Response to consultation on Guidelines on management of non-performing and forborne exposures
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Regarding the proposed threshold we believe that it is in general appropriate for the differentiation of institutions with an asset quality problem. Whilst there is not a clear evidence on an accurate level above which the impact on profitability or capital cease to be tolerable the figure chosen is deemed to be significant in terms of historical and target long run goals.
Nevertheless we find that the proposed indicator misses the fact that a considerable share of the non-productive can be in the form of foreclosed assets. In general these assets will benefit from a better outlook in terms of recovery since enforceability risks have been dispelled. However it is also true that accumulation of these assets in their balance sheet indicate lack of transferability due to very low quality or insufficient provisions. The costs and lack of expertise to deal with this assets is significant for the banks. Although it is considered among the elements to be discretionally considered by NCAs we believe that a comprehensive measure on NPLs plus Foreclosed assets will provide a better indicator of asset quality. We suggest to add the ratio: (Gross NPLs + Gross Foreclosed Assets)/ Gross Total Assets > 5%.
Finally we miss clear entry/exit criteria and the obligation to comply with the requirements included in Chapter 4 and 5. We would assume that each institution identified with elevated NPL ratio will have to comply as long its ratio above the threshold but would also expect that its NPE framework will continue to be in place although with business as usual targets. This entry/exit criteria is especially relevant in relation with disclosure requirements (https://www.eba.europa.eu/documents/10180/2200407/Consultation+Paper+on+Guidelines+on+disclosure+of+non-performing+and+forborne+exposures+%28EBA-CP-2018-06%29.pdf), where market would expect some information stability.
As crucial as frequency it is accuracy. In this regard we miss in the Guidelines a further effort to encourage the harmonisation in valuation standards. Currently, in some countries, national standards does not provide the same level of soundness and conservativeness than international standards (e.g. MRICS). This is particular important for the marketability of NPEs since international investors usually demand international standards valuations.
Question 1: What are the respondents’ views on the scope of application of the guidelines?
We agree with the scope both in terms of institutions, including the proportionality approach, and exposures. We welcome in particular the acknowledgement of the relevance given to foreclosed assets. Nevertheless, as expressed in our response to question 2, further work can be carried out in levelling its importance in comparison with NPEs.Question 2: What are the respondents view of the proposed threshold of 5 % NPL ratio?
First of all we support the setting up of a specific threshold applicable to all EU banks despite the distinctive features by jurisdiction or individual banks.Regarding the proposed threshold we believe that it is in general appropriate for the differentiation of institutions with an asset quality problem. Whilst there is not a clear evidence on an accurate level above which the impact on profitability or capital cease to be tolerable the figure chosen is deemed to be significant in terms of historical and target long run goals.
Nevertheless we find that the proposed indicator misses the fact that a considerable share of the non-productive can be in the form of foreclosed assets. In general these assets will benefit from a better outlook in terms of recovery since enforceability risks have been dispelled. However it is also true that accumulation of these assets in their balance sheet indicate lack of transferability due to very low quality or insufficient provisions. The costs and lack of expertise to deal with this assets is significant for the banks. Although it is considered among the elements to be discretionally considered by NCAs we believe that a comprehensive measure on NPLs plus Foreclosed assets will provide a better indicator of asset quality. We suggest to add the ratio: (Gross NPLs + Gross Foreclosed Assets)/ Gross Total Assets > 5%.
Finally we miss clear entry/exit criteria and the obligation to comply with the requirements included in Chapter 4 and 5. We would assume that each institution identified with elevated NPL ratio will have to comply as long its ratio above the threshold but would also expect that its NPE framework will continue to be in place although with business as usual targets. This entry/exit criteria is especially relevant in relation with disclosure requirements (https://www.eba.europa.eu/documents/10180/2200407/Consultation+Paper+on+Guidelines+on+disclosure+of+non-performing+and+forborne+exposures+%28EBA-CP-2018-06%29.pdf), where market would expect some information stability.
Question 3: Do you see any significant obstacles to the implementation date and if so, what are they?
No viewsQuestion 4: Does section 4.3.2 capture all relevant options available for credit institutions to implement their NPE strategy?
An additional relevant option that we have seen successfully executed in the market is the deconsolidation by the constitution of joint venture companies with international investors or real estate developers (in the case of real estate assets). As part of the active portfolio reduction strategy, banks have come up with this strategy by which significant risk is transferred (usually from 51% to 80%) while allocating the business management to specialised professional partners. This way banks have been able to enter into larger size transactions, at the expense of a lower price, but retained potential upside.Question 5: Do you see any significant obstacles to the operationalisation of the NPE strategy as described in chapter 5?
No viewsQuestion 6: Does the viability assessment of forbearance measures capture all relevant aspects?
No viewsQuestion 7: What are the respondents view on the proposed requirements for recognition of non-performing and performing/non-performing forborne exposures?
No viewsQuestion 8: What are respondents view on the requirements on timeliness of impairments and write-offs of NPEs?
No viewsQuestion 9: Do you have any significant objection against the proposed threshold for property-specific valuation (EUR 300,000)?
In principle the threshold seems too high for the majority of European countries where average mortgage is much lower. Although the Guidelines include the discretion for competent authority to define a lower amount we believe that a lower threshold, in line with EU average, should be set to guarantee level playing. This would increase the frequency of valuations for the most significant share of real estate collateralised loans which recent crisis has proved as a shortcoming in bank´s risk management procedures. We are fully aware of the excessive burden of yearly appraisals but as prices deteriorate, a 3 year timeframe is disproportionate. A lower threshold (e.g., EUR 200,000) is, in our opinion, a reasonable solution.As crucial as frequency it is accuracy. In this regard we miss in the Guidelines a further effort to encourage the harmonisation in valuation standards. Currently, in some countries, national standards does not provide the same level of soundness and conservativeness than international standards (e.g. MRICS). This is particular important for the marketability of NPEs since international investors usually demand international standards valuations.