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LENDING ACTIVITY AND NPLS RESOLUTION IN CEE
(WORKSHOP ‘BUILDING EFFICIENT DEBT RESOLUTION SYSTEMS’)
Dear Ladies and Gentlemen,
Honourable Guests,
After few years of subdued dynamic as a result of the crisis, 2011 marked further
consolidation in the recovery of lending activity in the CEE region, although
growth was slowly dissipating in the second half of the year on the back of European
jitters.
The recovery was, however, characterized by important cross-country
differences
also
influenced
by
divergences
in
the
macroeconomic
performance. Russia and Turkey, for instance, posted more robust growth rates in
the real economy and did also manage to substantially outperform the rest of the
region in respect to the dynamic in lending – with loan growth estimated to have
reached 21% and 31% at the end of last year, respectively. The Balkan countries
represent instead a clear exception as recovery in lending, particularly in the retail
segment, was delayed by the still high unemployment and weak households' financial
conditions.
Although demand factors proved to play the strongest role in explaining the observed
weaknesses in lending activity, credit quality issues still remain an important
constraint to a full recovery in some countries.
Following the remarkable deterioration recorded during the 2008-2010 period, the
generalised post-crisis improvement in macroeconomic conditions supported a
gradual stabilization of credit quality problems in CEE. In the majority of countries
impaired loans have peaked or stabilized by mid-2011 and the average impaired
loans ratio for the region has not increased since year-end 2010. At the end of last
year we saw the average impaired loans ratio drift to an estimated 14%.
Clearly, aggregate numbers tend to conceal a rather heterogeneous picture
and in some countries asset quality still remains a potential issue to monitor.
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Clear examples are represented by countries in Southern-Eastern Europe (SEE),
where economic recovery is lagging behind the rest of the region and non-performing
loans were still growing in 2011.
Within the SEE region, the Romanian banking sector emerges with a significant level
of non-performing loans which stood at roughly 23% of gross loans at the end of
September 2011. The ratio has also been growing since July 2011 on the back of a
negative balance sheet effect resulting from the RON depreciation.
Bulgaria is also worth mentioning in this context. At the end of September 2011,
around 15% of total loans in the banking system were non-performing. In this
country, asset quality remains vulnerable to the weak protection of creditor rights as
well as the non-negligible concentration of corporate loans in real estate and
construction, sectors which have been particularly hit by the recent downturn in the
real economy.
But also in other countries, such as Ukraine and Kazakhstan, distressed assets
remained at a high level last year, despite some signs of gradual stabilization. In
Kazakhstan, problematic loans have not yet even peaked, particularly if loans
“restructured” by simply extending maturities are taken into account. On the contrary,
in Ukraine non-performing loans have already reached their peak and we expect the
ratio to marginally decline going forward. This trend should be supported by
acceleration in NPLs resolution. The process already started in 2011 but it has been
progressing at slow pace due to the unfavourable regulatory environment.
Nonetheless, as some important changes in the legislation took place in autumn
2011, we believe that the NPL resolution should gradually accelerate in the course of
2012.
When looking at the impact of NPLs on economic activity, it is quite clear that a
high level of distressed assets may hamper the process of economic recovery.
On the one hand, it triggers lower demand from troubled households and nonfinancial corporations; on the other it also lead to tighter credit conditions and might
constrain new lending. In such situation, the economy is likely to experience a
prolonged contraction in credit-dependent investments with negative consequences
for long-term growth. Additionally, the lack of credit may result in a suboptimal
composition of output growth by favouring sectors which are not the most productive,
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but are simply less dependent on external sources of financing. With non-performing
loans not being resolved in a timely manner but, instead, being continuously rolled
over, the resources could remain tied up in unprofitable sectors, impairing the
efficiency and future prospects of the economy.
