Banks scramble to get rid of €100bn in junk loans

Jake Cordell
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Italian lender Monte dei Paschi came out bottom in recent EU stress tests
Italian lender Monte dei Paschi came out bottom in recent EU stress tests (Source: Getty)

European banks either sold or begun working on deals to dump more than €100bn of bad loans in the first half of the year.

Research from Deloitte found EU lenders sold a total of €44bn in non-performing loans in the six months to end of June, with another €68bn of offloads in the pipeline. The total of €112bn is higher than the amount of sales completed in the whole of 2015, in a sign banks are stepping up efforts to bolster their balance sheets.

Italian lenders led the sales league table, with €11.4bn worth of non-performing loans and other so-called non-core assets, defined as loans the bank does not believe are worth keeping, dumped.

The country’s embattled banks are also in advanced negotiations to sell off another €40bn worth of bad debt.

Across Europe, Deloitte estimated banks have around €2 trillion of bad debt, with Italian lenders buckling under €360bn.

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David Edmonds, a partner in Deloitte’s restructuring team said he expected the pace of sales to hold up, as banks battle to turn a profit in the era of super-low interest rates. “Non-performing loans remain a significant drag on a bank’s overall performance, both financially and operationally,” he said.

“Most European institutions are focused on exiting their non-performing loan stocks on an accelerated basis.”

Alarm bells have been sounded on multiple occasions during the first half of the year over the health of the European banking sector.

The International Monetary Fund (IMF), the European Central Bank’s (ECB) chief economist and a host of other analysts have all warned the current business model for many European lenders is unsustainable in an era characterised by weaker growth, lower interest rates and a squeeze on profits.

After selling €40bn of bad debt in 2015, UK banks have completed only three deals totalling €1bn so far in 2016, and there are no unfinished sales currently being negotiated.

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