global-dept-sales-september-2011v2

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

LOAN PORTFOLIO ADVISORY

Global Debt SalesPortfolio Solutions Group

kpmg.com

KPMG INTERNATIONAL


Foreword

Stuart King Partner, Madrid M: +34 914 56 82 69 E: [email protected]

Graham MartinPartner, London M: +44 78 2519 6802E: [email protected]

The debt sales market has become positively exhilarating since our first edition of Global Debt Sales just six months ago. The world is slowly but surely pulling itself out of the deep recession that followed the global financial crisis. But while some countries are faring reasonably well, others have seen their debt – both public and private – skyrocket to unmanageable levels.

The result has been a series of government regulations and business strategies that have reshaped the debt sales markets in many jurisdictions. And as the specter of sovereign debt defaults continue to circle EU countries in particular (including Portugal’s mid-summer debt downgrading to junk status by Moody’s), many pundits and industry observers are forecasting even greater levels of debt sales (particularly non-performing portfolios) in the near future.

In the midst of all of this, KPMG debt sales and portfolio services experts from around the world have come together to create the second edition of Global Debt Sales. As part of this ongoing publication series, KPMG’s global Portfolio Solutions Group (PSG) will continue to examine recent debt portfolio activity in a number of key banking markets across Europe, the Americas and Asia-Pacific. We’ll look at all types of ‘non-core’ debt sales, including performing and non-performing loans from around the globe, and will strive to provide high-level insights into trends and new opportunities on the horizon.

With extensive experience advising both sellers and buyers on hundreds of mandates globally, our senior team of loan portfolio professionals work alongside government and financial institutions, private companies, strategic and financial investors, debt collection agencies, industry financiers and other professionals to understand the specific issues facing each market. More and more, our clients look to us to provide a combination of strategic options analyses of portfolios and platforms, along with robust market sounding exercises with our extensive investor network to deliver quality solutions from both a country and global perspective.

We hope to once again share some insight with our readers in order to help market participants cut through the complexity of global debt sales and maximize the value of their loan portfolio positions.

We encourage you to contact the authors of this publication, or your local KPMG member firm to discuss any of these issues or insights in more detail.


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UCCMB italfondiario Due Diligence Portal-Software Web-Solutions Property PrOrgaplan CONact Unicredit CashflowSync RE-lifecycle Kowollik deuda morosa UEN Union Estates Network lucidi vendittellien détresse Troubelshooting incentive care ICD Pfandbriefbank Eurohypo Portfolio ; Exit - Strategia Immobilienfond SoftwareReo Immobilie imueble Casa Recupero Credito Bad Bank SIP Sistema integrada protection Caja workout Credito fallido creditsimmobiliare IAS/IFRS commercialista KMPG Deloitte revisione MPS Unicredit SGR Banca d`Italia Legge 106 cartoliarizzazioneamministrazione immobiliare condominiale integrazione sincronizzazione ruoli immobiliare millesimo conto economico FondoTreuhand Intesa Unicredit Immobilien Ubibanca ByYou Jerome Chapuis First Atlantic Ricucci EH-Estate Fortress condominio

Orgaplan Italien, Special Servicing, DocRating, DueDiligence, Draftcheck, Lucidi, welltbueroKowollik, recupero di credito, datawarehouse, cloud-solution, Workout, Incentive Care, Institutsverwaltung, distressed,conactor, Bad-Bank, Servicing, interim, turnaround, Cashflowsync, CCFS, Distressed Asset, CMBS, portal solution, ICD,troubleshooting, abs, Due Diligence, workplace, credit, Property-Management, Immobilie, NPL, Rating, Real-Estate, Conact,

Condominio ciclo di vita del Immobile fundos immobiliariosUCCMB italfondiario Due Diligence Portal-Software Web-Solutions Property Property Management Amministrazione immobiliareOrgaplan CONact Unicredit CashflowSync RE-lifecycle Kowollik deuda morosa UEN Union Estates Network lucidi vendittellien détresse Troubelshooting incentive care ICD Pfandbriefbank Eurohypo Portfolio ; Exit - Strategia Immobilienfond SoftwareReo Immobilie imueble Casa Recupero Credito Bad Bank SIP Sistema integrada protection Caja workout Credito fallido creditsimmobiliare IAS/IFRS commercialista KMPG Deloitte revisione MPS Unicredit SGR Banca d`Italia Legge 106 cartoliarizzazioneamministrazione immobiliare condominiale integrazione sincronizzazione ruoli immobiliare millesimo conto economico FondoTreuhand Intesa Unicredit Immobilien Ubibanca ByYou Jerome Chapuis First Atlantic Ricucci EH-Estate Fortress condominio

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Global Debt Sales | 1

ContentsTrend Watch 02

Basel III 02

The rebirth of the EU Securitizations Market 03

Introduction to Europe 06

United Kingdom 08

Ireland 12

Germany 16

Spain 20

Italy 25

Portugal 27

Poland 32

Russia 35

Spotlight on Africa 38

Introduction to Americas 42

The United States 44

Brazil 51

Mexico 53

Argentina 55

Introduction to Asia 57

China 58

Korea 61

Japan 64

Australia 67

Thailand 69

Taiwan 72

Indonesia 75

India 78

Malaysia 81

KPMG’s Portfolio Solutions Group’s Service Offering 84

Glossary of Acronyms 86


2 | Global Debt Sales

Trend Watch

Basel III – the straw that breaks the camel’s backFor the better part of three years, industry commentators and market pundits had been predicting a flood of debt sales from banks. Indeed, the signs all pointed to an imminent sell off as banks struggled to overcome the effects of the economic downturn and meet the increased regulatory capital demands now being put on them by regulators. The deterioration in quality of some banks’ portfolios added more fuel to the fire as the combined impact of increased capital requirements and impairment charges seemed to point to the need for capital constrained organizations to find some exit route.

So what has happened recently?Proposed in December 2009 and agreed by the G20 and the Basel Committee in December 2010, Basel III outlines the significantly increased capital and liquidity requirements for banks. Basel III also differs from its predecessor (Basel II) by taking a different regulatory approach: where Basel II strove to increase risk management standards by offering the ‘carrot’ of reduced regulatory capital requirements, the approach taken by policy makers in Basel III has been to focus much more on across-the-board increases in capital and liquidity requirements.

What’s more, regulators are increasingly taking a more national approach, effectively pushing institutions towards creating subsidiaries rather than encouraging branches and home state supervisors to act appropriately. The result is further pressure on already-strained capital and liquidity, as

resources become trapped in national markets. Many institutions are now actively re-evaluating their balance sheets and deciding which portfolios make sense to keep, and which they should sell.

While most of Europe is keenly awaiting the transposition process of Basel III into European Directive and Regulation (after which it will move on to national legislation), the key elements of Basel III are already fairly clear. They include:

• increased capital ratios (with a particular focus on the need for good quality, loss-absorbing equity capital);

• increasing quality of capital requirements with a focus on harmonization across borders;

• new leverage requirements (effectively capping the absolute size of balance sheets in relation to capital, irrespective of risk);

• new measures to improve counterparty risk management (largely focused on collateral management and stress testing); and

• new liquidity requirements to both ensure firms hold sufficient high quality liquid assets to meet short-term shocks, and to encourage a restructuring of the balance sheet with a focus on matching off long-term funding sources against longer-term assets.

Much of the media focus has been centered upon the increased capital ratios within Basel III and the extent to which organizations will (or will not) meet these ratios. The market should keep in mind, however, that transitional

timeframes will apply to many of the key elements.

But the Basel III capital ratio also effectively amplifies the existing issues in the current calculation of Basel II risk weighted assets. As a result, firms are increasingly looking to optimize their Basel II credit risk models and calculations, and are analyzing their portfolios in light of the level of pricing and performance that can now be achieved in the market.

Systemically important financial institutions (SIFIs) are under even more pressure, with further enhanced capital ratios expected (some anticipate an add-on of up to 3 percent, taking minimum common equity Tier 1 ratios up to 10 percent). This will result in even greater pressure on balance sheets from both a funding and capital perspective.

It should also be remembered that Basel III is only one element of the rapidly evolving regulatory framework, and many firms are now dealing with a raft of new or proposed regulation on a wide variety of issues including the impacts of new proposals on crisis management, regulatory reporting, and trade reporting (not to mention the implications of the UK’s Independent

“While Basel III hasn’t yet sparked a flurry of activity in the debt sales market, there’s good reason to believe that it is just a matter of time.”



Commission on Banking (ICB) final report that has now been issued).

So where will it all end?Undoubtedly, there is now significant pressure on banks’ balance sheets. Across the globe, bank executives are now striving to understand the impact of regulatory change: what will their firm’s future business model look like? What areas of the business will continue to be profitable? And what strategy should they follow for both the investment and divestment of divisions, assets and subsidiaries?

So while Basel III has yet to spark the flurry of activity that was widely anticipated, a number of barriers have started to fall away. For one, the overall impact of Basel III is becoming clearer. There are also signs that a more normalized loan portfolio market is returning and that the economic situation is working its way through to impairments. And once these challenges are sorted out, there is good reason to believe that Basel III will eventually trigger further portfolio rationalization and debt sales.

Of course, all of this leads to the obvious question of whether there are – or will be – any buyers in the market for these portfolios. One peculiarity of regulatory driven change is that it applies the same pressures (in the same direction) to the entire banking industry at once. So while there may be pressure to sell off those capital and liquidity hungry portfolios, there may be few banks lining up to buy them. In this environment, it should not be a surprise if many of those less desirable portfolios are eventually transferred out of the banking industry,

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either directly or indirectly through some form of securitization-like structuring.

The rebirth of the EU securitizations market There is no doubt that investors around the world have grown wary of securitized products, particularly following the suboptimal performance of U.S. Residential Mortgage-Backed Securities (RMBS) that had been backed mostly by subprime mortgages. With investor appetite for performing EU RMBS also declining, this article examines the resilient performance of EU RMBS both during – and after – the financial crisis. Indeed, EU RMBS remains a suitable funding instrument for financial institutions, as well as an appealing opportunity for investors.

European RMBS issuance is recoveringDespite the financial crisis, Europe has seen an overall continuation of the issuance of Asset Backed Securities (ABS), albeit at lower levels than before, and often supported to a significant degree by public institutions (such as the European Central Bank (ECB) and the Bank of England).

Interestingly, while total ABS issuance was increasing in 2007 and reached a record level in 2008, the volume that was actually placed with investors was already in decline by 2007 and was nearly non-existent in 2008 and 2009 (see Figure 1). As a result, the demand for the remaining issuance was primarily substituted by European credit operations, for which retained securitizations can be used as collateral.

Figure 1: Retained versus public issuance

Public (%) Retained (%) Issuance

Source: European ABS & CB Research, J.P. Morgan



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1. European ABS & CB Research, J.P. Morgan2. “Housing finance in the euro area”, European Central Bank, March 2009

The knock-on effect from the weak performance of U.S. RMBS is not only unfortunate, but undeserved. Performance of RMBS in Europe was solid during and after the crisis with EU RMBS outperforming their U.S. counterparts in both delinquency levels and downgrade rates (see Figure 2).Looking at delinquency levels in particular, evidence shows that the underlying assets of EU RMBS have performed better than those of U.S. RMBS, and – with the exception of Irish prime RMBS – European delinquency

rates did not rise above 3 percent through the global financial crisis. In contrast, U.S. delinquency rates started to rise at the end of 2008, hitting recorded delinquency rates of above 10 percent in 2010.

The downgrade rate shows similar trends, with European prime RMBS averaging just 4.3 percent over the 2007–2010 period, where U.S. RMBS averaged an astounding 40.1 percent.

There are two main reasons why EU RMBS perform better compared to

In Focus: Comparing European RMBS performance to the U.S.

their U.S. counterparts: the first is that European households tend to have a lower average level of indebtedness (as measured by lower debt-to-income and higher wealth-to-income levels), which made euro area households less sensitive to income or interest rate volatility. The second is related to stronger personal bankruptcy and duty of care laws in the euro area, which provide less incentive for borrowers to default on mortgages.

Figure 2: RMBS Prime 60+ Delinquency

Source: Moody’s Investors Service

But in 2010, securitizations came back in favor, when about 21 percent was publicly placed. Year-to-date figures (27 percent publicly placed)1 seem to indicate that investor demand will continue to recover.

Investor appetite primarily focused on high quality collateralInvestor interest in these assets has not been universal, however, with the largest share of the placed issuance coming from prime RMBS from the Netherlands, the United Kingdom and Italy, along with German auto ABS. It


is worth noting that these issues have occurred in countries with limited sovereign risk and relatively robust economic conditions. What’s more, these collateral types are generally perceived as bearing low risk when compared to other products such as Commercial Mortgage-Backed Securities (CMBS). And according to the ECB, investors seem to look for transparent and simple structures, low collateral risk and a good reputation of the originators.

RMBS will inevitably remain one of the most important funding sourcesOver the past decade, the market has seen European financial institutions slowly shift from traditional deposit funding of mortgage lending towards more capital market-based funding. Indeed, by the end of 2007 around 21 percent of housing loans were financed through RMBS and covered bonds2. With RMBS playing such a significant role in the current funding structures of financial institutions, we believe that their use is critical in restoring the funding to markets. In fact,


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according to the IMF, the restarting of securitization markets is critical to limiting the fallout from the economic crisis and to eventually enabling the withdrawal of central bank and government support3.

The ECB4 goes further still, suggesting that securitizations will become increasingly necessary due to a lack of alternative funding available to repurchase the repo-ed retained issuances, the continued phasing out of government guarantees and the need to refinance a large part of long-term debt over the next few years. This seems borne out by the fact that by late August 2010, European banks had EUR1.6 trillion of longer-term debt outstanding that was due to mature between August 2010 and December 2012, of which the Euro area accounted for EUR1.2 trillion. As a result, most banks will likely need to issue new securities to redeem their maturing debt, particularly in the Netherlands.

What is currently preventing investors from putting more focus on RMBS?While the performance of European RMBS is recovering, investor appetite in 2010 was still only around 15 percent of 2006 levels, largely due to a lack of trust in the market and overall volatility. At the same time, having been confronted with losses on investments that were initially rated with an AAA rating, investors have also lost some of their confidence in credit ratings assigned by rating agencies.

Changes in regulations and policy initiatives add to a better functioning of the RMBS marketA number of initiatives have been undertaken by regulators and market participants in an attempt to align the interests of all stakeholders in securitizations. For one, the incorporation of Article 122a in the Capital Requirements Directive aims to address potential conflicts in the existing ‘originate to distribute’ model by requiring originators and sponsors to retain at least 5 percent of the exposure. In line with

3. Global Financial Stability Report of September 20094. “EU banking sector stability”, European Central Bank, September 2010

this, the upcoming Solvency II regulations will also restrict EU insurance companies from investing in securitizations unless the originator complies with the new 5 percent retention requirement. In effect, this is expected to lead to renewed focus from originators on the longer-term performance of the created securities. If successful, these new requirements will ultimately contribute to mitigating the incentive of risk-taking and the easing of lending standards.

Other regulatory factors are also influencing ABS in the EU. For example, the ECB intends to introduce loan-level data requirements as a condition of eligibility in its central bank funding operations, and the Bank of England has published new transparency requirements which issuers must comply with if their asset-backed securities are to remain eligible as collateral in funding operations in that jurisdiction.

Furthermore, credit rating agencies are changing their rating methodologies. In January 2011, for example, Standard & Poors updated its counterparty rating criteria to establish a more precise link between the rating of an issue and both the counterparty’s rating and type of support provided.

ConclusionEven though the performance of EU RMBS has remained resilient, the market is actively working on restoring trust in EU securitizations, not least as a vital funding source for the future. And while investor appetite for European RMBS is certainly picking up, it is still far from pre-crisis levels, due to a number of factors such as the changing use of Structured Investment Vehicles (SIVs) by banks, evolving regulations, ongoing distrust with respect to structures, and last but certainly not least, upcoming Basel III requirements that will result in banks facing higher costs when investing in future securitizations.


6 | Global Debt Sales6 | Global Debt Sales

Introduction to Europe

Since the end of 2010, activity has started to gather pace in the European debt sale market. An increasing number of banks have been sounding out market interest for their portfolios and – most pleasingly from buyers’ perspectives – several headline-grabbing portfolio sale processes have begun, continued and closed. Thanks largely to the diversity of European debt sale markets, activity still remains most prevalent in the non- and sub-performing markets.

Over the past few months, we have noticed a growing interest in European banks seeking to exit non-core markets and products with a particular focus on Commercial Real Estate (CRE) lending.

To a large extent, this focus on CRE has been driven by the considerable defaults already acknowledged (if not reported) by many banks, and the knowledge that many of these portfolios will require significant hands-on, expert asset management to avoid further deterioration.

This notwithstanding, one of the key issues facing many of the European banks is their exposure to very thinly priced, late pre-crisis originated lending. And while the vast majority of these loans are classified as performing, they will present considerable challenges for capital allocations going forward and may see a lack of wholesale funding as LIBOR and EUROBOR rates increase.

“Spain has been one of the hottest markets in Europe so far this year, but clearly questions of sovereign debt and national defaults are popping up across the EU and have the potential to drive a significant level of portfolio sales.”



In this regard, many of the larger portfolios of residential mortgage, project finance and infrastructure loans (where pricing was particularly tight) may be challenged. With many strategicbuyers now absent (or constrained) from the market, more creative alternative solutions are often being considered. At the same time, strategic buyers are becoming increasingly focused and can increasingly afford to be more selective as higher volumes of non-core assets hit the market.

No ‘silver bullet’In all but a few markets and transactions, banks seeking to exit non-core loan portfolios have yet to see the emergence of any real ‘strategic’ buyers. But strategic and well capitalized banks do exist and – for the right opportunities – seem willing to expand (as was the case with Santander, which purchased Bank BZK’s business in Poland and the Williams Glynn business from RBS in the UK).

But the market must remember that – in many cases – CRE loans, thinly pricedresidential mortgages and PFI debt is often no more ‘core’ to potential buyers as it is to potential vendors. That said, there have been a few instances of localor foreign banks precipitating strategic portfolio acquisitions in order to expand in certain markets (such as Citibank to Barclays in the UK), but these have generally been the exception rather than the norm.

As frequent advisors to financial institutions, we have seen an increasing

focus on searching for the ‘pools of liquidity’ that have, to this point, focused elsewhere. And while many of these investors have historically been active in the RMBS/CMBS markets, or as LP investors into specialized private equity funds, they are slowly changing their investment mandates for such funds. But increasingly, their attention is turning towards direct and indirect investments in loan portfolios at palatable returns for both themselves and the vendors. Given the relative absence of foreign and local strategic buyers, the emergence of these ‘new’ buyers will be critical if European banks are to successfully deleverage over the next five years.

Eurozone debt crisisRecent discussions around European bailouts have become ever more sensitive and market destabilizing, with the resulting lack of liquidity combined with ongoing regulatory reforms ensuring that the sovereign debt issues currently being experienced will continue to provide negative repercussions for global growth and the entire banking system for quite some time to come. As deadlines approach for the repayment of support loans, accelerated disposals of non-performing and non-core assets will become ever more necessary and prevalent in the market.

Spain is ‘hot’Certainly the ‘hottest’ topic over the past six months has been Spain. Opportunity funds are currently negotiating potential transactions across the Spanish debt and equity space, local banks are seeking

to shed non-core and non-performing loans, and the impact of the Caja sector restructuring is now starting to yield portfolio disposals and equity raisings. As such, opportunities for investors prepared to engage with financial institutions are considerable. In the last few months alone, the market has seen an increase in the number of successful sales of real estate assets to buyers such as Cerberus and Fortress, and the progression of the current CAM loan process which involves the disposal of over EUR13 billion in non-core lending and real estate to a coterie of financial investors. We expect that, over the coming months, this activity will likely continue as sales in both big-ticket ‘non-core’ portfolios and non-performing loans continue.

Poland is ‘very hot’While many consumer non-performing loan (NPL) markets have struggled to (re)gain momentum following the financial crisis, the Polish market has gone from strength to strength. A number of existing and new foreign buyers remain in the market, but it is the strength of local buyers (and their desire to grow volumes under management) that is providing local banks with an extremely attractive alternative to in-house collection teams. This has led to pricing for non-performing consumer loans in the mid-to-high twenties, driven by both cheap local funding, and the comparative advantage of investing in local currency (the Polish zloty). That said, new foreign entrants remain interested in both debt portfolio and collection opportunities in the Polish market.

Given the relative absence of foreign and local strategic buyers, the emergence of

these ‘new’ buyers will be critical if European banks are to successfully deleverage over the next five years.



United Kingdom

In comparison to the sluggish activity of the past three years, the UK debt sale market has recently become a hive of activity. We have seen a number of banks and financial institutions begin formal sale processes for their loan portfolios, while others have undertaken informal market soundings in order to inform their boards in advance of potential future sales. To date, a considerable chunk of this activity has related to (ostensibly) performing UK CRE loan portfolios, including a number of high profile sales such as the formal CRE processes by Bradford and Bingley (discontinued), and RBS in Spain (now closed) and the UK (pre-closing). But behind these headliners, there are several other institutions already engaged with external investors to gauge pricing and potential deal structuring. Looking at the amount of NPLs, loans 90 days past due and allowance for credit losses/NPLs for four of the UK banks (see chart

below), it is easy to see the potential opportunity in this space.

Macroeconomic environmentInterest rate rises will have a significant impact on UK debt sales. Whilst short term expectations are that interest rates will not increase, they likely to have upward movement in the medium term. But how will this economic environment impact the valuation of a portfolio of loans?

Current low interest rates tend to incentivize the voluntary prepayment of floating interest rate loans, with contractual clauses on prepayment penalties and lock-out periods partially offsetting losses incurred by the lender. As a result, any rise in interest rates will reduce this incentive, and likely trigger an increased number of defaults. This will be especially true if the increase in interest rates is coupled with a slow recovery in the real estate market or the wider economy; and it will be more

prevalent in the riskier parts of a bank’s loan portfolio. As a knock-on effect, an increased number of defaults could further suppress market prices, thus lowering the cash flows to the lender at liquidation, and increasing the pressure on a bank’s loan recovery rates.

