Banks ponder shifting troubled loans off balance sheets as ECB pressure mounts

Ireland's main banks are considering new ways to shift loans in trouble off their balance sheets as they face mounting pressure from the European Central Bank to deal with trickier mortgages almost a decade after the financial crisis began.

Some of the banks are weighing setting up special purpose vehicles (SPVs) that would house bundles of non-performing loans (NPLs), according to sources. They would need to sell a majority stake in the vehicles to outside investors, possibly including overseas private equity firms, to be able to reclassify the loans as no longer being on their books.

However, unlike direct loan sales, which banks are pondering as they work on strategies for remaining problem loans, using SPVs would give banks an option to retain an interest in the assets and continue to service the loans.

Separately, sources said that banks are beginning to assess the possibility of following the lead of some overseas buyers of Irish mortgages in recent years and use international bond markets to refinance portfolios with high levels of NPLs.

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Non-performing loans

US private equity firms Lone Star and Oaktree affiliate Mars Capital have moved in the past seven months to refinance hundreds of millions worth of mainly non-performing loans bought from Irish lenders in recent years.

Market sources said that the successful so-called residential mortgage backed securitisation (RMBS) deals – including loans originally written by Irish Nationwide, Permanent TSB's former subprime mortgages unit and Bank of Scotland (Ireland) – show that there is demand for such bonds.

However, the banks would have to structure any potential RMBS deals involving troubled mortgages as off-balance sheet transactions to be able to remove the loans from their balance sheets.

The ECB's banking supervision arm took over direct oversight of AIB, Bank of Ireland, Permanent TSB and Ulster Bank, as it assumed responsibility of euro zone banks in late 2014. Ireland's domestic banks cut their level of NPLs from an average of 27 per cent of their loan books in 2013 to about 14 per cent at the end of last year as they restructured tens of thousands of unsustainable debt and the economy rebounded.

Supervisory intrusion

However, the ratio remains well above the EU average of about 5 per cent. The ECB has been putting pressure on banks – particularly in Cyprus, Greece, Italy, Portugal, Slovenia and Ireland – to come up with strategies to lower NPLs on their balance sheets.

Banks that fail to come up with proper plans to resolve NPLs in the coming years ultimately face increased supervisory intrusion, potentially higher capital requirements and restrictions on shareholder dividends.

A spokesman for AIB said the bank “continues to review all options in relation to reducing impaired loans”. Spokespeople for Bank of Ireland, Permanent TSB, Ulster Bank and the Central Bank declined to comment.