More than €50bn in non-performing loans on Irish banks’ books

More than ¤50 billion worth of non-performing bank loans (NPLs) remained in place in Ireland at the end of 2015, according to a stocktake published on Monday by the European Central Bank.

This was in spite of ¤74 billion worth of face-value loans being transferred from Irish banks to the National Asset Management Agency for work-out after the crash, and a further ¤40 billion reduction in NPLs in the two years from the end of 2013.

Ireland had a total NPL ratio of 19 per cent at the end of last year compared with an average of 7 per cent for the institutions now regulated by the Frankfurt-based Single Supervisory Mechanism.

Time lag

The ECB said the scale of the NPL issue in Ireland “remains high” and noted the “significant \[time\] lag” between a sustainable solution being agreed with a distressed borrower and an NPL reduction being recorded.

“This increased the length of time it takes to reduce NPL levels,” the ECB said in launching a consultation process on guidance to banks on non-performing loans.

The ECB noted that Ireland’s banking sector is dominated by five institutions: AIB, Bank of Ireland, Permanent TSB, Ulster Bank and KBC Bank Ireland.

Its stocktake of the Irish market found an NPL ratio of 18 per cent for households, 26 per cent for non-financial corporations, 38 per cent for SMEs and 44 per cent for commercial real estate (CRE).

The ECB said rising interest rates and Brexit-related economic headwinds could pose a “significant risk“ to the sustainability of continued NPL reduction, “especially given the high Irish household indebtedness compared with European peers and an economy which is heavily export reliant“.

Repossessions

It also cited issues around the timing of repossessions of owner-occupied homes as a “key challenge“ for Irish banks.

“This is not the case, for example, in CRE as the appointment of fixed-charge receivers to take control of defaulted borrowers‘ assets enables a faster enforcement of collateral,“ the ECB‘s paper states.

The ECB also notes that there are no specific national guidelines or rules in Ireland for NPL write-offs. The Central Bank‘s provisioning guidelines refer to NPL write-offs but do not set out requirements or a methodology for this topic.

The ECB‘s paper shows that there were 3,578 corporate insolvencies in Ireland between 2013 and last year, with the vast majority being creditors‘ voluntary liquidations.

Examinerships

The number of examinerships, which provides court protection for companies from their creditors to allow for a rescue plan to be put in place, amounted to 58 in the same period.

In terms of personal insolvencies, the number of cases handled by the courts since the introduction of legislation four years ago has been 840 while there have been 985 household bankruptcies since the term was reduced from 12 years.

The ECB‘s consultation process runs until November 15th and includes a public hearing on November 7th. The high-level group dealing with this issue is being chaired by Irish woman Sharon Donnery, who is a deputy governor at the Central Bank of Ireland.

The NPL guidance addresses the main aspects regarding strategy, governance and operations, which are regarded as key to successfully resolving NPLs. The guidance provides recommendations to banks and sets out some best practices that ECB banking supervision has identified and will constitute its supervisory expectations in the future.