“The UK consumer NPL market can go one of two ways; either a return to the old markets characterized by small sales to local buyers, or into a new market dominated by large global investors.”



To account for these higher than expected losses, lenders will need to set aside a larger proportion of capital to meet the risk provisioning requirements of their expected defaults. When coupled with higher portfolio management costs, this can further adversely impact the profitability to the lender. And while this will largely be factored into the eventual transaction price, disposing of loan portfolios may still be the most profitable approach to releasing resources within a constrained capital environment.

VendorsFrom a vendor perspective, many of the transaction drivers that existed six months ago remain valid (covered in more depth in the previous edition of Global Debt Sales, January 2011). These include the onset of Basel III capital requirements (see page 2), the need to comply with European Commission State Aid requirements, and the ongoing focus of UK banks on deleveraging, exiting non-core markets/products and aligning loan maturities with available funding.

In general, nearly all UK banks and building societies are still focused on consolidation rather than expansion. But with muted market pricing feedback, relative transaction inexperience and a notable dearth of strategic buyers in the market, there have been very few successful ‘quick exits’. Indeed, banks that have recently conducted transactions (particularly those with larger performing portfolios) have often felt significant P&L pain as a result of a transaction or in advance of a sale. An examination of the composition of loan portfolios for five large UK financial institutions reveals that the book value represents approximately 84 percent of the total loan portfolio on a weighted average basis.

Figure 4: NPLs, loans 90 days past due and allowance for credit losses/NPLs for some UK banks

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Source: Capital IQ

Figure 5: Composition of total loan books for some UK banks

£bn

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Source: Capital IQ


Selected dealsThe table below details several selected recent transactions in the UK debt portfolio market.

Table 6

Seller Buyer Asset typeFace value

(in local currency)Completion date

Barclays CreXus Investment Corp U.S. Commercial real estate £586m March 2011

RBS Blackstone UK Commercial real estate c.£1.6bn July 2011

Citi Barclays Egg’s Consumer PLs c.£2.3bn March 2011

Bradford and Bingley Discontinued Commercial PLs c.£435m Pending

MBNA Barclays Consumer PLs £130m April 2011

RBS Pending Commercial Infrastructure PLs c.£3bn In progress

LBG Arrow Global, Cabot Financial and Lowell

Consumer NPLs £276m June 2011

Irish Life and Permanent Pending Capital Home Loans (Residential BTL PLs)

c.£6.4bn In progress

LBG Pending Shipping PLs c.£6bn In progress

Confidential TPG Credit Residential Mortgage NPLs £50m March 2010

Bank of Ireland Pending UK RE loans > £1.5bn In progress

Citi Yorkshire Building Society Savings and mortgage business

c.£3bn July 2011

Source: Press articles and market feedback

BuyersThe buyer space has been much more interesting recently. Barclays acquisition of Citi’s Egg portfolio in March 2011 marked the first strategic purchase of a major portfolio transaction in many years and was widely cheered by vendors and pundits alike.

Outside of this notable transaction, however, the market has seen very little strategic interest from UK banks and building societies in buying their peer’s assets. Where strategic interest does exist, it is largely confined to those very high quality consumer loans that are complementary to the buyer’s existing customer profiles and are capable of external financing.

With few strategic banking purchasers for non-core loan portfolios, the sector has seen the rise of longer term financial buyers such as pension funds, insurance companies and sovereign

wealth funds. The appeal of these new buyers to vendor banks is obvious: deep pockets, lower return requirements and higher levels of experience in the credit investment space. And while this burgeoning group of buyers will not be a replacement for strategic bank purchasers, they do represent a credible and viable option for many of the non-core performing assets that are currently tapped for future sales.

While traditionally focused on RMBS and CMBS notes, the combination of depressed activity in the securitization market and the nature of many longer dated and better quality loans have meant that these investors are increasingly looking at the outright acquisition of certain loan portfolios.

Although many of these investors have been very selective and somewhat less proactive than traditional debt purchasers in the past, they are

increasingly moving up the learning curve and expanding their capabilities in this space. But questions still remain as to whether many of these larger pension and sovereign wealth funds will continue to function as passive investors through private equity and investment banking vehicles, or whether they will step forward to become outright purchasers of non-core banking assets (at suitable prices for vendors).

The UK consumer NPL sale market: Standing at the crossroadsThe UK consumer NPL market is at a crossroads. Down one path is a return to the ‘old market’ of 2007/08 where regular, small portfolio sales were the norm. But the other path may very well lead to the birth of a ‘new market’ dynamic in which large overseas investors look to secure large portfolios.



Return of the ‘old market’: Following a period of relative stagnation, the UK unsecured debt purchase sector has been enjoying a clear increase in loan sale activity since Q4 2010. In part, this upsurge has been driven by vendor banks choosing to market smaller portfolios that had – until recently – relied on additional collection cycles. These portfolio sales are generally being conducted via auction processes to a panel of debt purchasers. With high participation from many of the same buyers that have been in the market since 2003/4, there has been a strong focus on targeting those buyers that have been able to withstand the recent challenges experienced in the Debt Collection Agency (DCAs) and Debt Purchaser (DPs) markets.

From the vendor bank’s perspective, the purchaser panel must be carefully selected and structured to ensure that buyers are credible and that prices can be maximized. At the same time, most buyers are only able to purchase relatively small portfolios and often lack either the funding or capability to acquire larger portfolios (in the range of GBP300 million) which – in turn – would help vendor banks clear their warehoused loans, decrease their capital and increase their liquidity.

Birth of a ‘new market’: At the same time, a number of large global investors are increasingly looking to access the UK unsecured debt purchase market by structuring partnerships with existing DPs/DCAs or through investments in start-up servicing platforms. Part of the lure for these investors has been the potential to secure larger investments (in the range of GBP40 million) and different loan types (such as first/second lien mortgages, unsecured personal loans, and IVAs) which have generally not been available in the market in the past.

As a result, there is a growing opportunity for vendors to meet this new investor demand by selling larger portfolios of consumer NPLs and other loan types, which could not be achieved through the traditional ‘panel sales’ of the past. The growing use of ‘back books’ that had been created through reduced sales volumes in 2008-2010, further enhances the opportunity to conduct larger sales with the option of forward flow agreements.

A number of DPs are also exploring the potential of specific deal structures with vendors (such as profit sharing, stapled financing, and joint ventures) that may reduce the bid-ask gap.

It remains to be seen, however, whether the market will return to the status quo with vendors looking to dispose of their accumulated back books; or if they will leverage the size of their current warehouse portfolio, access to other debt types, or dynamic deal structuring in order to widen the appeal of their portfolios, tension current buyers, and drive forward flow arrangements.

Return of debt finance and market consolidation Since the peak of the market in 2008, there has also been significant consolidation in the sector, primarily led by private equity backers looking to either exit or enter the market. Indeed, the rapidly changing environment, where vendor banks are returning to the debt sale market, has added a level of complexity which can often be attractive to new entrants to the market.

For example, more recently, there have been a number of well-publicized sales of DCAs / DPs, one of which being the purchase of Cabot Financial from Citigroup for a reported GBP90 million by AnaCap Financial Partners (alongside Morgan Stanley Alternative Investment Partners, Partners Group

and the management team.) That deal then led to the merger with competitor Apex Credit Management to form the new Cabot Financial Group. It is also reported that Exponent Private Equity has sold its stake in the debt collector Lowell Group, to TDR Capital for a sum which was rumored to be in the region of GBP400 million; a pleasing sign to other businesses in the sector.

Finally, in recent months we have also seen debt providers return to the sector, and a number of investments have been completed such as the three-year, GBP180 million funding line provided to the new Cabot Financial Group by Citigroup, Barclays and Royal Bank of Scotland in April 2011, and the GBP120 million funding line secured by The Lowell Group through a consortium of five banks, which was secured at the end of 2010.

At the same time, most buyers are

only able to purchase relatively small portfolios and often lack either the funding or capability to acquire larger portfolios (in the range of GBP300 million) which – in turn – would help vendor banks clear their warehoused loans, decrease their capital and increase their liquidity.



Ireland

IntroductionIreland shares many of the same debt sale market characteristics as the UK: debt sale activity has picked up, banks and financial institutions have begun formal sales processes for their loan portfolios, and others are undertaking informal market soundings. On both sides of the Irish Sea, banks and financial institutions are actively engaged in testing pricing and potential deal structuring. Indeed, Irish banks are likely to be the main driver of debt sale activity in 2011.

The influence of NAMAFor some time now, many market participants have anticipated the eventual deleveraging of the ‘bad debt’ that was nationalized by Ireland’s National Asset Management Agency

(NAMA) following the financial crisis of 2008.

Recently, however, new guidance and direction has been provided by the Irish Central Bank, Department of Finance and the Troika (EU, IMF, ECB) to conduct an orderly run down of their loan portfolios over the next three years, with a total earmarked decrease in excess of EUR70 billion and a target loan to deposit ratio (LDR) of 122.5 percent. As can be seen from Figure 7, that is a signficant difference from the current average 180 percent.

This deleveraging process will have a significant effect on the future shape of the Irish banking market, with two key pillar Irish banks replacing the previous six pillar Irish banks. This effectively

Irish 2010 Average of 180%

Non-Irish 2010 Average of 139%

2013 Target LDR of 122.5%

Note: Irish average relates to AIB, BOI, EBS and ILP

0

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215%

176%

178%

174%

166%

165%

162%

158%

157%

151%

141%

134%

127%

126%

125%

123%

122%

121%

119%

76%

77%78

%84%

99%10

5%108%11

7%11

8%

"Expect to see Irish banks selling assets in the UK, Europe and America as they work to run down portfolios to meet the Irish Government and Treasury requirements."


Figure 7: European LDRs benchmarking as at December 2010

In comparison to their European peers, Irish banks currently have significantly higher loan to deposit ratios

Source: SNL Financial (most recent data available presented in chart) & CBI


For some time now, many market participants have anticipated the

eventual deleveraging of the ‘bad debt’ that was nationalized by Ireland’s National Asset Management Agency (NAMA) following the financial crisis of 2008.



Seller Buyer Asset typeFace value (in local currency)

Completion date

Bank of Ireland Pending U.S. RE loans €1.26bn In progress

Bank of Ireland Pending Project finance loans €2.7bn In progress

Burdale, Bank of Ireland Pending Asset-based lending €800m In progress

Allied Irish Bank Blackstone and Wells Fargo U.S. Commercial Real Estate €690m (USD 1bn) May 2011

Anglo Irish Bank Lone Star, Wells Fargo and JP Morgan U.S. Commercial Real Estate €6.9bn (USD 10bn) August 2011

Figure 8: The two key pillar Irish banks and those in run-off

Source: Public information and KPMG analysis

means that, similar to the recent situation with RBS in the UK, two new non-core banks will be created and then run-down over time, while both Anglo and INBS will remain in run-off, as illustrated in Figure 8.

With an increasing degree of transparency in terms of deleveraging, many Irish institutions are now mobilizing to meet these objectives in an orderly fashion. Indeed, recent activity by the Bank of Ireland, Irish Life and Permanent, and AIB to undertake sales processes for

non-core elements of their loan portfolios (all related to foreign assets) all point to the continued deleveraging of Irish banks and financial institutions.

However, the ability of these institutions to find buyers at suitable prices will – in large part – be driven by the quality of the assets being sold and the ability of the vendor to absorb the losses on the sale. Many vendors are now asking themselves if their sale price equates to a capital loss and – if so – whether it is within the tolerance levels prescribed

under the recent capital injections provided by the Central Bank.

For European buyers, therefore, the key question is which Irish banking assets will be sold and where. And while the obvious answer is the UK, it is clear from the reported steps taken by the Bank of Ireland (in relation to its European commercial loan portfolio), and Anglo (in relation to its American commercial loan portfolio) that several of the Irish banks have non-core assets in other markets outside of the UK.

Selected dealsThe table below details several selected transactions in the Irish debt portfolio market.

Table 9

BolCore

BolNon-Core

AIBCore

AIBNon-Core

EBS was acquired by AIB with effect from 1 July 2011.

In run-off

Anglo INBS


NAMA facing significant challengesHaving foreclosed on nearly 900 loans with a nominal value of EUR4.5 billion (or EUR1.3 billion at its own valuation) throughout 2010, NAMA

has now effectively dealt with the top 30 borrowers. The organization will now move its focus to the second tier (some 145 borrowers with loans representing some EUR34 billion) who lodged

business plans with NAMA by the end of April 2011.

And while NAMA currently holds approximately EUR10 billion in UK assets and EUR17.5 billion in Irish



assets (at their own values), the organization is seeking to reduce its debt by at least 25 percent before the end of 2013. But with only EUR2.7 billion in approved sales over the last 12 months, NAMA will need to conduct significant sales to achieve a EUR7.5 billion reduction in debt (net of costs), particularly since only 23 percent of NAMA’s loan portfolio is classified as performing. It is worth noting that – to date – NAMA had also provided EUR730 million to developers in order to complete projects.

With commercial property prices in Ireland down 61 percent from their 2007 peak5, NAMA believes that – while residential property values will likely continue to fall – commercial property prices have probably hit their bottom. NAMA is now exploring opportunities to finance both commercial and residential property deals, particularly through stapled finance deals.

NAMA’s potential loan sales are also being impacted by ongoing uncertainly about the retrospective nature of legislation proposed to prevent Upward Only Rent Reviews, and speculation surrounding the establishment of a REIT to house certain properties.

And while NAMA’s highest profile sale to date has been the purchase of Dublin’s Montevetro building by Google for EUR100 million, a number of assets are expected to come to the market in the near future including Citi Canada Square HQ in Canary Wharf (estimated at EUR1 billion), the sale of Santander HQ in Madrid (EUR1.9 billion), as well as the Rothschild HQ in London and Claridges hotel.

0

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Figure 10: Irish residential property price index

Source: Central Statistics Office, Ireland, 22 June 2011

Figure 11: Commercial real estate historical performance

Ind

ex v

alu

e (s

had

ed a

rea)

% r

etu

rn p

er q

uar

ter

(lin

es)

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10%

5%

0%

-5%

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-15%

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200

0

400

600

800

1,000

All property index All property Retail Office Industrial

Mar

ch 03

Mar

ch 03

Mar

ch 03

Mar

ch 03

Mar

ch 03

Mar

ch 03

Mar

ch 03

Mar

ch 03

Source: Recreated from Investment Property Databank, March 2011

5. SCS/IPD Quarterly Property Index April 29, 2011



0

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Book value of total loans less NPL and LLP

Non performing Loans Loan Loss Provision

Germany

While there is little doubt that activity in the German market has picked up over the past six months, this has mainly been driven by international banks cutting their exposure to the German market, with a particular emphasis on real estate secured loans to corporate borrowers. At the same time, German banks have all but stopped selling their corporate and SME non-performing loan portfolios in Germany.

Non-domestic assets offer the most opportunities in the near-termThere are two main factors driving these shifts. The first is that many German

banks already sold their older legacy NPLs during the ‘first wave’ of sales between 2003 and 2007. As a result, a large proportion of their current NPL portfolios now relate to cases that are only two to three years old, and German banks have not yet exhausted their potential to be worked-out rather than disposing them to third parties.

The second reason is that most troubled German banks have refocused their strategy and long-term business model on supporting German businesses and individuals at home and abroad. For German banks, therefore, the key focus

has been on reducing their balance sheets and raising Core Tier 1 capital by disposing of their foreign exposures (particularly where the loans were originated in foreign currencies). For the Landesbanks, where a significant portion of their funding is sourced by way of debt issues through their local Sparkassen network and direct retail deposits, the disposal of foreign-originated loans has been particularly active.

Overall, however, the volume of defaulted loans seems to have stabilized recently in the German market.

“The German debt sales market continues to lag far behind historical highs, but there is still a significant amount of activity – just not with large face values yet.”


Figure 12: Composition of total loans for some of the German banks as of December 31, 2010

Source: Capital IQ


0

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Loans 90 days past due & accruing interest (RHS)

1,95521,356

6,7678,435

9,676 9,250

1,514

1,31479302 200

29– –

12,282

3,986

Figure 13: NPLs/impaired loans, loans 90 days past due from some of the German banks as of December 31, 2010

Non-performing/impaired loans (LHS)

Perc

enta

ge

Source: Capital IQ

Figure 14: NPLs/impaired loans to total gross loans as of 31 December 2010

0%

2%

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HSH Nor

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10.8%

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6.5%

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5.4%

4.3%

3.4%

Source: Financial Statements at 31 December 2010 and Capital IQ

Competition creates margin pressures at homeAs German banks refocus their services on German borrowers at home and abroad, there has been a noticeable tightening of margins, particularly on loans to ‘investment grade’ borrowers, larger Mittelstand companies, loans which would qualify for Pfandbriefe cover pools or can be used as collateral with ECB or Bundesbank. This is largely a result of the improved economic conditions in Germany and increased competition from German banks fighting to acquire and maintain these borrowers as clients.

But as a result, the profitability of these clients is largely being eaten away. While in other markets (such as the UK), banks are employing a loss matching strategy as part of deleveraging, this could prove difficult for German banks due to tight competition. A number of German banks are also particularly ‘loss sensitive’ due to the increased Core Tier I capital requirements imposed by Basel III. This has led commentators to recently suggest that accumulated profits over the next three years may be insufficient for allowing some German banks to meet the capital requirements.

What about the German bad banks?There are now two fully established ‘bad banks’ operating in Germany. The first was EAA, which initially received EUR67 billion of assets from WestLB, followed by FMS which now owns EUR171 billion in assets transferred from HRE late in 2010. Both ‘bad banks’ have a similar structure, whereby asset management is primarily outsourced (WestLB’s Portfolio Exit Group (PEG) manages EAA’s, and PBB and Depfa manage FMS’s assets).



On the non-performing side, the trend of giving borrowers maturity extensions

and capital deferrals cannot go on forever.


However, it may be some time before we see portfolio sale transactions emerge from these entities. At the outset, the management teams of both banks have been focused on stabilizing the portfolios that were transferred in and implementing a competitive and sustainable asset management platform through third party servicers. They now appear to be shifting their focus onto building up multijurisdictional servicing platforms with an eye towards expanding their business to service assets of other banks in the region.

And while at this early stage of the workout process both EAA and FMS seem unwilling to accept steep discounts to the book value. That said, this activity has generally been limited to situations where the investor has exposure to the same borrower and is looking to build up a controlling interest in the borrower or the SPV in order to access the underlying assets or business.

International banks with German exposures feel the pinchMany of the international banks have significant exposures to the German market, including LBG, RBS, ING bank, DSB, Unicredit, Rabobank, Credit Agricole, AIB, Santander and ABN AMRO. But in most cases (Unicredit and Santander being the notable exceptions), it is believed that the parent companies have either substantially reduced the capital allocation, or frozen origination altogether for their German operations. This has left a number of international banks with substantial corporate (primarily CRE) portfolios, which were originated during the boom years at thin margins. But today, borrowers are either unwilling or unable to refinance

with another bank, either due to poor ratings, high LTVs or simply because they cannot obtain refinancing under terms as favorable as their current agreements.

On the non-performing side, the trend of giving borrowers maturity extensions and capital deferrals cannot go on forever. Indeed, as international banks scale back operations (and often lose some of their best talent to banks that are still originating), banks will find that these tactics will start to require significant resources to monitor and implement.

So where does this leave the international banks? With low margins on performing portfolios, debtor-friendly loan documentation, and complicated (and resource intensive) restructuring


cases, we believe that international banks will be the most likely source of transactions in the German market in the short- to medium-term. This may already be playing out: a recent article inThe Financial Times suggests that RBS is planning to put their German and U.S.portfolios up for sale in the near future.

Wait and see...During the ‘first wave’ of German NPL sales, more than EUR50 billion in portfolios were sold by German banks to specialist distressed investors and PE funds. However, today, we would estimate that pure portfolio sales of German-based loans will amount to somewhere in the region of EUR5 billion, with the bulk of this resulting from Apollo’s purchase of German residential mortgage loans as part of the Project Oracle transaction.

That is not to say that there has not been activity in the German market. In fact, there have been a number of

transactions since our last edition of the Global Debt Sales. However, pricing continues to be a big issue for loss-sensitive German banks, and some deals have been slowed by a prolonged process (such as Project Lichtenburg which started in August 2010), or not completed at all due to a pricing gap between the seller and buyers.

As a result of the first wave of NPL sales, most German banks have gained valuable experience in the transaction process. But while banks are now relatively sophisticated when it comes to the process of disposing loans, they are not seeing the same high prices that were typical of the first wave.

Certainly, the current amount of leverage in the market is a key factor. But it is also because, during the first wave, a number of investors who acquired large portfolios of loans at high prices did not achieve the returns or the timelines that they expected. In many cases, acquirers are still trying to work

In many cases, acquirers are still

trying to work through these portfolios, or looking to re-trade some of the exposures in secondary markets.

through these portfolios, or looking to re-trade some of the exposures in secondary markets.

And while we anticipate further activity in the German loan sale market as we head into the second half of 2011, we also recognize that there are a number of critical issues that rank higher on a bank’s boardroom agenda than the sale of German-based loans.

Table 15

Seller Buyer Asset type Face value (€bn) Completion date

German Bank (Project Lichtenburg)

N/A CRE NPLs 0.4 Expected H2 11

Dutch Bank N/A Performing RM & Consumer 0.1 Expected H2 11

Corealcredit Bank N/A RM NPLs 0.3 Expected H2 11

German Bank N/A Large commercial NPLs 0.2 Expected H2 11

Confidential TPG CreditResidential/commercial mortgage NPLs

0.2 Q2 2011

Japanese Bank N/A RM NPLs 0.2 No sale*

German Bank U.S. PE House RM NPLs 0.1 H1 11

German Bank EOS RM NPLs <0.1 H1 11

Servicer of German Bank N/A 2 pools of RM NPLs 0.2 (combined) No Sale*

Eurohypo, Landesbank Hessen-Thuringen (Helaba), Berlin Hyp and Archon Capital Bank

Colony Capital Institutional RE NPLs 0.370 Q3 2011

*Buyer pricing below seller expectations

Source: KPMG Analysis



Spain

IntroductionThe Spanish economy ended 2010 with a whimper. A slight increase in GDP (0.6 percent year-over-year) when viewed in annual terms (a decline of 0.1 percent6), places the Spanish economy in virtual stagnation. The Bank of Spain expects gradual improvement in economic activity and is therefore forecasting economic growth of 0.8 percent for 2011 and 1.5 percent for 2012. However, this is somewhat overshadowed by continued high levels of unemployment in Spain (21.3 percent in the first quarter of 2011 according to Spain’s statistics institute) with job creation numbers still not strong enough to overcome the past job losses. That said, the unemployment

rate is expected to start slowly reducing in 2012.

