THE GLOBAL loan portfolio market has for the past few years been geographically centred around Europe, but a shift toward Asia has begun as investors look for alternative loan portfolio opportunities.
Official numbers total approximately US$518 billion (Bt16.17 trillion) in non-performing loans (NPLs) is on the balance sheets of Asian banks. However, unofficial figures suggest this is likely to be much higher. With the likely impact of further unofficial distress remaining within the system, NPLs are rising up the regional agenda, according to new analysis from Deloitte.
Andrew Grimmett, restructuring services leader at Deloitte Southeast Asia, said that foreign buyers have become increasingly active in Asia Pacific, particularly considering that from 2008 until last year, the market had seen very little activity from foreign buyers. A key regional block, Southeast Asia is showing some signs of NPL growth. However, each country presents a different degree of market maturity and challenges for stakeholders, especially legal regimes and servicing.
In Singapore, the banking system is resilient and banks have strong liquidity and capital buffers, but they still need to remain alert. The banking system’s ratio of NPLs was 2 per cent at the beginning of 2017, up from 1.6 per cent the previous year and following a decade of low NPL ratios. Exposure to slowing regional economies and to the energy industry have contributed to the modest rise in NPLs, although most bank exposures are in regional economies other than Singapore, Andrew said.
As a result of increasing NPLs across Asia Pacific region, financial institutions are beginning to explore options to improve their NPL volumes and capital ratios alongside enhanced portfolio management, given the upcoming implementation of IFRS 9 standards for financial instruments. Having seen the success of European banks in managing to dispose of and de-leverage their non-performing and non-core assets over the past decade, Asian banks are beginning to assess whether this is a route they too could take.
The ongoing implementation of regulatory, accounting and other initiatives developed in response to the global financial crisis will also contribute to an increase in Asian NPL stock, with the introduction of IFRS 9 likely to play a leading role. In Europe, supervisors are relentlessly focusing on the quality of IFRS 9 implementation and on NPL stock resolution. Much depends on whether the Asian regulators will follow a similarly robust approach in the future.
With the exception of some countries, the legal environment that enables asset recovery in Asia remains challenging. It is often characterised by delay, uncertainty and excessive cost. In several jurisdictions, such as Malaysia, India and Vietnam, reform appears to be imminent. All of this is positive for the ongoing development of individual NPL markets within the region.
The last few years have seen loan sale activity primarily concentrated around Europe, said Andrew Orr, global transactions leader of portfolio lead advisory services at Deloitte UK.
While the NPL market in Europe will continue to be looking forward to 2018 and beyond, the company is likely to see an influx of investors – and investment – pouring into Asia, he said.
A number of international investors have attempted to benefit from first-mover advantage, acquiring small portfolios across the region in an attempt to familiarise themselves with legal and servicing frameworks.
This has not only enabled investors to enhance their understanding of local markets, but also set up business to allow for the acquisition of further, bigger portfolios across the region as the market develops.