Generally, we believe a faster resolution of NPLs is clearly desirable, but if not
properly managed it can prove harmful to a banking system’s stability. In more
vulnerable countries, such as Romania, Hungary and Latvia, an abrupt write-down
might cause significant capital shortages, with CAR falling below the minimum
required.
Though the relevance of asset quality issues in CEE as well as the impact of high
level of distressed assets on economic activity and financial stability have become
quite evident as a result of the crisis, I would like to draw your attention on the fact
that most of these economies still lack an effective set-up for a speedy
resolution of non-performing loans. At the same time, the absence of welldeveloped corporate and insolvency frameworks, shortcomings in the regulatory and
accounting frameworks, adverse tax incentives as well as simply overloaded court
systems and too lengthy proceedings pose further difficulties in the resolution
process.
To give you a concrete example of adverse tax incentives, in some
countries when writing-off a loan, whatever has been accumulated as provisions for
that loan is subsequently subject to taxation..
Creditor rights protection in CEE remains also an important area where further
improvements are of essence. The picture is quite differentiated across the single
countries: the new EU member states have witnessed a gradual improvement in this
respect upon the EU accession, while in other countries (e.g. Ukraine) creditor rights
protection still remains a very critical topic.
In the most problematic countries, the enforcement of creditor rights can be
carried out only through long lasting court proceedings, which often lack both
transparency and a consistent application of laws and regulations. A considerable
gap between theory and practice may be observed in some of the CEE countries,
with many legal provisions and regulations being not followed in practice as
prescribed. For instance, the event of default, regardless of the terms agreed
between the creditor and the debtor, is often admitted by the courts only after a delay
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in the repayment occurs. In some jurisdictions, even an instant repayment delay does
not constitute enough grounds for acceleration. Instead, a 90-days-past-due default
has to occur.
Another drawback in most of CEE jurisdictions is that they are rather debtorfriendly and it is not unusual that debtors are granted extensive options to contest
and delay the bankruptcy or enforcement procedure and in some cases – even to
avoid its initiation. Moreover, companies often choose to enter insolvency in order to
force an unreasonably aggressive restructuring of financial obligations and the focus
of insolvency procedure is sometimes less on reorganizing the problematic company
and the survival of economically viable entities, while rather to cater other groups of
interest. Banks may also be ordered to suspend enforcement procedures (auctions,
evictions) and, hence, be limited in their collection activities by law. It should also be
stressed that, in general, public mood is rather against the banks and clearly more in
favour of debtors. This makes legislative developments sometimes follow the trend
and contribute to make the already existing regulations even more debtor-friendly.
As a result, in jurisdictions where the insolvency route is cumbersome, banks tend to
resort to direct negotiations with the client even if this implies aggressive structures.
In some cases shortcomings can be partly mitigated by the possibility for the majority
of creditors to choose the judicial administrator which improves the cooperation and
the likeliness of success of a company’s reorganization.
There are also some governance-related issues playing a role in CEE. Good
examples in this respect are the different local accounting standards across the
region, which involves a different treatment of restructuring clients in terms of
provisioning, reporting etc. Moreover, in many countries there remains an important
difference between IFRS and local accounting rules and even when IAS has become
the only standard, in some cases its implementation has been adapted to take into
account local needs. For banks this usually requires additional resources to
implement a common platform in order to achieve an appropriate overview /
monitoring of portfolio quality. Furthermore, banks might sometimes be instructed by
supervisors and external parties to accept onerous impairments of single exposures,
although considerable collateral does actually exist.
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The lack of economic understanding and experience of judges is also one of
the causes for inefficient or even faulty auction procedures in some
jurisdiction. Moreover, it can be observed that the smaller the jurisdiction is, the
higher is the probability of having the auction process hampered by local interests
and untransparent behaviours. In some countries lack of buyers at the auction means
that the asset is returned back to the borrower and the loan is prescribed, which in
turn makes banks undertake forced repossessions.