Spain´s economic situation has also created an ever-increasing level of ‘doubtful’ (defined as loans more than 90 days past due) and defaulting debt. In fact, by June 2011, doubtful loans as a percentage of total loans reached their highest level since May 1995 at 6.42 percent. And while this is certainly driven by an increase in the quantity of doubtful loans, it is also influenced by the overall reduction of total loans in the market.

The real estate market is also struggling to stabilize. Prices have fallen approximately 15 percent since the first quarter of 2008 (in the first quarter

“Whether as a result of the financial institution restructuring process or the increased capital requirements of the new regulations, 2011 should prove to be a year of intense activity in the Spanish loan sales market.”

6. INE and Bank of Spain



Figure 16: Doubtful debt (2006–June 2011)

0

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1% 0.92%

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10,859 16,251

63,057

93,327

107,199116,611

of 2011 alone, prices fell 4.7 percent year-over-year and 2.6 percent quarter-over-quarter). As a result, the stock of properties is still high (approximately 700,000) and the outlook for the real estate market remains uncertain. Indeed, many analysts consider that official statistics and appraisals used by banks do not reflect actual market values, with some suggesting that actual real estate prices could be as much as 20–30 percent lower in large cities and up to 50 percent lower in coastal areas than the current valuations indicate.

External factors are also influencing the cost of financing, with the bail-outs of Greece, Ireland and Portugal pushing up Spanish risk premiums to levels not seen since 1995 (the 10-year bond yield hit 6.44 percent on 5 August 2011). It remains to be seen whether the government’s fiscal policy and reinforcement of the financial system measures will be enough to reduce uncertainty, restore market confidence

and exorcise the demons of a Spanish bail-out — at least for the time being.

Change in capital requirements: a step ahead in the restructuring of the financial systemThe reinforcement of the Spanish financial system continues to be a primary objective for the Bank of Spain and the Spanish Government. In 2009, the FORB (Fund for the Orderly Restructuring of the Banking Sector) was created, and in 2010 a new provisioning calendar and a new law regulating savings banks was adopted. And in February 2011, new capital requirements were adopted through the Royal Decree-Law 2/2011, which established a general minimum core capital ratio of:

• 8percentforconsolidatedgroupsof credit institutions and individual credit institutions that do not belong to a consolidated group and that are able to raise repayable funds from the general public; and

• 10percentforthosegroupsorinstitutions that have not placed securities representing at least 20 percent of their share capital or voting rights with third parties and that have wholesale funding of more than 20 percent7.

In this scenario, a total of 13 financial institutions will need to increase their core capital to comply with the new regulation, which – by the Bank of Spain’s estimates – will require additional capital of approximately EUR17 billion in July 2011 (EUR15 billion in the March 2011 Bank of Spain estimation).

7. Bank of Spain

External factors are also influencing

the cost of financing, with the bail-outs of Greece, Ireland and Portugal pushing up Spanish risk premiums to levels not seen since 1995 (the 10-year bond yield hit 6.44 percent on 5 August 2011).



The measure also encourages financial institutions (particularly savings banks) to raise private capital and requires banks that are seeking government funds to pursue their financial activity through a commercial bank. Those institutions that do not reach the required capital levels will be expected to implement their recapitalization plans (approved in April) by 30 September 2011.

It should be noted that – for those institutions which have opted to raise private funds – the Bank of Spain may grant a postponement in duly justified cases if it reasonably considers that the measures proposed in the plan will be carried out. The plan may be postponed until the end of 2011 for off-exchange recapitalizations and until March 2012 for share listing processes, provided there is a resolution by the competent governing body and a detailed implementation timetable.

In effect, the adoption of the most recent law will herald a new phase in the restructuring process of the Spanish financial system (see table 17). By establishing new core capital requirements and settling the need for private capital, the law should act as a catalyst that drives savings banks to hand over their financial activity to a bank in order to expedite their access to capital markets and funding. The process will also lead to the establishment of ‘bad banks’ to hold toxic assets (as in the cases of La Caixa and Caja Madrid).

But in the great battle for private capital that is being waged around the world, banks must demonstrate confidence in the quality of their assets, the strength of their management teams, and the value and credibility of their ‘equity story’. Many may not be in a position to do so. This may lead to a second phase

of the restructuring process, where major banks play a lead role.

Table 18 outlines many of the integration processes that were being undertaken by Spanish financial institutions as of July 2011.

Table 17


Table 18

Savings banks integration processesTotal

assets (€m)FROB

support (€m)

Capital requirement

March 2011 (p.p.)

Additional capital required March 2011 (€m)

Additionalcapital required July 2011 (€m)

BANKIA (Caja Madrid, Bancaja, Layetana, Ávila, Segovia, Rioja, Insular)

344.508 4.465 10% 5.775 Listed – None

CAJA DE AHORROS DEL MEDITERRANEO 72.000 – 10% 2.800 2.800

EFFIBANK (Caja Asturias, Cantabria, Extremadura) 52.000 – 10% 519 519

GRUPO BANCO MARE NOSTRUM (Murcia, Penedés, Granada, Sa Nostra)

71.723 915 10% 637 637

BANCA CIVICA (Municipal Burgos, Navarra, Canarias, Cajasol, Guadalajara)

71.668 977 10% 847 Listed – None

CAJA 3 (Inmaculada, Burgos CCO, Badajoz) 20.856 – 8% None None

LA CAIXA (Caixa, Gerona) 289.627 – 8% None None

NOVACAIXAGALICIA (Galicia, Caixanova) 78.077 1.162 10% 2.622 2.622

CATALUNYACAIXA (Cataluña, Tarragona, Manresa) 76.649 1.250 10% 1.718 1.718

BBK (BBK, Cajasur) (1) 48.739 392 10% None None

CAJA ESPAÑA DE INVERSIONES (Caja España, Caja Duero) (2)

45.543 525 10% 463 463

UNICAJA (Unicaja, Jaén) (2) 34.838 – 10% None None

UNNIM (Sabadell, Terrassa, Manlleu) 28.550 380 10% 568 568(1) Current merging process with Vital and Kutxa (2) Saving banks under bilateral merging process


Key figures of the restructuring process

Reduction in cajas from 45 to 18

Average total assets from €29bn to €72bn

13% reduction of branches (3,075)

11% reduction of workforce (14,112)

Additional balance sheet write-downs totaling €22bn*

FORB has already injected €11.56bn into banks

*Through the application of fair value accounting in ‘business combinations’ and ‘joint ventures’. Overall, savings banks have recognized impairment losses of €52bn since Jan 2008



Seller Buyer Portfolio characteristics Face value (€bn) Completion date Price

MBNA Confidential Unsecured 0.1 Sep-10 4–5%

Citibank Aktiv Kapital Unsecured 0.4 Nov-10 3–4%

BBVA DEShaw Unsecured 0.3 Dec-10 4–5%

Banco Santander/Reintegra

Lindorff Unsecured and platform 0.3 Jan-11 4–5%

Orange Calyon Unsecured 0.3 Jan-11 2%

Barclays card Link finanzas Unsecured 0.13 Jun-11 4–5%

UNNIM Aktua NPL Mortgages 0.1 Feb-11 15–20%

RBS Perella Weinberg Commercial mortgages 0.3 Mar-11 55–60%

Banco Santander Cerberus Corporate mortgages 0.3 May-11 20–30%

Credifimo Cerberus NPL Mortgages & REO 0.2 Jun-11 Confidential

Barclays Cap Confidential Unsecured 0.1 Jun-11 4–5%

MBNA Apollo Unsecured & platform 0.5 Jun-11 Confidential

Bankinter DEShaw Unsecured & servicing contract 0.3 Jul-11 Confidential

Banco Santander Confidential Unsecured 1.2 Aug-11 Confidential

Loan portfolio salesThe Spanish loan portfolio sales market enjoyed a welcome uptick in the first quarter of 2011 with three transactions successfully closed (see

Table 19). What’s more, there are several transactions currently in the market with a total Unpaid Principal Balance (UPB) of approximately EUR5 billion. These include several unsecured

consumer portfolios and residential and commercial mortgage loans (both performing and non-performing) and, in some cases, a servicing platform.

Table 19: Recent loan portfolio transactions

Source: Press articles and market feedback.

For its part, FROB will likely also influence increased sales in the Spanish market, particularly at a time when most analysts expect savings bank profitability to remain under pressure until 2012, with a return to a 10 percent ROE not expected until 2014. Assuming a cost of 8 percent for the FROB funds, institutions will need to come up with a combined EUR12 billion. Analysts estimate that these institutions may be able to generate close to EUR6 billion in net income, which implies the remaining EUR6 billion would need to be repaid through asset disposals and/or loan book downsizing. On top of the restructuring efforts and possible resulting loss of market share, pundits suggest that institutions participating in the FROB may have to reduce their loan books (on average) by up to 20 percent by 2014 in order to repay FROB funding.

And – largely as a result of the conservative generic provisioning system established by the Bank of Spain in 2010 – most Spanish banks and savings banks have now provisioned ahead of the required calendar, especially for their real estate related loans. At the same time, excess provisions were adapted in an attempt to smooth the cycle and stem the current deterioration in the macro environment. The Bank of Spain is already requiring banks to hold a 20 percent provision for acquired assets (Real Estate Owned, or REOs) that have not been realized after two years. And given that the increased provisioning should help breach the current bid-ask spread, this may – in turn – result in an increase in the sale of REOs later this year and into 2012.

On top of the restructuring

efforts and possible resulting loss of market share, pundits suggest that institutions participating in the FROB may have to reduce their loan books (on average) by up to 20 percent by 2014 in order to repay FROB funding.



EntityTotal assets €bn (Sep. 10)

Total assets €bn (Dec. 10)

Gross REOs 2010 €m

Provision 2010 €m

% CoveredREOs revenues

2010 €m

Banco Santander 441 429 7,509 2,300 31% 1,100

BBVA 402 392 4,793 1,601 33% 657

Bankia 346 328 7,402 2,443 33% n.a

La Caixa 282 286 4,869 1,217 25% 993

Banco Popular 128 130 3,689 1,079 29% 264

B. Sabadell 84 87 2,880 888 31% n.a

SIP Vascas 84 n.a. n.a. n.a n.a n.a

Unicaja + Espiga 81 80 1,772 n.a n.a n.a

Catalunya Caixa 78 77 5,485 1,700 31% 8

Nova C. Galicia 76 73 2,103 n.a n.a n.a

SIP Base 76 n.a. n.a. n.a n.a n.a

CAM 74 72 3,332 n.a n.a 834

GBC + Cajasol 72 71 1,983 555 28% n.a

Mare Nostrum 72 70 2,949 905 31% n.a

Bankinter 55 56 378 106 28% n.a

Ibercaja 45 45 963 290 30% n.a

Banco Pastor 31 31 1,526 311 20% n.a

Unnim 29 28 1,985 360 18% 252

Banco De Valencia 23 24 865 163 19% n.a

Caja3 21 21 544 176 32% n.a

The table below highlights the number of REOs held by the main financial entities as of December 2010.

Whether as a result of the financial institution restructuring process or the increased capital requirements of the

new regulations, 2011 should prove to be a year of intense activity in the Spanish loan and REO sales market.

Table 20


Source: Annual reports, CNMV and Bank of Spain

Italy

With increasing concern regarding the stability of the Italian economy, the government recently launched a plan to control the national debt. Given that the Italian GDP growth rate slowed in the last quarter of 2010 (for a total GDP growth rate of 1.3 percent year-over-year8) and that consumption in the private sector reportedly decreased 2.9 percent in the last quarter of 2010, this most recent move may, in fact, thwart future investment in debt sales.

Stagnating loan origination and increasing NPLsThe Italian banking sector has seen total loan growth slow dramatically versus previous years. Indeed, the sector grew by less than 6 percent between January 2010 and January 2011, dropping to only 0.5 percent in February 2011 as compared to December 20109. At the same time, the volume of non-performing loans (by gross book value) surged to exceed EUR90 billion in February 2011 (see Figure 21). This

represents a growth rate of 18 percent since the beginning of 2011, and a staggering 50 percent between February 2010 and February 2011. The NPL rate (measured by gross NPLs/total loans) has also steadily increased, gaining at least 1 percentage point between January 2010 and February 2011.

With both local and major banks experiencing an increase in NPLs, loan origination was greatly reduced, thus causing a ‘credit crunch’ for the Italian financial system. The combination of a worsening underlying loan/borrower quality (not only for NPLs but also delinquent borrowers – the class known as ‘incagli’), and growing capital requirements and liquidity pressures is likely to encourage banks to revisit the sale of loan portfolios.

Real estate market poised to remain flatUnlike many other countries in Europe and the Americas, Italy did not experience a sharp fall in house prices

during the global financial crisis (see Figure 22). In fact, after rising more than 70 percent from 1998 to 2008, the house price index has largely remained unchanged since the crisis, falling a mere 0.3 percent in year-over-year terms10. According to Nomisma (an Italian economic research institute), house prices in the 13 major Italian cities should remain stable in 2011.

“A recently launched plan by the Italian government to control the national debt may, in fact, thwart future investment in debt sales.”

8. ISTAT-Banca d’Italia 9. ABI; Banca d’Italia 10. Bank of Italy and the Global Property Guide




0.0%

J-10 F-10 M-10 A-10 M-10 J-10 J-10 A-10 S-10 O-10 N-10 D-10 J-11 F-11

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Figure 21: NPL portfolios development in Italian market

€m

Gross non-performing loans

Source: ABI; Banca d’Italia

Gross non-performing loans/total loans

Figure 22: House price change, annual (%)

Source: European Central Bank

Recent transactions and outlookIn large part due to a continued bid-ask gap, Italian NPL sales have remained fairly flat in 2011. Additionally, the ongoing lack of liquidity is also affecting a number of distressed debt investors, particularly in transactions that require equity of between 40–50 percent.

Some of Italy’s recent ‘non-core’ loan portfolio deals include:

• anunsecuredretailloanportfoliowitha gross book value of EUR150–200 million from a mid-sized bank operating in the centre of Italy; and

• amixedandgeographicallydiversifiedsecured and unsecured portfolio with a gross book value of around EUR3 billion from a major bank.

September is likely to bring about a large transaction by a big player.

Unlike some of their European counterparts, Italian banks have not established ‘bad banks’, preferring instead to opt for re-engineering their NPL recovery process, rather than directly selling NPLs. Recent examples include:

• theidentificationbyBancaEtruriaof a firm (within its banking group) that will be specifically tasked with managing relationships with external recovery partners; and

• theoutsourcingtoathirdpartyofthe collection function for selected NPL portfolios of two mid-sized banks operating in the retail market (but without transferring credit ownership).

-10

1991

1993

1995

1997

1999

2001

2003

2005

2007

2010

0

-5

5

10

15

20

Nominal Real



Portugal

IntroductionAfter seeing GDP fall 2.5 percent in 2009, the Portuguese economy enjoyed a year of positive growth in 2010. GDP increased 1.4 percentage points in 2010, largely off the back of stronger domestic demand (+0.9 percent against -3.2 percent in 2009).

However, despite this wistful recovery, the Portuguese economy remains under significant pressure. A number of factors have contributed to this: an EU-IMF joint bail-out was announced, just as the government reported a fiscal deficit of 9.1 percent. This was quickly followed by the rejection of the government’s fourth wave of austerity measures by the Portuguese parliament, which in turn led to the prime minister’s resignation. This effectively left the country with a caretaker government tasked with

the complex job of formalizing the aid request and negotiating the terms of the bail-out.

Subsequently, agreement was reached on a bail-out from the EU and the International Monetary Fund. The centre-right Social Democrats (PSD) won the general election and formed a majority with the conservative Democratic and Social Centre (CDS). One of the first tasks facing this new coalition government will be to implement a demanding austerity program as a condition of the EU bail-out. To complicate matters further, Moody´s recently downgraded Portugal’s debt to junk status citing a growing risk that the country would need a second bail-out before it was ready to borrow money from financial markets again.

“Given Portugal’s macroeconomic situation and the need for Portuguese banks to strengthen their capital ratios, there is likely to be an increase in the country’s overall debt sales market.”




On the retail credit side, markets experienced a significant slowdown in 2008 and 2009, with the growth rate stabilizing at around 2 percent in June 2010, due largely to the increase in mortgage loans and consumer credit. In comparison, loans to non-financial companies registered a slightly lower increase.

2010 was also a year of increased credit defaults for Portuguese financial institutions. The ratio of non-performing loans held by non-financial institutions increased from 4.1 percent in December 2009 to 4.5 percent a year later, while NPLs to households increased from 2.9 percent to 3.4 percent over the same time period. For its part, the ratio of non-performing mortgage loans remained steady, although at a historical high of 1.9 percent for the last three quarters of 2010.

Set against the backdrop of a fluctuating Portuguese economy, the impact of austerity measures, as well as strains on employment, income and the real estate market, it is expected that

non-performing loans will continue to grow in the near future.

Bail-out measures and implications for the Portuguese financial sectorAs part of the EU-IMF austerity plan, the government must achieve fiscal deficits of no more than 5.9 percent of GDP in December 2011, 4.5 percent of GDP in 2012, 3.0 percent in 2013 and then to continue a declining ratio of government expenditure-to-GDP in 2014. Progress will be measured against the cumulative quarterly deficit ceilings that the government will have to achieve.

In response, the government has outlined a number of measures to achieve the targets including:

• decreasingcorporateandpersonalincome tax deductions;

• reducingbenefitsandspecialregimes;

• extendingpersonalincometaxesto apply to all types of cash social transfers;

• restructuringtheexistingVATcategories;

• shiftingcertaingoodsandservicesfrom the reduced and intermediate tax rates to higher rates;

• raisingcarsalestaxandtaxesontobacco products;

• achievingareductionof1–2percentin central, local and regional administration staffing; and

• decreasingstate-ownedenterpriseoperational costs by at least 15 percent in 2011.

In relation to the financial sector, the austerity plan aims to maintain liquidity and support a balanced deleveraging,

while strengthening banking regulation and supervision. As part of these measures, Banco de Portugal (BdP) will now direct all monetary financial institutions (MFIs) under its supervision to reach a Core Tier 1 ratio of 9 percent by the end of 2011, and 10 percent in 2012 (or possibly higher, depending on each institution’s risk profile). The measures also aim to influence deleveraging, with the transformation ratio expected to reach 120 percent by the end of 2013.

Financial institutions will also see new mandatory reports and data validation requirements for the purpose of assessing solvency. To facilitate this, a series of on-site inspections are being planned in cooperation with the European Commission, the ECB, the IMF, as well as Portuguese supervisors, supervisory agencies, external auditors and other experts.

As a result of the austerity plan, the corporate/household debt restructuring framework will also be revised with technical assistance from the IMF. To promote the effective rescue of viable entities, the framework is expected to introduce faster court procedures for restructuring plans. General international ‘best-practice’ principles on voluntary out-of-court restructuring will also be introduced. Furthermore, these measures are also extendable to households, with existing personal insolvency procedures being revised to support the rehabilitation of ‘financially responsible individuals’. To communicate this change, authorities are expected to launch public awareness campaigns to promote the new and more effective restructuring tools.

To facilitate this, a series of on-site

inspections are being planned in cooperation with the European Commission, the ECB, the IMF, as well as Portuguese supervisors, supervisory agencies, external auditors and other experts.



Table 23

Seller SPE Asset typeFace value (thousand )

Value Dec 2010 (thousand )

Date

Banco Espírito Santo

Lusitano Leverage finance No. 1 BV

Leverage finanace loans 516,534 418,031 February 2010

Banco Espírito Santo Lusitano EME No. 2 Loans to small and medium entities 1,951,908 1,727,710 December 2010

Millennium BCP Tagus Leasing No. 1 Limited Leasings 1,233,699 1,141,824 February 2010

Millennium BCP Caravela SME No. 2 Limited Loans to small and medium entities 2,697,300 2,582,885 December 2010

Banco Português de Investimento

DOURO Mortgages No. 5 Mortgage loans 1,500,000 1,421,000 August 2010

Banco Português de Investimento

PME-Douro SMS 2 Loan to SME 3,500,000 n/a 2011

Banco Santander Totta Hipototta n.˚11 Mortgage loans 2,040,000 1,926,835 July 2010

Caixa Geral de Depósitos Nostrum Mortgages n.˚1 Mortgage loans 1,004,000 n/a November 2010

Caixa Geral de Depósitos Nostrum Consumer Finance Consumer loans 402,625 n/a November 2010

Caixa Geral de Depósitos Nostrum Mortgages n.˚2 Mortgage loans 5,429,950 n/a November 2010Source: Press articles and market feedback

Government intervention in the financial sectorInterestingly, it was not the condition of Portugal’s financial institutions that triggered the EU-IMF intervention. Rather, it was the overwhelming public sector deficit that resulted in rapid ratings downgrades that, in turn, caused an increase in spreads. As a result, the austerity program was primarily designed to significantly reduce public expenditure, create the conditions to provide liquidity into the economy, and generate economic growth.

To their credit, Portugal´s main banks all achieved positive results in the European stress tests, proving a ‘high degree of resilience to the adverse scenario’. Furthermore, the Top 5 Portuguese banks currently have a Core Tier I ratio of between 7.9–10 percent.

