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Prime Yield presents new research “Investing in NPLs in Portugal: The time is now!”

A new research conducted by Prime Yield, a Portuguese company focused on asset valuation, consultancy and research, concludes that the sale of Non-Performing Loan’s (NPL)* portfolios in Portugal is set to gain momentum in 2017, with the annual transaction volume expected to reach €2 billion. This activity follows an already buoyant 2016, when €1.5 billion are estimated to have been transacted.

Named “Investing in NPLs in Portugal: The Time is Now!”, the report was released in London during the conference “NPL Europe” and it is an innovative initiative where the company analyses the current moment of this market both in the national level and within the European context. Besides forecasting the potential transaction volume for this year, prime Yield’s report also outlines the main challenges to be addressed so that this market can further accelerate the pace in Portugal.

“The workout of NPLs is presenting important challenges to the European countries that suffered the most with the crisis, as it is the case of Portugal. In a time of growing pressure to reduce those credits in the Portuguese banking system, and with this type of portfolio drawing more and more attention among investors, it is very important that Portugal places itself in order to attract international capital that might be eyeing this sector”, says Nelson Rêgo, CEO of Prime Yield. “Portugal currently presents very favourable conditions in order for the activity of investing in this type of portfolio to gain momentum over the next two years”, he adds.

The strong business potential pipeline in Portugal – considering that the existing NPL stock is estimated to sit around €41 billion – is one of the key drivers for boosting transactional activity, as well as the growing interest of investors in this type of assets, taking into account both the entities already investing in Portugal and the ones that have announced the intent to do it. Besides, the national Banking sector has already announced more dynamic strategies for deleveraging. On the other hand, the growing competitiveness for the acquisition of core real estate assets may also attract opportunistic investors to this sector, which is seen as a way to indirectly invest in real estate (by buying property-backed NPLs portfolios), besides presenting a price profile that is more appealing to their strategies. In addition, the already announced creation of an integrated solution by the Portuguese Government to accelerate the resolution of this type of credits in the Portuguese banking system can also have a positive impact in NPL’s trade activity, underlines the research.

The current stock of NPLs in Portugal totals about €41 billion, a volume that weights about 4% in the total €1 trillion-stock accounted in the European Union. Still, this volume is quite distant from the leading country in Europe, Italy, with a stock of €276 billion. Except for Italy, only France, Spain and Greece have NPL stocks exceeding €100 billion. In terms of the NPL ratio (i.e., the weight of this type of credit in the total gross loans granted), Portugal records one of the highest levels in Europe, with a ratio of 19.5% as of the end of 2016, which can be compared to the 5.1% EU-average. In this indicator only Cyprus and Greece are above Portugal. Those were the two countries that had to enforce more restrictive measures regarding capital control, presenting NPL ratios close to 50% of the total loans granted. However, even though in a very slow pace, the Portuguese NPL ratio has been on a downward trend in Portugal since 2015.

As far as the challenges that Portugal still faces in order to increase its NPL portfolios sales activity, Prime Yield research mainly highlights the mismatch regarding buyers and seller’s price expectations.

“Investors are highly interested in this market, which is, as a matter of fact, the case throughout Europe. Concerning Portugal’s specific case, in addition to the tax and legal issues still to be resolved and to the governmental solution expected to be announced by the end of this year, price expectation is currently one of the most important challenges to address. It is crucial to find a balance between the price that the Banking Sector is willing to charge for its non-performing loans and the price that investors are willing to pay as they claim a more realistic assessment of these portfolios”, Nelson Rêgo finally states.

* In general, the European supervision authorities consider a loan as non-performing when more than 90 days have passed without the borrower having made payment of the agreed instalments or interest. Non-performing loans are also called “bad debt”
** Data from the European Banking Authority for 2016 .