Unfortunately, when it comes to banks’ approach to deal with NPLs, it becomes clear
that active restructuring is not yet a common practice in the region and the lack of
practical experience is a serious handicap in defining and implementing proper
restructuring strategies.
Also many banks still do not provide dedicated and knowledgeable resources
to deal with restructuring clients. This results in a lack of know-how and track
record in providing internal guidance for the existing non-performing loans. Moreover,
in many banks restructuring activity is even perceived negatively, which leads to the
difficulty of attracting qualified staff.
A further problem is also related to the generally low level of cooperation
among the banks – with each bank focussing on its own position rather than on
cooperation for a joint solution which would enable a turnaround of the client and
consequently improve the bank’s own result. One extreme herein is short-termism
which is exemplified by unreasonably aggressive exit strategies – in some cases
driven by the bank’s need to free up capital and hence to reduce exposures. On the
other extreme banks might push for long maturities avoiding to face the current
problem in view of a possible negative impact on the bank’s balance sheet.
Moreover, the lack of proper structuring of syndication agreements leads to inefficient
decision-taking during the restructuring definition and execution.
Given such complexity please allow me to spend some words about our
approach in dealing with problematic loans. Our focus is clearly concentrated
on the implementation of operational and organizational measures to help
avoiding a migration of a problematic exposure into the non-performing loan
portfolio. In this context, extensive monitoring structures have been set up in order
to identify underperforming customers or customers with potential financial difficulties
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at an early stage. Moreover, targeting problematic clients, we created collection
structures and procedures – both in-house and outsourced to external service
providers. Our collection strategies differ depending on customer segmentation and
the regular reporting and evaluation cycle provides us information on collection
performance.
In case of a client’s default, explicit regulations shall ensure a timely transfer of the
exposure from underwriting to restructuring. Restructuring units have been created
ad hoc in each bank and are specifically dedicated to deal with restructuring cases.
All our banks cooperate very closely on cross-border problematic clients and in
general try to share best practice and transfer the know-how across borders.
It is a matter of fact, that when dealing with problematic clients, we put strong
emphasis in trying to avoid enforcement or winding up of debtor’s operations
and instead to support a turnaround. Usually, a corporate advisor is engaged to
execute an independent business and strategy review. Furthermore, we usually
initiate communication with other banks and stakeholders, organize bank rounds,
formalize bank pools and implement standstill agreements. If required, we implement
prolonged payment terms or a payment moratorium. In selected and very limited
cases, we as a bank or an SPV do step in as a buyer of last resort of immovable
assets or company shares in order to implement the required structure.
Although we can count on a deep knowledge and expertise in managing problematic
loans, we would clearly welcome further improvements in the judiciary environment
and the insolvency frameworks as they could clearly contribute to make the
respective procedures less expensive, time-consuming and inefficient.
To conclude, let me stress that the introduction of better standards for credit
enforcement and guidelines for voluntary out-of-court restructuring together with
elimination of tax disincentives to debt write-offs are essential steps in creating an
environment, in which NPL issues may be actively and effectively addressed. The
establishment of efficient credit bureaus is also an important instrument. A number of
progresses have been made in many countries of the region, but in some cases
further improvements would be needed, moving for example in the direction of
consortium solutions with the involvement of all relevant stakeholders (not only banks
but also utilities companies for example). The presence of regulatory restrictions in
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sharing confidential information about specific customers within the same Group is
also an important obstacle, for which coordinated solutions involving public
authorities in different countries would be of extreme importance. Another
recommendable option for an efficient distressed debt resolution would be the
creation of public schemes / asset management companies (if possible, in
cooperation with International Financial Institutions) which would allow a timely
cleaning of the balance sheets by means of non-performing assets’ disposal.
Cross-border banks with large presence in CEE, like UniCredit, stand ready to do
their job and support all these initiatives so to achieve a full resolution of credit quality
problems and boost lending activity in the region.
Thank you for your attention.
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