Of course, as was the case in most European jurisdictions, the financial crisis forced the Portuguese government to intervene in the

financial sector in order to ensure wider economic stability. However, unlike other countries, Portugal’s intervention was neither systemic nor applicable to all of the banking sector. Rather it focused on two institutions which had very specific situations: first was the nationalization of Banco Português de Negócios (BPN), a small bank considered to carry systemic risk; and secondly in the form of a government guarantee (that has been called on) in relation to a loan provided by the six largest Portuguese banks to Banco Privado Português (BPP), a small private bank that ceased activity in 2010. In total, these two events had an impact on the fiscal deficit for 2010 of 1 percent and on the other hand, 0.3 percent of GDP, respectively.

BPN, on the other hand, saw the creation of three state-owned vehicles in October 2010 to receive the bank’s EUR1.8 billion of toxic assets: Parvalorem SA for bad loans, Parparticipações SGPS for participations

Interestingly, it was not the

condition of Portugal’s financial institutions that triggered the EU-IMF intervention. Rather, it was the overwhelming public sector deficit that resulted in rapid ratings downgrades that, in turn, caused an increase in spreads.



Table 24

Seller Buyer Asset typeFace value (€ million)

Date Sources and notes


n/a Project finance, leverage finance and structured trade finance

1,100 4th Quarter 2010 2011 1st quarter results release

Banco Santander Totta

n/a Loans (not detailed) 2.500 1st Quarter 2011 2011 1st quarter results release

Benco Espírito Totta

n/a Corporate Loans and Infrastructure Project Financings

1,300 1st Quarter 2011 Bloomberg 29th March 2011


n/a Corporate Loans and Infrastructure Project Financings

1,200 TBA Bloomberg 25th Jan 2011 and Diário Económico 26th Jan 2011 (portfolio of corporate loans and project financings including Wembley and London Airport; 945 M€ loans in Spain and Portugal, 418 M€ in USA and 1,300 M€ in Europe, Middle East and Africa).

Millennium BCP n/a Corporate Loans and Infrastructure Project Financings

1,600 TBA Agência Financeira 7th May 2011 and Factiva 9th May 2011 (407.7 M€ credits in Spain, 681 M€ in other European countries and 500 M€ in USA).

Caixa Geral de Depósitos

n/a Infrastructure Project Financings

1,065 TBA Diário Económico and Factiva 10th May 2011 (400 M€ credits in Spain and 500 M£/665.1 M€ in UK).

Confidential TPG Credit

Residential mortgage NPLs

75 Q2 2011 –

Note: 1) TBA: To be announcedSource: Press articles, annual reports and market feedback

in other companies and Parups SA for participation units in investment funds.

Debt market overviewWhile the legal framework for securitization operations by Portuguese MFIs was set up in 1999, it was not until 2001 that the first Portuguese-originated mortgage loan securitization was issued. The framework offers issuers two alternative types of vehicles: FTCs (Fundos de Titularização de Créditos or securitization funds) and STCs (Sociedades de Titularização de Créditos or securitization companies). These two vehicles have different legal features but are both subject to the CMVM

(the Portuguese securities market commission) who is also responsible for granting activity permission and the regulation of securitization activities.

However, the eligibility of loans for securitization largely depends on the originator and will need to meet a set of general conditions, such as not being subject to transmissibility restrictions, being of a pecuniary nature and not being associated with any litigation processes (in Portugal, the ability to securitize loans under litigation processes are granted only to the government and social security). In addition, there are restrictions on insurance companies, pension funds

Since the inception of securitization in

Portugal, volume has been growing at a considerable pace, particularly for the periods from 2002 to 2005 and from 2007 to 2009.



and asset management companies who can only securitize mortgage loans, loans extended to the government (and other state-owned enterprises) and credits resulting from pension fund contributions.

Furthermore, in an FTC securitized fund portfolio, loans require a weighting of at least 75 percent. And while this vehicle can be open or closed to the investment in new loans (and other assets), it is reliant on the rating notation initially attributed to the fund’s securitization units not being compromised.

Since the inception of securitization in Portugal, volume has been growing at a considerable pace, particularly for the periods from 2002 to 2005 and from 2007 to 2009. The first securitization of non-performing loans (NPL) occurred in 2007. Aimed at foreign investors and issued in partnership with international financial institutions, the pool included non-performing assets from major credit institutions operating in the Portuguese market.

As Portugal reached the end of 2009, total securitized assets amounted to EUR50 billion. Of this, loans were the most significant asset class, accounting for 95 percent of the total assets of the FTCs and STCs. Approximately 79 percent of these loans consisted of mortgage credit originated by MFIs. For FTCs, 11 percent corresponded to non-financial corporation loans, while for STCs the number was higher at 16 percent. According to the CMVM, there are currently 41 FTCs and four STCs operating in the Portuguese debt securitization market. Table 23 shows some recent securitizations, all of which were recorded off-balance sheet.

Data from BdP shows that, in June 2010, credit portfolios represented approximately EUR331 billion, or 62 percent of banks’ total assets, while on-balance sheet securitized loans accounted for 6.5 percent (EUR34 billion). Non-performing loans made up 2.4 percent of total assets within the financial sector.

Sources:

http://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=83253056&DESTAQUESmodo=2

BdP Estabilidade Financeira Novembro 2010 PDF (http://www.bportugal.pt)

Racios credito vencido soc nao finan CSV (http://www.bportugal.pt)

Racios credito vencido Households CSV (http://www.bportugal.pt)

Portugal: Memorandum of Understanding on Specific Economic Policy Conditionality Enquadramento legal Titularizações: http://www.igf.min-financas.pt/inflegal/bd_igf/bd_legis_geral/Leg_geral_docs/DL_303_2003.htm#DL_453_99

http://economico.sapo.pt/noticias/veiculos-financeiros-do-estado-para-limpar-bpn-estao-criados_107183.html

http://www.ionline.pt/mobile/120863-bpn-estado-ainda-pode-ter-avancar-ate-3500-milhoes-pagar--caixa

Relatório Assessing Securitisation Activity in Portugal – compilation and measurement issues – PDF (http://www.bportugal.pt)

http://www.bcpinvestimento.pt/sub/sub.asp?pagina_id=274

http://www.dn.pt/inicio/interior.aspx?content_id=652818

That notwithstanding, non-performing loans did grow at a rate of 7.8 percent in the first quarter of 2010 to 9.3 percent in the second quarter, to reach EUR12 billion in June 2010. Table 24 sets out some recent NPL deals in Portugal.

ConclusionWhen viewed in the context of Portugal´s current macroeconomic situation, the expected need for Portuguese banks to strengthen their capital ratios and deleverage their balance sheets will likely lead to an increase in the sale of non-performing loans and non-core asset portfolios in the near future.



Poland

IntroductionWhile the debt sales market in Poland may still be at an early stage of development, it already shows significant growth potential. Indeed, by 2014 the NPL debt sales market is expected to grow by more than 66 percent to Polish zloty (PLN) 8.9 billion from a current level of PLN5.4 billion. There are a number of factors that point towards growth. On the supply side, these include the current NPL overhang, expected increases in the level of bank lending, and some positive changes in banks’ attitudes towards portfolio sales processes. As for demand, this is largely being driven by the increased funding of debt collection companies, greater use of securitization, as well as the risk-minimizing benefits that come with participant experience. However, the

non-core secondary debt sale market in Poland remains in its infancy, with only a few sales of performing loan portfolios closed in the last five years.

Pre-crunch boom setting the stage for a boost Prior to the global financial crisis, the Polish banking sector was enjoying a period of rapid expansion. Between 2005 and 2008 the sector saw a 32 percent CAGR increase in total corporate and consumer loans (from PLN258 billion to PLN591 billion). As in most markets, the outbreak of the financial crisis caused the tightening of bank lending policies, which resulted in a decrease in total loans in 2009. Starting as early as mid-2008, the quality of loans had already begun to deteriorate sharply, particularly in the

unsecured consumer and corporate loan segments. Now left with a large overhang of NPL portfolios in the market, Polish banks are expected to sell NPL portfolios with renewed vigor in the quarters to come.

"Poland will be one of the hottest markets for debt sales over the next few years as banks shed NPLs to meet aggressive targets for 2014."



More loans and lower cost of riskOver the next few years, the Polish economy is expected to see stable growth (3–5 percent GDP growth through to 2014), which should encourage a systematic increase in the value of loans granted by domestic banks. Overall, however, the banking market remains largely underdeveloped in terms of mortgages, credit cards and corporate loan levels when compared to EU-15 countries, which leaves plenty of room for lending growth. In fact, according to the IBnGR Institute (Figure 25), the value of personal loans will increase by 42 percent to PLN715 billion by 2014 as compared to 2010. The forecast value of corporate loans will grow at a respectable, yet more modest rate of 25 percent (to PLN283 billion) in the same timeframe.

According to the latest economic forecast by the Polish Central Bank, the cost of risk for the Polish banking sector is expected to return to its long term values in the quarters to come, mainly as a result of sustainable improvements in both the labor market and the business climate for corporate borrowers. That said, it is expected that the long-term cost of risk will settle above the pre-crisis level and, as a result, the volume of corporate, mortgage and non-mortgage personal NPLs will remain fairly unchanged over the medium-term11.

Changes in the approach to the collection processThe increase in supply of NPL portfolios will also be influenced by the changing attitude of Polish banks towards selling NPL portfolios and outsourcing debt collection services in general. For

example, banks have increasingly started to shift the collection process towards outsourcing at an earlier stage of a borrower’s delinquency, and have put increased pressure on the efficiency of workout departments. Furthermore, Polish banks are beginning to show a greater interest in new forms of collection processing which – to date – have traditionally been the domain of collection companies. In some cases, banks are running pilot projects to test the use of EPU (electronic writ proceedings and transferable court payment orders).

And while most Polish banks are currently at different stages of preparing their NPLs for sale, they are also demonstrating more reluctance to sell (particularly in comparison to Western Europe) due to a perceived mismatch in pricing expectations between sellers and buyers.

In any event, the Polish market remains dominated by consumer loan portfolio

sales. And while corporate and mortgage loan portfolios are seeing some activity in the market, their full potential continues to be hampered by a range of complications including tax issues, legal obstacles influencing the efficiency on the buy-side, and operational efforts to collect required data and documentation.

As noted on page 2, Basel III will also bring additional pressure to bear by way of increased capital requirements and required improvements on margins.

Market perspectiveAccording to IBnGR Institute forecasts, there is great growth ahead for the NPL market. By 2014, Polish banks will be encouraged to have sold 39 percent of their non-performing mortgages (compared to 7 percent in 2009), 20 percent of their non-mortgage NPLs (14 percent in 2009) and 33 percent of their corporate NPLs (22 percent in 2009).

0

100

200

300

400

500

600

700

800

PLN

bn

504

634

715

227 245 264 283

2011 2012 2013 2014

6.0%

3.3%

7.9% 7.8%

7.2%

11.5%

12.8%12.8%

Figure 25: Value of personal and corporate loans in Poland

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Personal loans% growth in personal loans

Corporate loans% growth in corporate loans

Source: IBnGR, November 2010

562

11. IBnGR Institute forecast



As a result, the value of the NPL debt sales market is expected to increase by 66 percent to PLN8.9 billion by 2014 (as compared to PLN5.4 billion in 2010). In fact, we expect the number of loan portfolio transactions to increase this year, mainly driven by the expected sale of non-performing loans that were granted during the credit boom period of 2006–2008.

Relative easy access to funding for local debt buyersAnother factor driving the purchase of NPL portfolios is the continued access to funding available (at relatively attractive pricing) to debt collection companies. Throughout 2010 and well into the first quarter of 2011, major debt collection companies received considerable capital injections or gained access to relatively cheap capital from

the market. At the same time, the market also saw oversubscriptions both on the equity and debt issue sides. Combined with a recent favorable zloty foreign exchange rate, local investors are now also in a more favorable position when compared to their foreign competitors. The table below shows some of the larger loan portfolio transactions in the Polish market for the first four months of 2011.

Combined with a recent favorable

zloty foreign exchange rate, local investors are now also in a more favorable position when compared to their foreign competitors.

Figure 26: Value of the Polish NPL debt sales market

Seller DateFace value

(PLN m)Buyer Loans Assumed price

PKOBP April 542 Kruk S.A.Consumer unsecured NPLs

17%

BRE Bank April 600 UndisclosedConsumer unsecured NPLs

12%

Kredyt Bank April 1,015 BestConsumer unsecured NPLs

20%

Santander Consumer Finance

Pending 6,000Project in progress

Performing residential mortgage loans

At par or with a slight discount to par

BRE Bank SA H1 2011 621.5 Kruk SA Retail c. 14.5%

0.01.02.03.04.05.06.07.08.09.0

10.0

–10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

PLN

bn 5.4

25.6%

55.6%

–4.9%

12.9%–0.5%

8.3

9.4 9.0 8.9

2010 2011 2012 2013 2014

Source: IBnGR, KPMG analysis

Table 27: The largest portfolio sale transactions in the period Jan–April 2011

Source: KPMG analysis



Russia

Russia has seen a number of changes in the provisioning methodology for banks recently: between 2009 and 2010 the Central Bank of the Russian Federation (CBR) established more flexible requirements for the creation of reserves in relation to NPLs, and then, at the beginning of 2011, introduced new rules for provisioning in relation to repossessed assets. These new rules stipulated that, as of 2012, banks should recognize a 10 percent provision for repossessed assets that are not sold within one year (with increases to 35 percent within two years and 75 percent within three years) in order to reflect the impairment of assets.

But the Russian economy suffered a significant decline as a result of the global financial crisis. With unemployment increasing to 8.4 percent in 200912, many

banks had significantly reduced the level of lending activity during 2009-2010 and strengthened their lending policies.

At the same time, the overall increase in the level of legacy NPLs catalyzed banks to make significant efforts to collect or restructure overdue loans. However, in the majority of cases, banks found that the borrower’s ability to generate free cash flow for debt repayment was so low that restructuring or bankruptcy were often the only options left for corporate NPLs.

As a result of this rapid growth in overdue loans, banks found their earnings and capital significantly reduced, and (in order to avoid breaching statutory capital adequacy ratios) many Russian banks started to move overdue loans off their balance sheets by selling them to affiliated companies. In 2009, for

12. Federal State Statistics Service

“While the Russian NPL portfolio market is only just developing, there is high potential for NPL sales in the future as banks attempt to divest non-core assets and improve capital and liquidity.”



example, Sberbank transferred around USD 4 billion of overdue loans at face value to their affiliate, Sberbank Capital.

Overview of overdue loan portfoliosAccording to the CBR, the volume of overdue debt in relative terms increased from 1.4 percent of total bank loans as of 1 January 2007 to 5.1 percent at the start of 2010 (see below). The majority (61 percent) of overdue loans to corporate clients and almost half (46 percent) of overdue loans to individuals were concentrated in the top 10 Russian banks.

Loan portfolio salesWhile the banks have started to sell retail NPLs over the past three years, much of the activity has been centered on collection agencies (Sequoia Credit

Consolidation, Morgan & Stout, and EOS Group to name a few). However, there are serious doubts as to whether this traditional outlet will have the liquidity to absorb the accumulated NPLs now in the Russian economy. Furthermore, collection activity in the Russian market remains unregulated, which is considered by many experts as a key obstacle to the development of the country’s secondary NPL market.

Regardless, the Russian NPL market has seen strong growth year-over-year. According to research by collection agencies, it grew from USD 1.3 billion in 2008, to USD 2.5 billion in 2009 and then USD 3.5 billion in 2010. Over that time, the market saw a number of large sales of non-performing loans by MDM Bank (USD 266 million), OTP Bank (USD 180 million), Raiffeisenbank (USD 170 million), and VTB 24 (USD 130 million).

While the banks have started to sell

retail NPLs over the past three years, much of the activity has been centered on collection agencies (Sequoia Credit Consolidation, Morgan & Stout, and EOS Group to name a few).

$bn

Figure 28: Overdue loan portfolio development

0

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1%

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Top 1061%

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Overdue loans, individuals

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5.1%

2 3

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Note: According to the Association of European Businesses in Russia, there is insufficient transparency from the Russian market on credit quality, risk management and corporate governance standards. Discrepancies in the information made available combined with the many NPL definitions used in the market result in reduced comparability and create confusion in areas where transparency is needed. It should be noted, therefore, that our analysis in this overview is based on available data on overdue loans from the Central Bank website.

Source: Central Bank of the Russian Federation



Seller BuyerPortfolio

characteristicsCompletion

dateFace value,

(USD m)Sales price

Ursa Bank n/d individuals Q1 2008 74 12%

Home Credit Bank n/d individuals Aug 2008 135 n/d

Credit Europa Bank Morgan&Stout n/d Sep 2008 n/d n/d

Raiffeisenbank EOS Group individuals Oct 2009 170 5%

OTP Bank Morgan&Stout individuals Dec 2009 180 n/d

Alfa-Bank Lindorff individuals Jan 2010 37 3%

Alfa-Bank MDM bank corporate, secured Jun 2010 40 n/d

AK Bars n/d individuals H1 2010 3 n/d

VTB 24 Russkaja Dolgovaja Korporacia individuals Jul 2010 130 n/d

Rosbank n/d individuals H2 2010 49 n/d

MDM Bank EOS Group individuals Jan 2011 266 4%

Swedbank (Russian branch)

Raiffeisenbank retail loans Aug 2011 21.5 n/d

For their retail portfolios, however, most Russian banks have displayed a preference for initially transferring distressed portfolios to collection agencies under agency schemes rather than selling portfolios. That said, since the end of 2009, banks have started to sell non-performing secured mortgage

It should be noted, however, that

Sberbank, one of the largest Russian banks, is rumored in recent press reports to be planning to sell a retail NPL portfolio with a face value of up to USD 230 million in the second or third quarter of 2011.

loans, which had not been the case in previous years.

According to press articles, the average price for retail loan portfolios decreased from a range of 4-5 percent of the value of the portfolio at the beginning of 2009, to a range of 1.5-3 percent by the

beginning of 2010. In large part, this is apparently due to the deterioration in the quality of loan portfolios being offered for sale. The table below shows some recent portfolio transactions.


Table 29


2011 market outlookOverall, the Russian NPL portfolio sales market is best described as being in the development stage, with no specific rules and regulations currently in place. However, certain draft laws aimed at regulating collection activities are being discussed and may be introduced later in 2011. As a result, the market may see the establishment of greater restrictions and obligations on buyers and sellers.

While there are certainly a large number of investors interested in the Russian market, very few Russian banks tend to sell their bad loan portfolios. This may be a symptom of an unwillingness to disclose information on the quality of their portfolios and, as a result, they do not tend to offer their bad assets for sale. And while we expect banks to continue to sell overdue retail portfolios, they will

likely hold overdue corporate portfolios, as the latter are usually secured by pledges.

It should be noted, however, that Sberbank, one of the largest Russian banks, is rumored in recent press reports to be planning to sell a retail NPL portfolio with a face value of up to USD 230 million in the second or third quarter of 2011.

In our opinion, the total amount of NPLs in the Russian market is likely to be significantly higher than the reported 5 percent of total loans. And given that we do not anticipate any substantial positive trends in the current economic situation that could significantly reduce this amount, investors can expect to see a more active Russian NPL sales market in the future as banks there attempt to divest non-core assets and improve capital and liquidity.


Spotlight on Africa

The Nigerian banking sector: Mistakes, lessons and opportunitiesPrior to the global financial crisis, Nigeria’s banking sector had seen exceptional growth in its capital base. Indeed, thanks largely to recapitalization exercises conduced in 2005 and 2007, many Nigerian banks found themselves with more capital on hand than they did investment outlets. As a result, there was a significant move towards gaining exposure to the capital markets in the form of proprietary investments and advances (given as margin loans). But as the financial crisis hit, global foreign direct investment also began to dive, sparking a significant flight of capital from the

markets. The crisis brought Nigeria’s All Share Index (ASI) down from its peak of 60,527 in May 2008 to a low of 31,450 in December 2008, representing a loss of some 48 percent of market capitalization in just seven months.

The falling price of oil in 2008 also had a significant effect on Nigerian banks, many of whom had a sizable exposure to the downstream oil and gas sectors through the funding of letters of credit (bank guaranteed loans) for the importation of refined petroleum products. And so as oil prices declined from USD 146/barrel to a low of USD 76/barrel, Nigerian banks saw a correlated decline in foreign exchange earnings which, in turn, put pressure

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Aftermath of the banking consolidation in 2005 left banks very liquid and funds were pumped into the stock market

The height of the financial crisis

Relatively stable position following CBN intervention

“Nigeria’s banking sector has recovered well since the financial crisis and the country now presents numerous opportunities for investors.”


Figure 30: The capital market crash resulted in the default of margin loan repayments.

Source: Cashcraft Asset Management Limited


on the country’s foreign reserves. As a result, the Naira (NGN) was devalued (from NGN118 to NGN150 to the dollar in late 2008) after enjoying a long period of relative stability.

In the aftermath of these events, the economy saw strong liquidity constraints as banks withdrew credit in reaction to the general economic slowdown and resulting deterioration in their loan books. Exacerbating the situation, Nigerian banks were declined access to lines of credit by their foreign counterparts, which only worsened the local liquidity situation.

Actions taken by governmentMuch of the response to the Nigerian financial crisis has been spearheaded by the Central Bank of Nigeria (CBN). As early as October 2008, the CBN started to take corrective action by creating an expanded discount window (EDW), which provided perpetual overnight standing facilities and extended the tenor for borrowing from overnight to 360 days. The CBN also reduced the monetary policy rate by 200 basis points to 6 percent in order to boost liquidity in the market and stimulate banks to lend to the economy.

However, in order to meet their day-to-day settlement obligations some banks gradually became excessively dependent on the EDW, effectively becoming perpetual net-receivers of funds from the interbank market, which in turn heightened liquidity concerns.

