Abstract
Recent empirical evidence raises doubt about the ability of financial market participants to generate information efficient valuations for capital market instruments whose cash flows are related to residual claims and dependent on real estate income. We contribute to this literature with the examination of value implications of non-performing loan (NPL) divestitures in the banking industry during the period 2012–2018. In a first step, we provide descriptive statistics of the European NPL market, which lacks transparency and publicly available basic information on portfolio size and components. We then analyze wealth effects of distressed loan sale announcements for a uniquely large transaction database with 317 NPL deals, which is largely driven by real estate collateral. Our results show positive stock market reactions for vendor banks following NPL divestitures that tend to be driven by real estate collateral and a size effect.
Highlights
Non-performing loans (NPL), commonly referred to as loans in arrears for at least 90 days, have continuously been characterized as the top priority of the European Central Bank (ECB) and continue to attract central attention
With regards to transaction volumes, while the smaller single-name transactions or portfolio baskets start with gross book value (GBV) of €5 m, the largest transactions amount up to €26bn face value. These large block transactions oftentimes account for NPL disposal into bad-banks or similar government endowed entities
The descriptive analysis reveals that the sell-side of the secondary market is relatively granular, while we face narrow buy-side structures
Summary
Non-performing loans (NPL), commonly referred to as loans in arrears for at least 90 days, have continuously been characterized as the top priority of the European Central Bank (ECB) and continue to attract central attention (see inter alia ECB 2018a, b). With the outbreak of the European debt crisis, the quality of banks’ assets had deteriorated in a manner that, despite robust economic recovery and a variety of regulatory efforts, NPL still today pose a threat to bank and thrift institutions. Against this backdrop, the European regulator requires banks to develop effective strategies for reducing NPL, to set up clear governance and to operate powerful workout structures (ECB 2017). The ECB assists with a variety of guidance measures, and especially since 2014, one of the core advices is active portfolio reduction, effectively requiring banks to sell or securitize their (mostly real estate based) residual claims on NPL holdings to loan investors in the secondary market. Woltering et al (2018) detect equity mispricing of property-holding companies in 11 countries during 2005–2014, which can be exploited using simple trading strategies based on net asset value spreads. Gallo et al (2000), Mori and Ziobrowski (2011) and Cici et al (2011) provide additional evidence in favor of equity mispricing in the case of U.S REITs
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