. Although the price for the sale of these loans equaled approximately 3% of the overall due amount, the transaction does not negatively affect the bank’s profitability and capital base because the €620 million on-balance-sheet problem loans were already highly provisioned. We expect that the pricing of this transaction will set the benchmark for similar deals on unsecured problematic retail loans that will take place at other Greek banks. Eurobank’s fully owned subsidiary Financial Planning Services SA, a licensed Greek NPE servicer, will continue servicing these loans, and aims to expand its scope beyond Eurobank’s problem loans. Accordingly, the bank stands to benefit from any potential recoveries of these problem loans through fees and commissions from Intrum. Concurrently, through this deal Eurobank achieves around 30% of the NPE reduction target set for 2017, based on its commitment to the European Central Bank’s Single Supervisory Mechanism and the Bank of Greece. All Greek banks, including Eurobank, are striving to manage their high level of NPEs, which derive from Greece’s deep and prolonged recession. In particular, Eurobank had around €22.1 billion of NPEs outstanding as of June 2017, comprising a high 44.1% of its gross loans. As shown in the exhibit below, the formation/flow of NPEs has been negative since September 2016, reducing the bank’s NPE stock. We expect this trend to continue in the second half of the year: we estimate a pro forma NPE ratio of around 43.4% as of June 2017, taking into account the Intrum transaction. We also expect that the bank will be able to meet its target of reducing its NPEs in Greece to around €18.8 billion by December 2017, alleviating some of the significant asset quality pressure it faces.
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