In response, a special joint audit was conducted by the CBN and the Nigerian Deposit Insurance Corporation (NDIC) on all banks in August 2009 to determine their true financial position (see Figure 31). The audit exposed significant issues at ten banks that ranged from capital inadequacy and

Figure 31: Financial position as at December 2009

(400,000) (300,000) (200,000) (100,000) 100,000–NGN million

200,000 300,000 400,000

UNITY*

BANK PHB

INTERCONTINENTAL

OCEANIC

FINBANK

AFRIBANK

UNION

SKYE

FCMB

STANBIC

UBA

DIAMOND

ZENITH

GT BANK

STERLING

WEMA

FIDELITY

FIRSTBANK

ECOBANK

ACCESS

* Although Unity Bank recorded positive shareholders’ funds as at December 2009, it failed the CBN audit as it did not meet minimum capital adequacy requirementsSource: Annual Reports



liquidity constraints to insufficient corporate governance and risk management procedures. Of the ten, two (Unity Bank and Wema Bank) were deemed to be less dire than the other eight banks, and they were given till June 2010 to independently re-capitalize.

For the other eight (namely, Intercontinental Bank, Oceanic Bank, Afribank, Union Bank, Bank PHB, Spring Bank, Equitorial Trust Bank and Finbank), the management teams were immediately replaced by CBN appointees. The CBN also enforced the maximum tenure of 10 years for bank CEOs as required in the Corporate Governance code. This resulted in the retirement of three CEOs, namely those of Zenith Bank, UBA and Skye Bank.

Over the next few months, the CBN injected NGN620 billion (USD 4.13 billion) as liquidity support and long term loans to nine of the 10 banks (all except Unity Bank). The CBN also assisted banks with their loan recovery efforts, resulting in the recovery of more than NGN110 billion (USD 733 million) of previously non-performing loans owed to five of the rescued banks.

The Nigerian government also played its part with the passage of the Asset

Management Corporation of Nigeria (AMCON) bill on 19 July 2010. AMCON, a ‘bad bank’, was established as the principal vehicle for the acqusition of NPL and the recapitalisation of distressed banks in Nigeria.

The plan has been largely successful in reducing the NPL overhang on banks. In December 2010, AMCON purchased NPLs with a face value in excess of NGN2.2 trillion (approximately USD 13.3 billion) paying a total consideration of around 50 percent. This was followed up in March 2011 with an additional acquisition of NGN1 trillion (approximatly USD 6.6 billion) for around NGN600 billion, or 60 percent of face value.

As part of these measures, the CBN reviewed the overall banking framework, which resulted in the revocation of the universal banking license model and a mandate for all banks to divest from non-core banking operations. That said, banks willing to retain non-core banking businesses were permitted to establish a ‘HoldCo’ structure in which the bank and all other businesses operate as subsidiaries. In effect, this enabled banks to ring-fence depositors’ funds, thereby creating a clear demarcation between banking and non-banking activities.

So what next…?Thanks largely to the quick action taken by the regulators, the Nigerian banking sector has seen notable improvement over the past year. AMCON’s intervention sparked a rally in banking stocks in January 2011, and the stock market has recovered somewhat from the lows experienced in 2009. There have also been strong indications of interest from a few strategic and financial buyers in acquiring some of the banks that failed the CBN special audit (see Table 32).

Table 32: List of potential target Nigerian banks and acquirers

Target bank Market share by asset base*

Potential acquirers

Investor type

Oceanic Bank** 6.1% None yet Nil

Intercontinental Bank 4.2% Access Bank Nigerian bank

FinBank 1.1% FCMB Nigerian bank

Union Bank 7.5% African Capital Alliance Private equity

Afribank*** 2.0% Vine Capital Private equity

Bank PHB 3.4% Habib Bank Foreign bank* Based on Q3’10 balance sheet ** First Bank recently pulled out of negotiations for the acquisition *** Fidelity Bank Plc (a local bank) also showed interest in Afribank and has been identified as a reserve bidder

Source: KPMG Market Research

The plan has been largely successful in reducing the NPL overhang on banks.

In December 2010, AMCON purchased NPLs with a face value in excess of NGN2.2 trillion (approximately USD 13.3 billion) paying a total consideration of around 50 percent.



To date only three Nigerian banks (UBA, Stanbic IBTC and First Bank) have indicated their interest in adopting the HoldCo structure, with most other banks seeking to divest their investments in their subsidiaries and either sell them to interested buyers or liquidate them.

According to recently published financial results, these measures are already having a positive impact on the banking sector, with some banks (Guaranty Trust Bank Plc, Zenith Bank Plc, Access Bank Plc, for example) showing significant improvements in their results for 2010 versus 2009.

It should be noted that the CBN has also mandated the adoption of International Financial Reporting Standards (IFRS), which all listed and significant public entities (including banks) are required to adopt by 2012.

Opportunities for investorsNigeria presents numerous opportunities for investors. In part, this is due to the recent banking reforms. But it is also a factor of the country´s improving economy (which saw GDP growth of 7 percent to USD 370bn in 201013), and its large population (with 150 million people, Nigeria is Africa’s most populous country).

As existing banks seek additional capital to fortify their market position and gain market share, competition will intensify in the industry. Indeed, a number of opportunities potentially exist for investors either seeking to acquire existing banks (as FirstRand of South Africa is rumored to be in the process

of with Nigeria’s Sterling Bank Plc) or to enter into strategic partnerships with other Nigerian banks.

There is also continued flux in the market, with some troubled banks yet to attract investor interest, and some investors opting out of negotiations mid-stream. The abolition of universal banking and subsequent directives by the CBN also means that banks are currently streamlining their operations and divesting from non-core banking operations such as insurance and investment banking. We expect these factors to create opportunities for foreign investors in the Nigerian financial services industry.

Additionally, there is an opportunity for the acquisition of non-performing loans (both from AMCON and banks) through a structured sale process. A number of banks have set themselves aggressive targets to significantly reduce NPL ratios down to single digits, which will mainly be achieved through a combination of sales to buyers (other than AMCON) and enhanced internal recovery efforts.

There has also been interest in investing in AMCON’s three-year zero coupon bonds, which are currently trading at a 10.25 percent yield through the secondary market and are backed by the federal government. A second series of bonds for the sum of NGN1.3 trillion (USD 8.7 billion) has also been proposed, and is expected to be auctioned in the primary bond market by AMCON in the proposed sale of up to NGN3 trillion zero coupon bonds.

A second series of bonds for the

sum of NGN1.3 trillion (USD 8.7 billion) has also been proposed, and is expected to be auctioned in the primary bond market by AMCON in the proposed sale of up to NGN3 trillion zero coupon bonds.

13. CIA



Introduction to the Americas

The Americas have proven to be somewhat of a mixed bag for the debt sales market. On the upward trajectory is the U.S. which – over the past few months – has seen a steady flow of deals. Most investors and market observers forecast that deal activity will continue at either the same level or slightly higher over the next quarters. Going forward, most transactions in the U.S. are expected to include pools of commercial mortgages and large commercial and industrial (C&I) loans, although an increase in OREO deals could also be expected as pricing gaps narrow.

In Brazil, several banks have started discussions regarding disposals of large portfolios of performing and sub-performing non-core loans (especially unsecured consumer credits), but it is uncertain whether these transactions will materialize within the next semester. While the Chilean market has not been particularly active, KPMG has recently been engaged by a global bank to conduct a sale of its residential non-performing mortgage portfolio, and it is expected that this opportunity will be followed by similar deals in the next few months.

In Mexico, however, the NPL market has experienced slower growth in the last semester compared to 2010, largely as a result of the modest local economic recovery, which has

propped up loan portfolios at many major banks. Here again, KPMG has been engaged by a global bank to advise on the sale of a large unsecured consumer pool, and there are strong expectations that this may lead to an increase in activity from other financial players (such as department stores or auto lenders) in the short-term as banks and financial institutions attempt to clean-up their NPL stocks.

Throughout the rest of the region, activity has increased slightly, but most transactions have proven too small for global investors to justify scalable acquisitions. And while banks in both Colombia and Argentina continue to sell comparatively smaller tranches directly to servicing entities and local investors, Peruvian institutions have yet to enter the NPL market with any significant transactions.

“Opportunities in the Americas must be viewed on a market-by-market basis since activity has varied widely across the region.”


Global Debt Sales | 43Global Debt Sales | 43

KPMG has been engaged by a global bank to advise on the sale of a large

unsecured consumer pool, and there are strong expectations that this may lead to an increase

in activity from other financial players (such as department stores or auto lenders) in the short-

term as banks and financial institutions attempt to clean-up their NPL stocks.



The United States

Bank failures in the U.S. reached an 18-year high in 2010, with 157 insured commercial banks and savings institutions failing over the course of the year. At the same time, the number of institutions on the FDIC’s ‘Problem List’ increased almost 3 percent (from 860 to 884) in the fourth quarter of 2010 representing total assets of USD 390 billion. But there has been a remarkable improvement in 2011, with just 48 failures for the year to 24 June 201114.

Today’s U.S. loan sales market is largely being driven by four main sectors of

activity: U.S. banks looking to sell their non-performing/non-core assets; international banks seeking to sell their non-performing/non-core assets in the U.S.; FDIC sales; and potential sales due to impending regulatory changes.

By most estimates, the current amount of non-performing and non-core portfolios in the U.S. market is estimated to be between USD 300 billion–USD 350 billion. On top of this, market observers expect an additional USD 100 billion potential market expansion as a result of impending regulatory changes that could force financial institutions to aggressively mark-down or divest assets.

“All signs look positive for further growth in the U.S. debt sales market, with regulatory change driving banks to dispose of non-core or non-performing loans.”

14. FDIC



Table 33: Transaction details for last 20 failed banks

BuyerAnnounce date

Failed bank

Loss share agreement?

Assets under loss share (US$000)

Cost of FDIC (% of) failed bank assets

First American Bancorp 06/24/11 Mountain Heritage Bank Yes 69,200 39.63

Hamilton State Bancshares, Inc. 06/17/11 McIntosh State Bank Yes 242,100 23.53

Stonegate Bank 06/17/11 First Commercial Bank of Tampa Bay No 0 28.90

First Citizens Bancorporation, Inc. 06/03/11 Atlantic Bank and Trust Yes 141,800 17.48

Columbia Banking System, Inc. 05/27/11 First Heritage Bank Yes 142,200 20.77

Blue Ridge Holding, Inc. 05/20/11 Atlantic Southern Bank Yes 585,100 36.87

Blue Ridge Holding, Inc. 05/20/11 First Georgia Banking Company Yes 452,100 21.41

Columbia Banking System, Inc. 05/20/11 Summit Bank Yes 113,400 11.21

Bond Street Holding, Inc. 05/06/11 Coastal Bank Yes 104,074 10.27

First Michigan Bancorp, Inc. 04/29/11 Community Central Bank Yes 362,400 38.46

Bank of the Ozarks, Inc. 04/29/11 Park Avenue Bank Yes 514,100 42.51

Bond Street Holdings, Inc. 04/29/11 First National Bank of Central Florida Yes 246,930 12.40

Bond Street Holdings, Inc. 04/29/11 Cortez Community Bank Yes 46,874 27.05

Bank of the Ozarks, Inc. 04/29/11 First Choice Community Bank Yes 251,000 31.32

Citizens South Banking Corporation 04/15/11 New Horizons Bank Yes 84,600 28.72

Hamilton State Bancshares, Inc. 04/15/11 Bartow County Bank Yes 247,500 21.05

Community Bancorp, LLC 04/15/11 Superior Bank Yes 1,840,000 8.54

AloStar Bank of Commerce 04/15/11 Nexity Bank Yes 384,200 23.15

Trustmark Corporation 04/15/11 Heritage Banking Group Yes 156,400 21.51

Central Bancshares, Inc. 04/05/11 Rosemount National Bank No 0 9.57

Source: SNL Financial and FDIC



Based on data reported in call reports filed by commercial banks and savings banks.

Nonaccrual loan sales = Total outstanding balances of all loans, leases, debt securities and other assets held in nonaccrual status that were sold during the quarter ending on the report date. This field includes only the outstanding balance (net of unearned income) of each nonaccrual asset at the time of its sale. Only transfers of nonaccrual assets that meet the criteria for a sale as set forth in FASB Statement No. 140 should be included in the calculation for this field.

Additions to nonaccruals = Aggregate amount of all loans, leases, debt securities and other assets (net of unearned income) that have been placed in nonaccrual status during the quarter ending on the report date, includes assets placed in nonaccrual status during the quarter, as well as assets placed in nonaccrual status during the quarter that have been sold, paid off, charged off, settled or returned to accrual status before the end of the quarter. Data current as of 12 May 2011.

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U.S. loan portfolio sales market While the U.S. market enjoyed a sharp rise in sales of non-accrual assets in 2010, (hitting a high of USD 29.6 billion for 2010 versus USD 14.0 billion in 2009), the overall level of non-accrual assets held by banks still remains high. Additions to the ‘Loans Held for Sale’

pools amongst banks also indicate that increased future sales activity is highly likely. And while the data for the first quarter of 2011 indicates that sales declined from the prior quarter (falling by more than 33 percent quarter-over-quarter to USD 6.12 billion), the decrease may be related to seasonal

variables and does not belie an overall reduction in sales activity for the year15. In fact, over the year starting 31 March 2010, the most active sellers of non-accrual assets include some of the largest banks in the U.S. (See Figure 34).

Figure 34: Banks’ sales of non-accrual loans

Source: SNL Financial

According to a 30 March 2011 note from bank research analysts Christopher McGratty and John Barber at Keefe Bruyette & Woods, roughly USD 23 billion of non-performing assets were sold in 2010, a 300 percent increase over the 2009 total. Looking ahead, the analysts expect ‘continued momentum’ in 2011, driven by narrowing bid-ask spreads and improving bank balance sheets. Reinforcing this position is the fact that

the total amount of nonaccrual assets at U.S. banks totaled USD 173.3 billion at the end of the first quarter of 2011.

Key drivers for disposal of non-core/non-performing loansRegulatory change in the U.S. has been the primary objective behind the banks’ disposal of non-core or non-performing loans. Indeed, the

Additions to the ‘Loans Held for

Sale’ pools amongst banks also indicate that increased future sales activity is highly likely.

15. SNL Financial



Table 35: Largest sellers of nonaccrual assets*, 31 March 2010 to 31 March 2011

CompanyNonaccrual assets sold, LTM (USD m)

Additions to nonaccrual assets LTM (USD m)

Total nonaccrual assets as of 03/31/2011 (USD m)

Citigroup Inc. 9,161 25,743 16,136

JP Morgan Chase & Co. 2,552 24,989 23,305

Ally Financial Inc. 1,768 6,735 4,643

Wells Fargo & Co. 1,658 27,484 25,105

Regions Financial Corp 1,262 4,245 3,468

BB&T Corp 1,091 4,917 2,616

BBVA USA Bancshares Inc. 1,024 2,164 1,734

Bank of America Corp 1,012 26,203 33,359

U.S. Bancorp 978 4,142 4,136

Synovus Financial Corp 798 1,361 1,006

KeyCorp 763 2,269 969

HSBC North America Holdings Inc. 594 11,223 8,353

Capital One Financial Corp 575 1,758 1,265

CIT Group Inc. 537 1,536 1,306

Associate Banc-Corp 509 433 489

Sun Trust Banks Inc. 508 4,712 4,018

Marshall & Ilsley Corp 462 2,747 1,579

Fifth Third Bancorp 459 2,054 1,861

Zions Bancorp 457 1,709 1,690

UnionBanCal Corp 444 1,040 875

*All nonaccrual asset figures displayed may include assets guaranteed by the U.S. governmentBased on Regulatory Date reported on Y-9Only currently operating top-tier bank holding companies were rankedData current as of 19 May 2011Source: SNL Financial and FDIC

concurrent goals of increasing capital ratios while simultaneously improving portfolio quality generally tend to be mutually exclusive, and therefore pose a number of unique challenges for banks (especially the smaller regional and community institutions).

As a case in point, KPMG was recently engaged by a regional bank in the southeastern U.S. seeking to sell its troubled portfolio. Given the stringent FDIC deadlines, the sale process was conducted in a very aggressive and

shortened timeline. And while the bank was successful in receiving multiple bids for the portfolio, it was ultimately unable to complete the transaction due to its inability to raise the necessary amount of capital. However, the level of interest that resulted in multiple bids within such a short period of time is a clear indication of the appetite for such deals in the marketplace. That said, transactions in this particular segment of the banking universe should be analyzed thoroughly as capital needs

may seriously impact the ability of relatively small banks to divest their toxic portfolios.

Basel III regulations should also act as a catalyst to NPL and non-core transactions in the U.S.. In fact, a recent Barclays capital study suggests that the top 35 U.S. banks may be short of between USD 100 billion to USD 150 billion in equity capital when these regulations are imposed. What’s more, the study expects that 90 percent of the shortfall will be concentrated in the



Figure 36: NPLs, loans 90 days past due and allowance for credit losses/ NPLs for some of the U.S. banks as of 31 December 2010

Source: Capital IQ

Figure 37: Composition of total loan books for some of the U.S. banks as of 31 December 2010

$bn

0

200

400

600

800

1,000

1,200

Wells FargoJP Morgan ChaseBank of AmericaCorporation

760.6

485.4595.7

36.0

229.6

182.2

147.1

21.7

25.7

Book value of total loans less capitaland impairment

Impaired loans Total capital

0

5,000

Bank of AmericaCorporation

JP Morgan Chase Wells Fargo

10,000

15,000

20,000

25,000

0

10,000

20,000

30,000

40,000

$m$m

Loans 90 days past due & accounting interest Non-performing/impaired loans

22,379

87.7% 126.2% 114.9%

33,190

4,037

14,481

18,500

26,242

Allowance for credit losses/non-performing loans


Source: Capital IQ

biggest six banks (assuming the banks will need to hold ‘top quality’ capital equal to at least 8 percent of their total assets, adjusted for risk).

As discussed in more detail on page 2, Basel III reforms will impact banks in two ways: they will gradually tighten the definition of what counts as Tier 1 ‘top quality’ capital; and they will force banks to increase their risk adjustment for big swathes of their businesses. As a result, banks will need to respond by either increasing their capital through retained earnings or equity issuance, or by reducing their risk-weighted assets through sales and cutting back on risky business lines.

The performing loan market is also set to see increased activity as a number of non-U.S. based banks with performing portfolios in the U.S. re-categorize them as non-core, and start to consider their realization options. In turn, this will offer a number of great opportunities for healthy U.S. banks and financial investors interested in acquiring portfolios to grow inorganically or add new asset classes to their portfolio.

Before considering a potential sale of assets in the U.S., however, some key regulatory issues will need to be considered. These include:

• theexpectationfromU.S.bankregulators for full documentation of the transfer (including objectives, rationale, and details of the structure), and appropriate senior management approvals, even for private transactions. Depending on the volume of assets considered for transfer, participants would be prudent to inform the appropriate U.S. banking regulators in advance of any transaction;

• transferofassets(particularlythoseof low quality), will often lead to enhanced scrutiny by regulators on the lending and/or investment function in order to identify any


unsafe or unsound practices or potential weakness in the risk management process;

• U.S.bankregulatorsnowexpectorganizations to conduct an impact analysis of the transfer to the balance sheet and capital requirements, with particular consideration to liquidity impact and requirements;

• theexpectationthatthevaluationmethodology will be clearly documented; and

• regulatoryreportingimplicationswithregard to the transfer of assets.

Recent non-performing or non-core transactions and loan portfolios to come to marketThere are signs that U.S. banks are finally starting to be more aggressive about selling distressed real estate loans. For example, Toll Brothers Inc. recently purchased a portfolio of 83 non-performing loans with outstanding balances totaling roughly

USD 200 million through a venture with Deutsche Bank AG. But Toll Brothers is not the only homebuilder on the hunt for real estate loans: the Rialto Investments unit of Lennar Corp. reports contributing USD 33.6 million in revenue to the company’s total during the fiscal first quarter; Barclays Plc announced in March that it had signed a definitive agreement with CreXus Investment Corp. to sell 30 commercial real estate loans for USD 586 million in cash (the portfolios consisted of mortgages as well as subordinated notes and mezzanine debt); and it was recently reported that Wells Fargo & Co. has put a USD 500 million loan fund up for sale16.

International banks have also been more active in selling their U.S. assets. Recently, Anglo Irish Bank announced the sale of its $9.5 billion portfolio of U.S. commercial real estate loans to Lone Star Funds, Wells Fargo and J.P. Morgan Chase & Co. J.P. Morgan had the winning bid for the first pool of

performing loans, which had a face value of $1 billion to $1.5 billion and consisted of debt maturing in two years or less; Wells Fargo won the second and third pools, which were performing loans with around five years remaining and a total face value of $3 billion to $3.5 billion; and Lone Star, which specializes in buying distressed mortgages, won the remaining five pools of Anglo Irish’s non- and sub-performing debt with a face value about $5 billion. The transaction is expected to close in October 2011.

There has also been increasing interest from banks in exploring various structuring alternatives such as JVs and SPVs in addition to direct whole loan sales. These vehicles would help the sellers deconsolidate bad assets while minimizing losses (and possibly retaining potential upside and reducing the pressure on their internal work-out teams).

Table 38: Selected non-performing and non-core asset portfolio transactions by U.S. banks:

Seller Details

FDIC • PMOLoanAcquisitionVentureLLCpurchasedapproximately$1.7billionportfolioincludingapproximately200loansand 80 realestate owned properties.

