KBC’s sale of bad loans to kick-start wider wave of disposals

Analyst tells clients to expect further nonperforming loan sales in coming months

KBC Bank Ireland’s announcement on Monday of its agreed sale of €1.1 billion of nonperforming loans (NPLs) to US distressed debt group CarVal is a deal that would ordinarily have been transformational – moving the bank from the ignominious situation of having the highest problem loans ratio among banks in the Republic, at almost 13 per cent, to the lowest.

It will leave the bank with €250 million of remaining NPLs, according to a company spokeswoman. That equates to 2.4 per cent of its total loans. It’s a ratio that is less than half of the next lowest, Bank of Ireland’s 5.8 per cent, and is in line with the EU average, where regulators want banks in general to converge.

Of course, KBC Bank Ireland's Belgian parent, KBC Group, no longer has any interest in remaining in the Republic, a market where it's difficult for banks to move on borrowers in default and where lenders, as a result, must hold much higher levels of expensive capital in reserve than the EU norm.

The surprise is that the bank reached a deal to sell its NPLs before its wider €9 billion performing loan book, which Bank of Ireland has been in talks to acquire since February, but for which it has yet to sign a legally binding agreement.

Davy analyst Diarmaid Sheridan told clients in a note to expect further NPL sales in the coming months. Ulster Bank's €1.5 billion of problem loans are currently on the market as the UK-owned lender also races to exit the Irish market.

And while the remaining three banks' NPL ratios will naturally decline as they carve up the performing books of KBC Bank Ireland and Ulster Bank between them, analysts expect that they will also test the waters with portfolios of legacy problem loans, before they face a spike in defaults in the coming 12 months as a result of the Covid-19 pandemic.

While Bank of Ireland offloaded €350 million of NPLs earlier this year through a bond market refinancing, and AIB disposed of a portfolio of mortgages that were once valued at €1 billion, both – together with Permanent TSB – have more work to do. AIB's NPLs ratio stood at 6.5 per cent at the end of June, while Permanent TSB's was 7 per cent.

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