• TheassetswereallfromformerAmtrustBankNAwhichwastakenintoreceivershipbyFDIC.

iStar Financial • iStarFinancialsold$1.35billionportfolioofcommercialproperties.• Thebuyerwasvarioussubsidiariesofinvestmentfirm,DividendCapitalTotalRealityTrust

Citigroup • Private-equityownedOneWestBankboughta$1.4billionreal-estateloanportfoliofromCitigroupInc• InadditionCitigroupisbelievedtobeplanningtosellabout$12.7billionworthofdistressedassets

Partriot National Bancorp

• PatriotNationalBancorpenteredintoacontracttosellnon-performingloansandrealestateofESVenturesOnefor$65million• Thebankplanstoreinvesttheamountreceivedfromthesaleintoearningassetstoimprovenetinterestmargin

Midwest Regional Bancorp

• StarwoodCapitalGroupacquiredanon-performingcommercialloanportfoliowithanoutstandingprincipalbalanceof$157million from Midwest Regional Bancorp

• Theportfolioofloanswaspurchasedfor40centsonthedollar,representingpriceofapproximately32%ofinitialcapitalization

Confidential • TollBrothersInc.andDeutscheBankpurchasedaportfolioof83non-performingloanstotaling$200million• Theportfolioconsistsprimarilyofresidentialacquisition,developmentandconstructionloanssecuredbypropertiesatvarious

stages of completion


16. SNL Financial



Table 39: Selected non-performing and non-core asset portfolio transactions by international banks:

Seller/Bank Details

Anglo Irish Bank • AngloIrishBankrecentlyannouncedthesaleofits$9.5billionportfolioofU.S.commercialrealestateloanstoLoneStarFunds, Wells Fargo & Co. and J.P. Morgan Chase & Co

• ThedealwasledbyEastdilSecuredandthesaleisexpectedtocloseinOctober2011

Allied Irish Bank • AlliedIrishBankagreedtosellroughly$1billionU.S.commercialmortgagestoBlackstoneGroupLPandWellsFargo&Co.• Blackstoneispayingmid-80sonthedollarforhalfofroughly$1billionportfolioandWellsFargoispayinglow90sforthe

other half

Barclays • Barclays’islookingtoreducethesizeofitsbookofU.S.commercialreal-estateloans,valuedatabout$3.8billionattheendof 2010, the bank plans to sell the properties and loans on an asset-by-asset basis rather than as a part of one package

• Further,thebankhassofardisposedoffaportfolioofcommercialreal-estateloanswithafacevalueof$739million(inMarch 2011)

Bank of Ireland • BankofIrelandismarketingU.S.propertyloanswithafacevalueofEUR1.26bn• TheIrishbankputtheAmericanloansontheblockon16Mayandexpectstoclosethesaleinthenextsixmonths

Lloyds Banking Group

• LloydsBankingGrouphastappedJPMorganandCitigrouptorunthesaleprocesstodivest600UKretailbranches.Thebankswere told they would have to provide a GBP15 billion–20 billion loan to help cover a funding gap at Lloyds and ease the disposal process as part of the mandate.

Commerzbank AG • CommerzbankisrequiredbytheEuropeanCommissiontodisposeofits100percentsubsidiaryEurohypoby2014fortheapproval of capital injection from the German government

• Asat31December2010Eurohypo’sinternationalrealestatefinanceamountedtoEUR40billionSource: Press articles and market feedback

Trends in residential and commercial real estate values and forecastThe U.S. commercial real estate market ended 2010 on an upbeat note. According to Real Capital Analytics, slightly more than 6,000 major properties traded hands during 2010, totaling USD 120 billion in sales. In fact, investment in commercial real estate increased with each successive quarter last year: from USD 15.8 billion in sales during the first quarter of 2010, to USD 21.8 billion in the second quarter, USD 31.7 billion in the third quarter and USD

50.8 billion in the final quarter. On an annual basis, this figure represents a 120 percent increase from the decade-low of USD 54.6 billion in 2009.

However, the figures for Existing Home Sales as well as New Single Family Homes Sales have not been as positive. The market experienced a significant drop in the third and fourth quarter of 2010, which reflected double digit percentage losses when compared to corresponding quarters from a year ago.

The losses are forecasted to continue through the first half of 2011, albeit at a lower rate, followed by a modest growth in the latter half of 2011. Indeed, there are already signs that the market is stabilizing. A recent Wall Street Journal article reports that the resurgence of the Silicon Valley tech industry has led to a new boom in the area’s real estate market, with rising rents and a scarce supply of homes. Commentators are clearly hoping this is a signal that the housing market might finally have reached its bottom.



Brazil

In general, the Brazilian market has been characterized by banks continuing to sell non-performing portfolios to specialized investors for three main reasons. The first is to realize tax benefits by selling their non-performing loans in order to speed up the write-off of loans, thereby allowing them to reduce their income tax calculation base. Increased liquidity is another reason, as is the strategic refocusing of many institutions´ core businesses, particularly where non-core and non-performing loans have been phased out.

ChallengesWhile most of the recent transactions in Brazil have largely involved consumer portfolios (such as retail, credit cards

and telecom invoices), some institutions have recently demonstrated their intention to sell their SME and corporate portfolios. However, there will likely be a gap to be bridged between sellers´ expected sales price and the prices offered by the investors.

The market also suffers from a lack of information regarding the loans and borrowers (particularly in relation to corporate loans), which negatively affects the pricing assumptions applied by investors, therefore generating riskier scenarios, higher return expectations and creating price expectation gaps. In order to reduce these pricing gaps, a number of initiatives are now being developed, largely focused on improving data quality and creating ‘selling

“There are still a number of challenges depressing the sale of loan portfolios in Brazil, but investors can expect a lift in the sale of NPLs as banks look to raise capital outside of their performing portfolios.”



structure alternatives’ (such as profit sharing structures, joint-ventures, etc.) To that end, the Brazilian market has already seen some activity by local and regional investors who are exploring structuring alternatives as a means to create arbitrage between the deals’ actual returns and targeted returns for institutional investors.

OpportunitiesThere has been a significant increase in regulatory control of loan sales in Brazil. In part, this is the result of reported inconsistencies related to apparent irregular accounting procedures for performing portfolio sales at Banco Panamericano, a Brazilian mid-sized bank, at the end of 2010. But the Central Bank of Brazil (Banco Central) has also recently increased the minimum required capital for transactions involving payroll and auto loans, while at the same time, the government raised the IOF (financial operations tax).

The combination of these developments has negatively impacted the sales of performing loans by small and medium sized banks in Brazil. As a result, many of these banks are now looking for capital raising alternatives, including non-performing and non-core loan portfolio sales.

Transactions perspectivesOverall, the non-performing loan sale market in the first quarter of 2011 has followed roughly the same trend as the first quarter of 2010. However – historically – banks generally start to develop their non-performing loan strategies during the second and third quarter, with an even greater focus during the fourth quarter (although this is often when these institutions also feel other pressures related to achieving their cash-flow budget or taking advantage of tax benefits).

As a result, participants in the Brazilian market can expect to see an uplift in non-core loan sale activity in the second half of 2011 and into 2012.

The combination of these developments

has negatively impacted the sales of performing loans by small and medium sized banks in Brazil. As a result, many of these banks are now looking for capital raising alternatives, including non-performing and non-core loan portfolio sales.



Mexico

Mexico has seen an overall decrease in the number of non-performing loans as compared to 2010. In large part, this is a result of two main factors: the country’s modest economic recovery (which has created a greater debtor capacity to repay their loans) and the tighter lending practices set by banks after the crisis in 2008-2009. Combined, these two factors have – in general – translated into healthier loan portfolios at major banks. In fact, non-performing loans as a percentage of total loans has declined every year since 2008, and the trend seems set to continue in 2011.

The non-core market also seems to be somewhat stagnant, with only one or two instances over the past year of

diversified companies pulling out of certain segments to focus on their core business. For now, however, there is no evidence that the non-core market is going through a meaningful change.

Key drivers for disposal of non-core/non-performing loansSince 1999, when the Mexican Federal Government created the Mexican Deposit Insurance Institute (IPAB), the organization has taken over a number of bankrupt banks and their related distressed asset portfolios. In general, the IPAB oversees the acquisition of these assets and appoints advisors (such as KPMG) in its efforts to dispose of the portfolios.

“The Mexican loan sales market has largely decreased over the past year and shows few signs of picking up in any significant way in the near future.”



And while favorable tax treatments and minimized losses continue to be the primary motivation behind the disposal of bank’s non-performing loans, liquidity needs have also become an increasingly important catalyst. For example, during the course of the financial crisis, many players in the collection business saw a reduced cash profit from their operations, reflecting debtors’ constrained cash flow. What’s more, some of these players had traditionally been financed by foreign investors, who – during these difficult times – often provided limited or no funding at all.

Non-performing and/or non-core loan portfolios to come to marketDue to the higher default rate on portfolios of financial institutions and financial arms of department stores and car companies in 2009, the market expects to see a moderate supply of portfolios that encompass different kinds of distressed assets (commercial, consumer, mortgage, automotive) over the course of the coming year.

Trends in residential and commercial real estate values and forecastEven though Mexico was harder-hit by the 2008 global crisis than any other Latin American country, this did not result in a contraction in the value for the real estate market in 2010. In fact, given the keen competition among banks and other mortgage-lending financial institutions, prices actually rose at a healthy rate while – at the same time – interest rates started to decline. However, for 2011, analysts expect that an increased supply of housing stock will likely help keep prices in check and interest rates at 2010 levels.

Figure 40: Non-performing loan portfolio development

$m (

pes

os)

0 0.0%

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000 12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

2000 2001

9.92%

5.16%

92,577 47,028 44,814 30,928 26,916 20,868 27,552 43,142 60,739 60,607 49,544

4.86%

3.31%2.63%

1.89%2.08%

2.66%

3.38% 3.25%

2.44%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Gross non-performing loan ($m pesos) Gross non-performing loan/total loans (%)


Source: National Banking & Securities Commission of Mexico


Argentina

Despite the numerous transactions that occurred in Argentina following the country’s 2001-2002 crisis, there are still a number of NPL portfolios available. Recent activity has been largely driven by utilities and retail companies that have started to sell their non-performing portfolios over the last two years.

Since the global financial crisis in 2008, Argentina has benefited from several conditions that have stimulated sizable transactions such as:

• theavailabilityoflocalfunds‘onhand’ to investors looking for highly profitable investments;

• theexistenceofmanyservicingcompanies offering high-quality collecting services; and

• thecountry’sgrowingexperienceandcomfort with this type of transaction which, with each successful sale, demonstrates its viability as a method for converting under-performing assets into fresh capital.

And while the financial system has felt renewed confidence and started to resume providing credit to consumers, retail segment credit in particular has come with high rates and strict lending requirements. Ultimately, however, more

“There are still a number of NPL portfolios available in Argentina, and the conditions seem set for a long-term increase in debt sales.”



easily accessible credit will lead to new distressed balances, which – as time goes on – will eventually restock bank’s NPL portfolios in the long-term.

Future opportunitiesLooking at the publicly available financial statements published by the country’s financial institutions, it is clear that they

continue to carry significant NPLs on their balance sheets. That said, around half of the remaining NPLs are owned by state-owned banks, who do not seem eager to sell (see Table 41). And while utility companies generated huge NPL portfolios during the 2001–2002 crisis, most of these have not yet been offered up for sale.

Table 41

Bank NPL level

Banco de la Provincia de Buenos Aires

• USD465million. Public bank belonging to the Province of Buenos Aires.

Banco de la Nación Argentina

• USD309million. Public bank belonging to the National State of Argentina.

Banco de la Ciudad de Buenos Aires

• USD115million. Public Bank belonging to the City of Buenos Aires (Federal District).

Banco Macro • USD198million

Banco Hipotecario • USD203million

HSBC • USD137million

Banco Galicia • USD71million

Banco Patagonia • USD81million

Banco Santander • USD60million

BBVA Banco Francés • USD83million

Citibank • USD31million

Source: Central Bank of Argentina – December 2010



Introduction to Asia

Half way through 2011 and the Asian portfolio market is picking up, albeit at a lower volume than in previous years. The traditionally strong markets of Korea and India have continued to provide portfolio opportunities in the first half of 2011, while Thailand (also a steady market over the past five years), is offering a number of opportunities with two banks already slated to run transactions in the third quarter of 2011, and a number of others following closely behind.

And while the Australian market continues to focus primarily on single credit transactions, the notable exception has been the sale of a (largely performing) GE housing mortgage portfolio. The success of this transaction, coupled with increasing buyer appetite, suggests that we will see more activity in the Australian market, although (for the short-term) it will likely be dominated by single credits and performing portfolios.

The market in China continues to be relatively quiet, but many pundits are asking ‘for how long’? Asset Management Companies (AMCs) established in 1999 in order to acquire NPLs were initially provided with 10 year financing, which was subsequently rolled-over for a further 10 years. In addition, to counter the effects of the financial crisis, local banks undertook large lending programs, deploying more than USD3 billion between 2009 and 2010, which will inevitably require attention in the medium term.

Elsewhere in Asia, activity is expected to be relatively minimal and will likely be driven by the continued selling of Lehman assets, single asset deals, and the divestment of non-core assets held by parties looking to exit certain markets or raise liquidity.

“The outlook for Asia overall seems strong with continued activity in Korea, Thailand and Australia, and growing expectations for an opening of the Chinese market.”




China

The overall asset quality of Chinese banks continued to improve through the first quarter of 2011 as the government increased the pressure on banks to take corrective measures such as reducing their exposure to real estate and municipality loans. But total NPLs

have been slow to decline: as of March 2011, total NPLs were CNY433 billion, versus CNY434 billion in December 2010, and CNY497 billion in December 2009. As a result, the NPL ratio remains unchanged from the December 2010 level of 1.1 percent.

Figure 42: Non-performing loan portfolio development (end of period figures)

Source: China Banking Regulatory Commission (CBRC)

Figure 43: Asset quality indicators: China's major banks

Source: Companies’ Q1’11 earnings releases, CapitalIQ

“While asset sales between Chinese domestic companies should see significant growth over the next two years, foreign investors continue to be limited in their investment opportunities in this market.”

1,320

8.6

7.1

6.2

2.51.6

1.1 1.1

1,260 1,270

561497

434 433

2005 2006 2007 2008 2009 2010 Mar-11

NPL (CNY bn) - Left Axis NPL Ratio (%) - Right Axis

0

200

400

600

800

1,000

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1,400

0

2

4

6

8

10

107.1

91.7

1.8

1.01.1 1.1

80.1

70.865.2 64.5

26.6 24.7

NPLs June 2010 (CNY bn) NPLs March 2011 (CNY bn) NPL Ratio March 2011 (%)

*For Bank of Communication, the 2010 figure of CNY 26.6 billion is as of September 2010

0.5

1.3

2.0

2.8

0

40

80

120

Bank of Communication*

China ConstructionBank

Industrial and Commercial Bank

of China

Agriculture Bank of China



2011 OutlookAccording to industry analysts, China’s stimulus-driven loan growth during 2009 and 2010 may significantly increase NPLs over the next two to three years. It is expected that – as the government continues to tighten monetary policy and curb lending to stem inflationary pressures – several borrowers will eventually default. As a result, Moody’s estimates that the Chinese banks’ NPL

ratio may increase to 5 percent by 2013 (from around 1.1 percent today).

However, investors should not expect debt sales opportunities to increase significantly in the near-term. In large part, this is due to regulatory restrictions that require any locally-originated NPLs held by state-controlled banks to be sold only to domestic investors, thereby limiting the overall size of the buyer pool.

Furthermore, Chinese banks are – on the whole – quite profitable, well capitalized, and proving capable of absorbing most future risks to their portfolios. That said, regulatory initiatives and deteriorating credit risk profiles in certain segments may still present opportunities to foreign investors.



Segment opportunities:Indeed, foreign investors may want to focus on three areas where significant opportunities exist: Urban Development Investment Corporations (UDICs), real estate loans, and off-balance sheet exposures.

UDICs: According to industry experts and Chinese regulatory authorities, UDICs represent a potential source of NPLs going forward. These specialized investment vehicles used the government stimulus measures of 2009 and 2010 as an opportunity to expand borrowing. As a result, total government debt reached CNY14.4 trillion as of December 2010, representing 30 percent of total bank loans.

According to an April 2011 report by Standard & Poor’s, as much as 30 percent of bank loans are expected to turn sour over the next few years, with UDICs making up the largest share of non-performing assets for the industry. A more recent report by UBS reinforced that view, suggesting that local government debt could be as high as 30 percent of GDP and may generate around CNY2–3 trillion in non-performing loans in the future. As of the end of last year, UDICs already had more than CNY8 billion in overdue debt (although 5 percent of these companies were also using new bank borrowing to repay existing loans).

In response, the government has announced plans to limit banks’ exposure to UDICs, prohibit municipal governments from providing guarantees for bank debt, and nullify all existing guarantees. In addition, the China Banking Regulatory Commission (CBRC) has ordered banks to reassess all loans

to UDICs and to cease additional funding if adequate security is not provided.

Real estate: Given the high levels of lending growth in the real estate sector during the last two years, this is also an area that is expected to experience increased NPLs. The government has initiated several corrective measures in 2010 and 2011 (such as restricting banks’ exposure to real estate and increasing interest rates), but many pundits still believe there is a real risk of a real estate bubble forming, which will ultimately lead to a fall in real estate prices, and potentially trigger significant defaults.

This rebalancing may already be underway: according to the National Bureau of Statistics of China, the sales price of newly constructed residential buildings decreased in nine out of 70 cities surveyed in May 2011, as compared to January 2011, when only three cities registered a decline.

Off-balance sheet credit exposure: Chinese banks have a significant exposure to entrusted loans (where banks merely act as a facilitator between two parties and provide a guarantee). As of December 2010, these off-balance sheet, risk-weighted assets represented approximately CNY5.32 trillion or 5.6 percent of total banking assets. But there is little sign of a slowdown in this area: in the first quarter of 2011, Chinese banks facilitated CNY320 billion of loans between companies.

Interestingly, more than 40 percent of the entrusted loan deals announced since January 2010 have been granted to property developers, who are themselves facing increasing challenges due to government’s monetary

tightening and the risk of a fall in property prices.

Regulatory developments:For domestic buyers, recent regulatory initiatives will likely increase the pace of activity for loan transactions. For instance:

• Duringthefirsthalfof2011,theCBRC, the Ministry of Finance (MoF), and the National Development and Reform Commission (NDRC) jointly announced plans to dispose of CNY2–3 trillion worth of local government loans in June and September 2011. The regulatory bodies contend that there is an increasing possibility that these loans will become non-performing. In addition to transferring part of these loans to new entities, they intend to allow both provincial governments and city-level governments to issue bonds.

• TheCBRChassuggestedthatitmayask banks to segregate the NPLs of UDICs, and dispose of them in order to clean their balance sheet. However, the opportunities to buy such NPLs will be restricted to domestic investors.

• Inthesecondhalfof2010,theCBRCintroduced a new regulation laying out the guidelines for the transfer of loans. And while this regulation is not applicable to NPLs, it does lay out guidelines to facilitate the smooth transfer of loans. For instance, the law made it mandatory to obtain the consent of the borrower and the guarantor prior to any loan transfer transaction being initiated.



Korea

Korea continues to be one of Asia’s most active NPL markets, having completed more than 20 deals worth KRW6,178 billion (USD 5.8 billion) in 2010. Already this year, the market has seen at least five deals close worth KRW1,243 billion (USD 1.17 billion), leading to expectations that this pace is likely to continue in the short to medium term.

Korean banks, however, have seen a significant rise in NPLs over the past two years. In large part, this is related

to Project Financing (PF) loans, which accounted for only 3 percent of the banks’ loan portfolios, but represented around 26 percent of their total distressed debt. As a result, South Korea’s Financial Supervisory Service (FSS) has advised Korean banks to remove KRW1.35 trillion (USD 1.2 billion) worth of distressed loans related to PF through write-downs or sales, and KRW2.29 trillion (USD 2.15 billion) worth through leasing and auctioning.

Figure 44

Source: Financial Supervisory Service, Korea

“The Korean market will see increased activity in the short term, driven by the sale of suspended banks and assets currently being consolidated into bad banks.”

7.7

14.7 16.0

24.8 25.9

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0.0

5.0

0.72

1.141.24

1.901.98

10.0

15.0

20.0

25.0

30.0

2007 2008 2009 2010 2011 1Q

Per

cen

tag

e

NPL Balance NPL Ratio

KR

W t

rilli

on

Korean banks, however, have seen a significant rise in NPLs over the past two years. In large part, this is related to Project Financing (PF) loans, which

accounted for only 3 percent of the banks’ loan portfolios, but represented around 26 percent of their total distressed debt.



Figure 45: Asset quality performance

Source: Company filings

Key drivers influencing the supply of non-core/non-performing loansThe banks’ loan portfolios (particularly the NPLs) will continue to evolve under continued pressure from regulatory authorities and the imposition of stringent liquidity and capital requirements.

Given the conditions facing major lenders, the FSS has announced that it will initiate an inspection plan to ensure that banks set aside enough provisions for real estate project financing. And while details of the inspection plan have yet to be finalized, 18 domestic banks have already reduced their distressed project financing exposure from KRW7.7

trillion to KRW6.37 trillion under the FSS’s guidance since December 2010.

For its part, South Korea’s Financial Services Commission (FSC) is also taking steps to reduce the level of distressed debt in the Korean market. It plans to limit lending per borrower to KRW10 billion (USD 9 million) or 20 percent of their equity capital and restrict savings banks from investing in risky assets.

However, the FSC is also trying to carefully balance economic stability with a reduction in debt. So while Korean regulators instructed banks to reduce their bad-debt ratios to below

244

1.07%

1.61%

3.33%

3.64%

1.20%

1.65%

1,878

6,811

284

1,987

7,677

0.0%

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2.0%

3.0%

4.0%

0

5,000

10,000

Busan Hana Woori

NPL (USD m) - 2010 NPL (USD m) - Q1 2011

NPL Ratio - 2010 NPL Ratio - Q1 2011

1.5 percent in April 2011, they also urged banks to provide support to construction companies after five of the nation’s biggest builders sought credit protection from the court.

Anticipating a spike in household loan defaults, the FSS governor reiterated his concern regarding the pace of growth in household credit in June 2011. In response, the FSS has undertaken a number of important steps including:

• instructingfinancialservicescompanies to hold higher provisions for real estate project financing;

• hintingatthepotentialfortheintroduction of policies to suppress excessive lending for households;

• warningcreditcardfirmstocurboverly aggressive asset growth in the household sector;

• outliningplanstotightenrulesonsubordinated bonds sold by saving banks; and

• introducingstrictercapitaladequacyratios requirements for saving banks.

Real estate outlookWith a large percentage of 35–55 year olds already owning homes in Korea, real estate prices are likely to come under severe pressure due to weakening demand. Indeed, some analysts suggest that the Korean real estate bubble could burst in the same way as Japan.



Seller TrancheOPB

KRW millionsOPB

USD millionDate Buyer

Kookmin bank Multiple 212,500 200 17-Feb Woori F&I

Kookmin bank Multiple 275,500 259 1-Jun Woori F&I/UAMCO

Hana bank Multiple 267,000 251 21-Apr Confidential

Woori bank Multiple 257,900 242 2-Jun Woori F&I

Woori AMC Multiple 231,000 217 12-Apr Confidential

1,243,900 1,170

1 USD = KRW1063.6

OutlookWith eight saving banks suspended in the first six months of 2011 due to heavy exposure to the construction loan market, savings banks are under growing pressure to maintain their asset quality. As a result, the pace of NPL or portfolio disposals is expected to gain momentum through 2011 as authorities sell the NPL portfolios of the suspended banks.

As recently as June 2011, state-run Korea Deposit Insurance Corp. (KDIC) had initiated the process of selling four of the suspended banks (namely Busan Savings Bank, Jeonju Savings Bank, Daejeon Mutual Savings Bank and Bohae Mutual Savings Bank). And while the sale method is – as yet – undisclosed, experts believe that authorities will consider selling them either individually or in a package. It is also expected that they will be sold under a purchase and assumption (P&A) deal requiring a healthy entity to buy the distressed bank(s). It should be noted that the core assets of one suspended bank (Samhwa Mutual Savings Bank) were sold to Woori Finance Holdings Co already this year.

Targeting non-performing project finance loans in particular, seven local

banks (Kookmin Bank, Woori Bank, Shinhan Bank, Korea Development Bank, Hana Bank, Industrial Bank of Korea and agricultural cooperative lender Nonghyup) joined forces with UAMCO Ltd (a privately held asset management corporation) in June 2011 to establish a ‘bad bank’ known as the Project Financing Stabilization Bank. By forming a private equity fund under UAMCO, the bad bank expects to initially buy KRW1 trillion (USD 922 million) worth of non-performing PF loans at a 50 percent discount to market price. According to senior FSC officials, by the end of the first half of 2012, the bad bank is expected to purchase a further KRW2.5 trillion (USD 2.3 billion) in troubled real estate loans. The bank expects to turn a long-term profit by investing capital to complete unfinished projects and selling them on the market. However, given the growth in defaults in project finance lending that is expected over the next two years, the banks are proposing to set up more bad banks of a similar size in the future.

As part of their own reforms, the South Korean Parliament passed a bill in March 2011 to create a fund that will support struggling saving banks. The fund is partly financed by deposit insurance fees collected from various financial

segments (including commercial banks and insurers). While the total size of the fund is not clear, the FSC expects to receive KRW710 billion (USD 631 million) per year from deposit insurance fees. Separately, Kim Seok-dong, Chairman of the FSC, suggested that the government is planning to spend KRW10 trillion to support the savings-bank sector.

According to the FSC, Korea’s two major asset management companies will also start to buy NPLs in their own right. State-run Korea Asset Management Corp (Kamco) will purchase KRW3.5 trillion of distressed real-estate PF loans from small lenders, while UAMCO is planning to buy KRW8 trillion worth of NPLs. Expecting the Korean bad loans market to expand in the future, UAMCO recently announced that it is planning an IPO in 2013 to fund its acquisitions.

South Korea’s lenders are also becoming more active in the market, with the four largest (KB Financial Group Inc., Woori Finance Holdings Co., Shinhan Financial Group Co. and Korea Securities Finance Corp) showing interest in acquiring loan portfolios from small saving banks.

Table 46 represents a summary of the main transactions in Korea in 2011.


Table 46

Source: KPMG market research. Please note that this information has not been verified. It is not intended to be a full list of all sales, but rather a selection of some publicly known sales that KPMG is aware of.


Japan

The Japanese banking sector seems to be stabilising gradually with sound 2010 financial results and lower losses on NPL disposals. However, it may have to bear the financial brunt of the March 2011 earthquake, which is expected to have an economy wide impact at least in the short term.

Banks announced improved earnings for the fiscal year 2010, on account of lower losses on NPL disposals as well as higher income from equity and bond investments but regional banks are facing relatively higher NPLs. Although, there is no real pressure from the government to sell or dispose of NPLs, as the focus remains on helping the victims of the natural disaster, the market could still expect a few portfolios being put up for sale sooner or later.

Overall, the debt sales market has not seen much activity in recent times apart from small deals involving regional players and some secondary transactions by players trying to exit the market. However, investor interest in such deals remains and any large transactions going forward are expected to attract many investors.

In April 2011, the Deposit Insurance Corp of Japan set up the Second Bridge Bank of Japan to take over deposits of up to JPY10 million and healthy loans of the Incubator Bank of Japan which went bankrupt in September last year. It will be three years before the bank can be sold off in the market but the next few months could see the bank’s NPLs being sold off to Resolution and Collection Corp.

“Japan’s debt sales market has – understandably – been quiet since March 2011, but it is clear that the long-term impact of the natural disasters will be to decrease the quality of existing loan portfolios in the country.”

Figure 47: Banking sector NPLs

300

250

200

150

100

50

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%Mar 02 Mar 04 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10

NPLs (JPY bn) NPL Ratio (%)

8.7%

2.4%1.8%

1.5% 1.5% 1.5% 1.7% 1.9% 1.9% 1.9%1.4%

284

207

138

76 624047 41 41 39 43 48 52 50 50

1.5%

2.9%

5.1%

7.2%


Source: Financial Services Agency




Figure 48: Asset quality performance

Seller Buyer Asset type Face value Completion date

Japanese bank Various Sub-performing Loan USD 200–300m 6/30/2011

Lehman Various Sub-performing Loan USD 1bn Prospective

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

500

1,000

1,500

2,000

SumitomoTrust

CMTH

1.3%

1.9%

1.8%

2.5%

2.7%

2.3%

2.2%

2.6%

2.5% 2.3%

2.1%

1.4%

128 112 214 217

659 680

1,395

1,410 1,5721,629

1,766

1,862

Mizuho Resona SMFG MUFG

NPL Amount – Q4 2010 (JPY bn) NPL Amount – Q1 2011 (JPY bn)

NPL Ratio – Q4 2010 (%) NPL Ratio – Q1 2011 (%)

Source: Macquarie Research Feb 2011

Real estate marketDespite the magnitude of the earthquake in Japan, the real property damage is only about 0.02 percent of J-REITs (Japan’s primary real estate players) total combined asset value, much lower than what was originally being anticipated. However, price decline in the areas directly affected by the earthquake has been larger in the range of 10–15 percent.

Further, real estate cap rates that recovered marginally in the beginning of 2011 are now expected to remain

flat throughout the year as foreign capital investment remains weak due to uncertainty around the nuclear radiation issues.

Growth in the sector is expected to rebound in 2012–13, when the economy

moves back to a positive growth rate of approximately 2 percent, led by rapid reconstruction efforts.

OutlookIt was expected that the banks’ may be forced to review their NPLs and dispose them once the ‘Moratorium Law’ expired by end of March 2012 (one year extension announced in Dec of 2010), but so far banks have not made any announcements on this subject.

Experts expect the six largest banks to have stable gross NPLs (around 2.5 percent) over the next two years but smaller regional banks may report higher NPLs after being badly affected by the earthquake. Several factors including the affect of the earthquake, negative 2 percent economic growth expected for financial year 2011 and the credit being extended to the Tokyo Electric Power Company (TEPCO) are expected to have a negative impact on the quality of loan portfolios.

Outlined below is a summary of the main transactions in 2011.

Table 49: Outlined below is a summary of the main transactions in 2011.

Source: KPMG market research. Please note that this information has not been verified. It is not intended to be a full list of sales, but rather a selection of some publicly known sales that KPMG is aware of.



Australia

The Australian NPL market enjoyed an upturn in activity in the first quarter of 2011, with distressed and leverage transactions driving secondary loan market volumes. But despite this upturn, volumes transacted in the Australian NPL market remain relatively thin when compared to many overseas markets. Indeed, trading is largely dominated by single name asset sales, with portfolio deals outside of retail NPL books looking particularly scarce.

Interestingly, NPL values on lender balance sheets are at a higher level than the previous year, at least for the big four banks (see Figure 50). But the regional lenders also seem to be experiencing similar trends, which have – in some cases – been further exacerbated by recent natural disasters in some states. According to a survey of 26,000 bank

customers produced by Fujitsu and J.P. Morgan, residential loan delinquencies also continue to rise. And while there are certainly indications that the delinquency levels may be stabilizing, any upward pressure on interest rates could see a return of volatility in the market.

To date, Australian banks and other lenders have largely resisted portfolio sales despite the increasing NPL values and delinquencies, looking instead to recoup losses by enhancing their debt recovery functions. For the big four banks, there is also a concern of damage to their brand that may result from a potential sale. Instead, they are looking to replenish loan books, particularly given the rundown of loan assets that resulted from widespread deleveraging during the GFC.

“Increased portfolio debt sales for Australia will largely depend on an increased willingness from lenders to become more proactive around their balance sheet management, and a significant narrowing of the bid/offer spread between buyers and sellers.”

Figure 50: NPL amounts and % of total loan books

7,000

6,000

5,000

4,000

3,000

2,000

1,000

CBA

1.0%1.0%

1.3%

1.7%

1.4%

1.5%

0.8%

0.9%

2.7%1.8%

ANZ NAB Westpac Macquarie

0

Dec-09 Dec-10


Source: Capital IQ


However, the market has cheered the uptick in secondary activity, as it is widely believed to reflect a changing mindset for Australian lenders who are starting to recognize the benefits of offloading problematic exposures. And

while – to date – the market has mainly been characterized by single name transactions involving highly syndicated exposures (often where one bank looks to exit its position which triggers other banks to also sell down), we believe

this dynamic is a healthy precursor to eventual portfolio sales.

Some notable transactions in the first quarter of 2011 include:

Table 51

Recent transactions

Redcape Property Group With lenders rumored to be exiting at around 90 cents in the dollar

Colorado Group With senior bank Mizuho Bank joining other senior lenders such as Unicredit, ANZ, and Bank of Scotland International in selling its AUD29m hold at around 45 cents in the dollar

RiverCity Motorway With lenders in the stressed group continuing their exits at around the low 40s

I-Med Holdings The private equity-owned company continued to sell at around 70 cents in the dollarSource: Debtwire & Loan Connector

Initially, the bulk of portfolio sales in Australia is expected to come from foreign banks seeking to exit non-core operations. A recent example is GE Money which sold off a performing mortgage portfolio worth approximately AUD5 billion. And while this was primarily a performing portfolio, the interest levels demonstrated by the market were high and act as a good gauge for the regional buyer appetite for Australian transactions.

However, for an upswing in portfolio debt sales to be realized in 2011, the market will need to see an increased willingness from lenders to become more proactive around their balance sheet management, and a significant narrowing of the bid/offer spread between buyers and sellers.

A recent example is GE Money

which sold off a performing mortgage portfolio worth approximately AUD5 billion.



Thailand

Since our last edition of this publication in January 2011, the portfolio market in Thailand has seen remarkable growth, with two banks conducting auctions and a number of other parties exploring sales. This will likely see more than 20 billion Thai Baht (THB) come to market in the second half of 2011. Other banks we have spoken to indicate possible transactions in the fourth quarter after the result of the recent government election sinks in.

There has also been a considerable rise in single credit transactions/secondary trades, a number of which – according to market feedback – were already completed in the first quarter of 2011.

Thai market watchers are also closely following the plans for the closure this year of Thai Asset Management Company (TAMCO), a state agency created in 2001 to tackle growing NPLs. According to TAMCO press releases, the company will have a liquidator appointed to manage the orderly sale and resolution of remaining assets. The TAMCO website shows that, as at 31 December 2010, the company had

a stock of settled and impaired assets (comprised of 15,201 cases with a book value of THB775 billion plus) and more than 141,000 non-performing assets (with an approximate value of THB77 billion).

And while there have been a number of buyers expressing interest in Thailand over the past 12 months, the portfolio market is likely to continue to be dominated by those players who have an established AMC with servicing capabilities in Thailand. It is worth noting that, while it is not mandatory for portfolios to be traded exclusively to AMCs (from originating banks), there are a number of benefits available to both buyers and sellers if this is the case, such as tax exemptions (see Table 52) and certain subrogation rights for the buyer (in relation to legal actions already commenced by the seller). However, these benefits are applicable primarily when the originating bank sells to an AMC as opposed to secondary sales. Therefore, most selling banks prefer to sell to AMCs, especially in relation to retail/consumer and SME debt portfolios.

“Thailand enjoyed incredible growth in debt sales in the first half of 2011, and expectations are high for continued levels of activity through the rest of this year.”

Since our last edition of this publication in January 2011, the portfolio market in Thailand has seen remarkable growth, with two banks

conducting auctions and a number of other parties exploring sales.



Table 52

Source: Public sources and KPMG analysis

The market for larger transactions in Thailand continues to be dominated by public auction ‘sealed cash bid’ processes. However, there have been a number of smaller bi-lateral deals in the last 12 months, primarily made up of smaller value transactions. And while secondary sellers often pursue shorter timeframes, typical closing periods tend

to actually be around three months. Significantly, one of the larger local buyers, Bangkok Asset Management Company (BAM), continues to propose an extended settlement period, typically over several years. It is also worth noting that (to date), local banks have not been willing to undertake financing for portfolio acquisitions, nor has any

degree of vendor finance typically been available.

NPL figuresAs of March 2011, gross NPLs for commercial banks stood at THB292 billion or 3.49 percent compared to THB338 billion or 4.58 percent as at September 2010 (see Figure 53).


Transfer of NPLsCorporate income tax on initial transfer (see note 1)

Specific business tax on initial transfer

Corporate income tax on subsequent recoveries

Specific business tax on subsequent recoveries

Value added tax

Bank sells NPLs to AMC Exempt Exempt Exempt (See Note 2) Taxable Exempt

Bank sells NPLs to non-AMC Taxable (See Note 1) Taxable (See Note 1) Taxable Taxable Exempt

AMC sells to AMC Exempt Exempt Taxable (See Note 2) Taxable Exempt

AMC to non-AMC Taxable (See Note 1) Taxable (See Note 1) Taxable Taxable Exempt

Note 1: If the NPLs include interest owed by the debtor, the bank (as transferor) is liable for Corporate Income Tax (CIT)/Special Business Tax (SBT) based on the amount of the interest that is included within the consideration paid for the NPLs. However, from a CIT perspective it is likely to be tax-neutral, given that the debt is written off and the bad debt provision reverses.

Note 2: CIT - Net profit of AMC from administration of NPLs purchased or transferred from a bank or AMC (transferor) that owns more than 50% of the shares with rights to vote in the AMC will be exempted from CIT equal to the amount of any dividend that the AMC pays to the transferor. However, for this exemption to apply, there must be an agreement between the AMC and the bank/AMC that they will forgo deductions for other expenses equal to the amount of dividends received. It is likely to be rare for an AMC to sell to another AMC in a circumstance where the transferor holds more than 50% of the voting shares in the transferee AMC. For that reason, the more likely outcome is that an AMC sale to an AMC is often going to be taxable.

Note 3: The formula to calculate the amount of the interest that is subjected to CIT/SBT is complicated and is based on a methodology that results in pro-rating cash collected into principal and interest. From a practical perspective, tax can be payable notwithstanding an economic loss is incurred in managing a portfolio of NPLs.



90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

10.00%

NPL Amount at 31 March 2011 NPL Amount at 30 Sept 2010

%NPL at 31 March 2011 %NPL at 30 Sept 2010

9.00%

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

BBLKTB

KASIKORN

SCBTM

BBAY

SCIB

TBANK

CIMB B

TUOB

Stan C

hart T

hai

TISCO

KIATN

AKINLH

BIC

BC

MEGA

THCREDIT

Figure 53: Gross NPL – Thai commercial banks


Source: Bank of Thailand web site


Taiwan

Taiwanese banks have seen a significant reduction in their NPL assets over the past year as the asset quality of Taiwanese banks continued to improve through the first half of 2011. In large part, this has been due to the banks’ own internal focus on risk management as well as a number of recent regulatory initiatives such as the imposition of limits on real estate and mortgage lending.

In fact, the total NPLs of the domestic banks fell more than 42 percent

year-on-year to reach TWD110.3 billion in April 2011 – the lowest level since 1999. This brought the average NPL ratio of all domestic banks down to 0.54 percent, as compared to 1.02 percent a year earlier. What’s more, their average coverage ratio also improved dramatically, rising to 176.4 percent in April 2011 versus 102.5 percent a year earlier.

“Largely due to regulatory measures aimed at reducing the number of ‘at risk’ loans held by local banks, Taiwan is expected to enjoy an increase in loan sales over the next year.”

Figure 54: Non-performing loan portfolio development

1.0%

191

1.0%

184175

168160

152144

138

122 119 119113 110

0.9%

0.9%

0.8%

0.8%

0.7%0.7%

0.6%0.6% 0.6%

0.6% 0.5%

175

150

125

Apr-10

May

-10

Jun-1

0Ju

l-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-1

1

Feb-1

1

Mar-

11

Apr-11

200 1.2%

1.0%

0.8%

0.6%

0.4%100

Total NPLs of domestic banks (NT$b) Avg. NPL ratio of domestic banks (left axis)


Source: Financial Supervisory Commission


Figure 55: Average NPL coverage ratio of domestic banks

102%

Source: Financial Supervisory Commission

2011 OutlookTaiwan’s banks have also been active in conducting portfolio sales. According to some analysts, in the first half of 2011, banks (including China Trust, ANZ, Standard and Chartered Bank) sold loan portfolios worth approximately TWD 45 billion (USD 1.5 billion). The vast majority of these loans comprised unsecured consumer loans, a trend that is expected to continue into the second half of the year.

In particular, the real estate sector could witness an increased number of portfolio deals in 2011. Indeed, as

housing prices continue to increase, Taiwan’s regulators are hoping to pour some water on the market by tighteningthe lending norms for borrowers and enforcing higher provisioning. There is just cause for concern: Taiwan’s property prices continued to increase through 2010, largely driven by record low interest rates. And while the national average house price increase was 12.7 percent during the year ended June 2010, a number of cities experienced a much higher growth rate (Kaohsiung increased 34.3 percent and Taipei markets rose 20 percent in the same period).

108%

113%

119%

124%

129%

136%

142%

158% 159%162%

172%176%

Apr-10

May

-10

Jun-1

0Ju

l-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-1

1

Feb-1

1

Mar-

11

Apr-11

180%

150%

120%

90%


As a result, Taiwan’s Financial Supervisory Commission (FSC)

announced a series of new measures in March 2011 aimed at further reducing the number of loans that could be at risk. These measures included:

• a45percentriskweightingonnewbank loans for owner-occupied residences secured by residential real estate;

• a100percentriskweightingforloanson properties that do not qualify as an owner-occupied residence;


• areductionofconstruction-relatedloans to less than 30 percent of a bank’s total outstanding loans; and

• anobligationtoconductanonsiteappraisal for real estate properties involved in transactions.

The FSC is continuing to press those banks with higher NPL ratios to explore measures that will lower these numbers (such as asset sales) to improve asset quality. Starting in 2011, the FSC also implemented a financial examination rating system for domestic banks to standardize risk-based examinations. As a result, the FSC can now evaluate financial soundness, regulatory compliance, consumer

protection and risk management of domestic banks as part of its examination of banks’ overall business operations.

Combined, these changes will likely result in an increase in loan sales over the next year. For example, several banks will need to reduce their exposure to the real estate sector. One significant example is the Land Bank of Taiwan which, with mortgages accounting for around 36 percent of the total loan portfolio, has recently announced that it will reduce its mortgage loan exposure by 10 percent this year. Clearly there is more activity on the horizon.

Figure 56: Selected banks’ property-related loan exposure

2,100 60

50

40

30

20

10

0

2,0002,000

1,700

51.0

38.7

1,780

1,900

1,800

1,700

1,600

Bank of Taiwan Land Bank Taiwan Cooperative

Total Outstanding Loans (TWD bn) – left axis

Share of property-related loans (%)

25.5

One significant example is the

Land Bank of Taiwan which, with mortgages accounting for around 36 percent of the total loan portfolio, has recently announced that it will reduce its mortgage loan exposure by 10 percent this year.


Source: Company reports, CENS.com


Indonesia

Indonesian banks are in a fairly comfortable situation in comparison to their global counterparts. Indeed, the recent global economic downturn has had little impact on most Indonesian banks, which have enjoyed lower NPLs and strong loan growth overall.

Since 2006, gross NPLs for most major Indonesian banks have remained below the regulatory limit of 5 percent. As outlined above, average NPL ratios for key banking segments are around 3 to 3.4 percent. It should be noted however that the decrease in NPL (on a net basis) might partially be attributed to the impact of the first adoption of a new

Indonesian GAAP (PSAK No. 55R on “Financial Instruments – Measurement and Disclosure”), for which the banks now determine their allowance for impairment loss based on individual and collective provisioning instead of using Bank Indonesia regulations. It should be noted that the model used for collective provisioning was introduced last year and therefore has a limited track record, but there is a possibility that the NPL figure might increase in 2011.

On an aggregated level, foreign-owned banks have dramatically reduced their NPL coverage (which had been upward of the 5 percent limit imposed

“While Indonesia had not seen any NPL sales in the first four months of the year, there are indications that state-owned banks may initiate sales in the near future.”

Since 2006, gross NPLs for most

major Indonesian banks have remained below the regulatory limit of 5 percent.

0

10

20

30

40

50

60

Figure 57: Commercial banking sector NPLs

2001 2002 20072006200520042003 20092008 Q12011

2010

12.2%

39 28 30 25 53 48 41 42 48 45 51

7.5%6.8%

4.5%

7.6%

4.1%

6.1%

3.3%3.2%2.8%2.6%

Non Performing Loans (IDR bn) NPL Ratio (%)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%


Source: Bank Indonesia


Figure 58: Asset quality performance (Gross NPL)

1.0% 1.0%

BCA BRI Bank DanamonIndonesia

Bank Mandiri BNI

1.0% 1.0% 1.0%

3.0% 3.0% 3.0% 3.0% 3.0%

2.0%

4.6%

3.2%3.0% 3.0%

4.9%

2.7%

2.4%

3.5% 3.5%

5.0%4.8%

4.3%

3.8%

3.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

FY08 FY09 FY10 FY11e FY12e

Historically, NPL sales by state-

owned banks have been difficult due to strict requirements for a number of government approvals in order for the sale to proceed.

Perc

enta

ge

State-owned banks

Source: Company reports; Morgan Stanley Research

Figure 59: NPL ratios of financial institutions

Foreign-owned banks Other banks

Commercial banks

Mar-

10

Apr-10

May

-10

Jun-1

0Ju

l-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-1

1

Feb-1

1

Mar-

11

Note: Other banks include: Foreign exchange commercial banks, non-foreign exchange commercial banks,regional development banks and joint venture banksSource: Indonesian banking statistics

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%



on incumbent banks) over the last six months to a level more comparable to their peers in the Indonesian market space.

Interestingly, in the first quarter of 2011, the country’s central bank (Bank Indonesia) began to encourage banks to increase lending and attain a minimum loan-to-deposit ratio of 78 percent. Many industry experts have voiced concern about this however, citing the potential to lead to an increase in bad loans and reduce margins for lenders. Regardless, the financial industry regulators remain confident about the stability of the overall system.

Regulatory changes for NPLsHistorically, NPL sales by state-owned banks have been difficult due to strict requirements for a number of government approvals in order for the sale to proceed.

However there are now proposals to amend these regulations, which (if approved), should allow for a more streamlined process. For example, under the current system, the Financial Minister must provide approval for the treatment of an NPL portfolio owned by a state-owned bank. But under the proposed revisions, receivables will be allowed to be solved without such approval and, instead, will be dictated by company policy.

While commentators expect the provision treatment to remain robust so as to avoid wealth loss to the state, the new regulation is likely to make NPL sales an easier choice for state-owned banks.

Property market growth back on trackIndonesia’s real estate sector outlook seems stable and positive. In large part, this is due to the growing strength of the economy and the rising purchasing power of middle-upper income groups. And while the residential property market remained weak overall, continuous price increases have been the result of the increasing cost of construction materials, labour costs and higher permittance fees.

Surveys show that the Residential Property Price Index (RPPI) for the first quarter of 2011 had increased to 4.48 percent (up from 2.53 percent in the same quarter last year). But it is generally believed that there continues to be reasonable demand for residential properties, despite unfavourable interest rate conditions.

OutlookIndonesia is expected to see strong loan growth in the region of 20–25 percent through 2011. In the first four months of 2011, loan growth stood at a staggering

24 percent. However, total loan growth is increasing faster than the NPL growth rate (estimated to remain well below the regulatory limit of 5 percent over the next two to three years), leading to an overall reduction of the NPL ratio.

And while the market did see a rise in NPLs at the beginning of the year, it is still too early to say if this will be seen as a threat by authorities, particularly in light of the positive outlook predicted by market analysts.

It should be noted that, given the banks’ prudent lending practices and well-capitalized systems, there have been no NPL sales in the sector so far this year. However, should the proposed regulatory changes referred to above occur, then it is likely that one or more state-owned banks will investigate a sale process in the near future.

Surveys show that the Residential

Property Price Index (RPPI) for the first quarter of 2011 had increased to 4.48 percent (up from 2.53 percent in the same quarter last year).



India

The Indian NPL portfolio market continues to remain relatively active, albeit with mixed results as a number of portfolios failed to trade in recent times.

In India, banks typically look to sell NPLs that have been non-performing for two years or more, primarily to generate liquidity. However, most banks appear to prefer selling older NPLs (in excess of five years) in order to reduce their gross NPL numbers and add to the bottom line.

There have been a number of transactions that have either occurred or been announced in 2011, however they have all been quite small with principal balances of less than USD 50 million. And while several banks (Union Bank of India, Central Bank of India, Dena Bank, Bank of Baroda, Bank of India, State Bank of India, and UCO Bank) are often front runners for sales, the closing rate is actually somewhat low due to valuation gaps between the vendors and buyers.

According to the latest data released by the Reserve Bank of India (RBI), gross NPLs of commercial banks reached INR847 billion (USD 19 billion) at the end of March 2010, a 24 percent increase over 2009. That said, NPL ratios have continued to decline over the last few years with the NPL ratio standing at 2.4 percent at the end of March 2010, versus 5.2 percent in March 2005. However, given the increase in bad debts from state-run banks (reported to be approximately INR300 billion (USD 6.7 billion) as of December 2010, the market may begin to see another rise in the

level of NPLs held by banks. Indeed, the estimated NPLs of all government-run banks (state and federal) are reported to have topped INR680 billion (USD 15.3 billion) as of December 2010 with many of the problem loans found within the agricultural sector.

In its 2010 banking report, the RBI highlighted NPL management and liquidity as two of the most critical factors for banks in the coming years. The authority also predicts a deterioration in the quality of restructured advances. And while RBI relaxed provisioning norms for banks in April 2011, they also increased the provisioning for bad loans by up to 10 percent.

Figure 60: Banking-sector NPL

Source: Reserve Bank of India (financial year ending 31 March)

“India’s banks are expected to see an overall increase in NPL ratios in the near future, but ongoing gaps in expectations between buyers and sellers continue to hound the market.”

0

100

200

300

400

500

600

700

800

900

NPL (INR bn)

2005 2006 20082007 2009 20100.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

NPL Ratio (%)

5.2%

580512 503

558 682 847

3.5%

2.7%2.4% 2.4% 2.5%



0

50

100

150

200

Figure 61: Asset quality indicators

NPL (INR bn) – 2009 NPL Ratio (%) – 2009

NPL (INR bn) – 2010 NPL Ratio (%) – 2010

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

163

178

3.3%

3.0%

4.3%

6.5%

3.3%

1.7% 1.7%2.3%

2.0%1.5%

2.4%

1.9%1.4%

2.0%

1.4%1.8%

96 93

25

45

28 32

1927

1421

16 20 20 18

StateBank of

India

ICICI Bank ofIndia

PunjabNational

Bank

UnionBank of

India

IDBI SyndicateBank

HDFC

Source: Reserve Bank of India (financial year ending 31 March)

Fully 81 percent of loans in the Indian banking sector are thought to be comprised of low and moderately risky loans. And while Indian financial institutions are required to allocate 40 percent of lending to specific priority sectors, at least 50 percent of bad loans already relate to such sectors, with agriculture representing a large majority of those.

Despite the pressure from government towards priority sector lending, many of the nationalized banks (in order to align themselves to stringent capital

adequacy norms under Basel) are selling their NPL portfolios to AMC at a discount. This trend has been further influenced by the RBI’s objection to the ‘strong-arm tactics’ employed by a number of institutions in recovering loans, resulting in more banks being inclined to sell their NPLs.

In fact, commercial banks and AMCs are jointly developing standardized processes for auctioning stressed assets in the banking sector in an effort to revive the secondary market for bad loans. And while this is widely expected to expedite the sales process, growth of the bad loan market may in fact slow down as RBI’s recent guidelines begin to restrict the AMCs’ ability to convert such loans into equity, thereby making it more difficult to monetize them. Furthermore, the valuation gap between banks and AMCs continues to remain a key challenge in NPL transactions.

Besides selling NPLs, banks are also seeking to reduce their non-performing inventories by organizing recovery camps throughout the country. These camps provide a forum for borrowers to directly discuss their repayment problems with senior bank executives with the intention of arriving at a mutually acceptable solution. A number of key bodies also support the NPL recovery, including, Lok Adalats, Debt Recovery Tribunal and SARFAESI Act.

Banks also fear that their NPLs may increase by as much as 150 percent due to the introduction of the Core Banking System (CBS), which banks will need to

A number of key bodies also

support the NPL recovery including, Lok Adalats, Debt Recovery Tribunal and SARFAESI Act.



Given the potential for only moderate

credit growth expectations (on account of rising borrowing costs), increasing pressure on debt servicing and the impact of certain events (such as FCCB redemptions, real estate sector slowdown, IFRS applications), many observers expect the NPL ratio to increase in the near future.

adopt by September 2011. The system is designed to automatically process and update transactions and help identify NPLs on a daily basis.

It is worth noting that bank rates have seen consistent increases over the last year following rate hikes by RBI in a bid to contain high inflation. Not only are the higher interest rates putting pressure on credit growth for banks, they are also expected to lead to an increase in NPLs.

SBI, India’s largest bank, has been facing significant pressure with an NPL ratio of 3.3 percent in March 2010. With a bad loan portfolio of INR253 billion (USD 5.7 billion), SBI itself accounts for almost 30 percent of the country’s NPLs. As a result, SBI has recently indicated a stricter NPL resolution regime, including taking a more aggressive stance in declaring defaulting borrowers as willful defaulters.

Real estate According to the latest data from the National Housing Bank, housing prices across eight major cities declined by 15 percent in the first quarter of 2011, largely due to a slowdown in property demand. The situation is aggravated by increasing construction costs, with key construction components such as steel, cement, labor and bricks seeing increases of 18 percent over the past two years. Inventories of unsold homes are also rising, with Mumbai at a 28-month high.

Rising borrowing and construction material costs may force distressed debt sales in the real estate sector. According to Knight Frank, Indian developers will be expected to repay USD 40.8 billion to various lenders (including banks and private equity funds) over the next two to three years.

FCCBsThe RBI has also voiced concern regarding companies that have raised funds through Foreign Currency Convertible Bonds (FCCBs). FCCBs were frequently used to raise funds during 2005–2008 when the equity market was at high levels, but with almost INR315 billion (USD 7 billion) worth of FCCBs falling due by March 2013, a lot of companies are expected to face problems. To facilitate the redemption of existing FCCBs, the RBI has allowed Indian companies to take fresh external loans and issue new FCCBs to address debt obligations. That said, FCCB redemption is likely to lead to higher defaults, especially for relatively smaller players.

OutlookGiven the potential for only moderate credit growth expectations (on account of rising borrowing costs), increasing pressure on debt servicing and the impact of certain events (such as FCCB redemptions, real estate sector slowdown, IFRS applications), many observers expect the NPL ratio to increase in the near future.



Malaysia

The guidelines issued by Bank Negara Malaysia (BNM) in December 2005 allowing banks to sell NPLs (subject to certain conditions) has been an ongoing catalyst to NPL sales in Malaysia, as the guidelines provide banks with an opportunity to quickly resolve NPLs.

Malayan Banking Berhad (Maybank), the largest bank in Malaysia, conducted the first ever sale in Malaysia through a competitive open auction. It sold its first major corporate NPL comprising two tranches totaling MYR2.1 billion in June 2007 to Standard Bank of South Africa Group and Standard Chartered Bank Group. The sale was completed at MYR424.8 million, allowing Maybank to realize an estimated gain of MYR256

million. The bid, which involved a two-stage process, attracted a high level of interest, with over 20 potential investors at the initial stage. The first stage involved the investors submitting non-binding indicative bids, following which four bidders were selected to submit bids for the auction during the second stage.

The following year, Maybank entered into an agreement with Standard Chartered Bank (Hong Kong) Limited Alternative Investments and Orix Leasing Malaysia for the disposal of a secured residential portfolio with a face value of MYR1.4 billion. This portfolio consisted of more than 8,000 NPL accounts.

“Malaysia’s NPL market seemed to be picking up steam in 2007 and 2008, but has since dropped off completely, largely due to lower NPL ratios overall and greater financial strength at local banks.”



In the same year, CIMB Bank Malaysia Bhd (CIMB), Malaysia’s second largest bank, announced that it had sold a portfolio to Standard Bank Group of South Africa following a competitive bid. This portfolio consisted of 202 corporate and small and medium-sized enterprise accounts with a value of MYR1.1 billion. It realized a gain of MYR106 million from the sale. And while the bank announced that it was exploring the possibility of selling another NPL portfolio following the initial sales, plans for this sale have yet to be released.

These successes have caused other banks to explore the sale of NPLs by taking a similar approach to that of Maybank and CIMB. For example, in 2008 Bank Islam Malaysia Berhad announced that it went through the process of appointing an advisor to evaluate the NPL sale. However, the bank later decided not to go ahead with the sale citing confidence that it was able to bring down the NPL ratio without resorting to a sale. It is worth noting that not all transactions that have taken place in Malaysia were conducted via competitive open auctions with virtual data rooms.

The momentum for NPL sales in Malaysia has seemed to drop off since the end of 2008, with no NPL sale transactions reported. Most financial institutions have managed to lower their NPL ratios and seem to have sufficient financial strength to hold onto their NPLs. This decision to hold is being further influenced by a pricing expectation gap between buyers and sellers.

That said, feedback from global investing institutions indicates that Malaysia continues to be a preferred destination for investment, with a creditor friendly regulatory environment.

Loans in arrears accounted for 4.1% of total loans as at end 2010, which remained relatively stable since 2008.

Table 62

2009 January 2011

% %

Net NPL ratio 1.8 2.2

Note: In 2010 banks adopted FRS 139 Source: Bank Negara Malaysia website

This portfolio consisted of 202

corporate and small and medium-sized enterprise accounts with a value of MYR1.1 billion. It realized a gain of RM106 million from the sale. And while the bank announced that it was exploring the possibility of selling another NPL portfolio following the initial sales, plans for this sale have yet to be released.





KPMG’s Portfolio Solutions Group’s Service OfferingA Dedicated Portfolio Solutions GroupKPMG’s Portfolio Solutions Group understands the complexity of loan sales. In the last 24 months alone, our team of professionals has helped both buyers and sellers close numerous transactions and secure real value for their loan portfolios.

KPMG member firms can offer both buy-side and sell-side clients balanced, independent advice based on years of hands-on experience and extensive global insight.

We have worked with a wide variety of vendors and purchasers, including financial institutions, commercial banks, development banks, utility providers, governments, private equity funds, insurers and government asset management companies, and have built a strong reputation for cutting through the complexity of loan sales to deliver highly tailored and insightful advice.

Sell Side ServicesWith extensive experience closing numerous portfolio transactions around the world, our team works with portfolio vendors to guide them through each stage of the loan portfolio sales process. From early preparatory steps of portfolio analysis and buyer identification through to the execution of SPAs and financial closing, KPMG firms’ professionals provide a wide range of services, including:

Assessing current portfolio values and market demands: Face value and market value can often be substantially different. By leveraging our strong relationships with investors, KPMG professionals undertake market soundings and indicative bid processes to provide vendors with clear insight into the existing appetite and potential market value of their debt portfolios.

Identifying buyers and selecting assets: KPMG’s global Portfolio Solutions Group tracks specialist buyer preferences and uses this knowledge to attract the right buyers to deals throughout Europe, Asia Pacific and the Americas. The additional benefit of having a dedicated in-house broker dealer based in the US firm’s New York office, means that KPMG has a network of experienced professionals in key locations around the world to support multi-jurisdictional sales.

Aligning sale processes and portfolios to maximize value: Not all debt portfolios can be pushed through the same sale processes. Indeed, by

investing the proper time into reviewing the underlying portfolio information and understanding buyer preferences, sellers are better able to meet their own objectives and align to buyer demand.

Navigating buyer negotiations and optimizing sale terms: KPMG professionals leverage their experience gained from numerous successful portfolio sales around the world to deliver insight into drafting and negotiating the vendor Sale and Purchase Agreement (SPA), including methods for getting vendors comfortable with the “must have” versus “nice to have” clauses in the contract. This in turn results in buyers bidding with more confidence as a number of transaction risks are already dealt with in the SPA.

Understanding the implicit value of portfolios: Selling a portfolio is not always the best outcome of a strategic portfolio review. KPMG experts spend time prior to starting a sales process to determine whether buyer and seller expectations are aligned. Being able to understand and communicate the key drivers of the portfolio’s performance, and – by closely monitoring the keep/sell value – can help clients select the strategic best outcome to match their corporate objectives.

Independent and transparent process: By acting as independent sales advisors, KPMG professionals provide both buyers and sellers with confidence that the sales process will be fair and at arm’s length, particularly in bids or transactions involving state-owned entities.



Buy Side ServicesKPMG firms’ professionals are well placed to support buyers in sourcing, valuing and reviewing loan portfolio assets. And by combining our strong market relationships and global network, we provide buyers with the confidence of knowing that their purchases align with their core business assets, achieve competitive pricing and provide sustainable value for their business. We deliver a wide range of buy-side services, including:

Deal Sourcing: KPMG professionals maintain deep relationships with dedicated portfolio and strategic buyers to identify and source portfolio opportunities that match buyers’ unique investment criteria.

Due diligence and valuation: Whether for a stand-alone portfolio or as part of a wider asset acquisition, KPMG professionals leverage local expertise and global processes to provide market pricing assessments, due diligence services, and assessments on underlying portfolio data, and deliver

expert insight into prevailing market conditions and industry benchmarks.

Deal structuring: Our deal structuring services cover securitization, tax, regulatory and accounting considerations, meaning that KPMG can help buyers understand the implications of their asset purchases – both from their own perspective and that of the vendor – to help clients better negotiate and close deals, and achieve greater value from their portfolio over the long term.

Post deal services: Following successful acquisitions, KPMG professionals work with buyers to develop and implement sustainable implementation plans with the aim of ensuring a seamless integration of assets into their overall portfolio. With extensive experience conducting in-house and external servicer reviews, we also provide trusted assessments of borrower restructuring plans, compliance with processes and internal control reviews.

Global strategies with local execution In today’s global marketplace, both buyers and sellers must be able to work together to confidently structure deals across multiple jurisdictions and markets at once. With offices in more than 145 countries, KPMG firms’ professionals understand the benefits of creating global strategies with local executions. Our Portfolio Solutions Group is supported by KPMG’s global network of member firms that seek to provide our clients with a consistently high level of quality and expertise no matter where the assets are located.



Glossary of AcronymsABS Asset Backed Securities AMCs Asset Management CompaniesCMBS Commercial Mortgage-Backed Securities CRE Commercial Real EstateDCAs Debt Collection Agency DPs Debt PurchaserECB European Central BankEDW Expanded Discount Window EUROBOR Euro Interbank Offered RateFDIC Federal Deposit Insurance CorporationFROB Spain’s Fund for Orderly Bank RestructuringG20 The Group of Twenty (Finance Ministers and Central Bank Governors)GDP Gross Domestic ProductICB UK’s Independent Commission on Banking IMF International Monetary FundIOF Tax on Financial Operations IVAs Individual Voluntary ArrangementsJVs Joint VenturesLDR Loan Default Rate LIBOR London Interbank Offered RateLP investors Limited Partnership InvestorsLTVs Loan-to-ValueMFIs Monetary Financial InstitutionsNPL Non-Performing LoanOREO Other Real Estate OwnedPFI Private Finance InitiativeREIT Real Estate Investment TrustREOs Real Estate Owned Assets RMBS Residential Mortgage- Backed Securities ROE Return on EquitySIFIs Systemically Important Financial Institutions SIVs Structured Investment Vehicles SME Small and Medium EnterprisesSPV Special Purpose VehicleUPB Unpaid Principal Balance




Contacts

KPMG’s Portfolio Solutions Group operates across KPMG’s global network of firms, with experienced professionals based in leading financial centers around the world. Please get in touch with one of the team listed below, or your local member firm contact, for more information:

Portfolio Solutions Group

Graham MartinPartner, LondonM: +44 78 2519 6802E: [email protected]

Stuart King Partner, MadridM: +34 914 56 82 69 E: [email protected]

Frank Janik Partner, BangkokT: +66 81 869 6522 E: [email protected]

Andrew JenkeDirector, LondonM: +44 7901 512 747 E: [email protected]

Hernan Magarinos Director, New YorkM: +1 917 656 6042 E: [email protected]

David White Director, BangkokT: +66 2 677 2682 E: [email protected]

Sudhi Joshi Vice President, New York T: +1 607 592 6258 E: [email protected]

Nick ColmanAssociate Director, FrankfurtM: +49 17 3541 8596 E: [email protected]

Jonathan HuntAssociate Director, LondonM: +44 7748 701 509 E: [email protected]

Nicolas MalagambaAssociate Director, London/MadridM: +44 7197 132 969 E: [email protected]

Federico Montero Associate Director, London M: +44 77 8522 5621 E: [email protected]

Bruno PerriManager, BarcelonaM: +34 616 71 37 49 E: [email protected]

Sundeep Lakhtaria Manager, London M: +44 77 9581 2518 E: [email protected]

Europe

Guy WarringtonPartner, LondonM: +44 7802 608 583 E: [email protected]

Joel Eduard Grau BlasiDirector, Madrid M: +34 639 92 65 09E: [email protected]

Edwin HerriePartner, AmsterdamT: +312 0656 7981E: [email protected]

Alan BoynePartner, DublinT: +353 1 4102645 E: [email protected]

Fabrizio MontaruliPartner, RomeT: +39 06 809711 E: [email protected]

Frank NagelPartner, FrankfurtT: +49 69 9587 4238 E: [email protected]

Mark BownasPartner, Budapest T: +36 1 8877 122 E: [email protected]

Africa

Dapo OkubadejoPartner, LagosT: +234 1271 0533E: [email protected]

Americas

Scott MarcelloPartner, New York T: +1 212 954 6960 E: [email protected]

Salvatore MilanesePartner, Brazil T: +55 1132 458 324 E: [email protected]

Asia

Chris WhittinghamPartner, BangkokT: +66 2677 2104 E: [email protected]

David HeathcotePartner, SydneyT: +61 2 9335 7193 E: [email protected]

WoonChee OoiPartner, Petaling JayaT: +60 3772 13388 E: [email protected]

John SimPartner, BangkokT: +66 2677 2288 E: [email protected]

Hiroyuki OshidaPartner, TokyoT: +81 3 5218 6702 E: [email protected]

Fergal PowerPartner, Hong KongT: +852 2140 2844 E: [email protected]

Kyung Jae YuPartner, SeoulT: +82 2 2112 0753 E: [email protected]

Bhavesh Parekh Director, India M: +91 986 767 6677 E: [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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Publication name: Global Debt Sales – Issue 2Publication number: 110815Publication date: September 2011

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