20 Sep 2022
Banks are continuously putting strategies in place to reduce the number of NPLs in their portfolio. One of those strategies is selling them to either other banks or investors, but how exactly do you make your NPL portfolio more attractive to buyers?
Non-performing loans are those in default. The European Central Bank defines a loan to be non-performing when it is:
Essentially, these are loans that for some reason, likely due to an economic downfall, the borrower does not or cannot make payments. Often, these loans are sold by banks to other banks or investors as there is reduced capital and they need to create space for other profitable resources. Banks may sell non-performing loans to focus on the loans that bring in money each month. They may consider selling these loans at a discount to be more profitable than trying to collect money from an unmanageable borrower.
However, when buying and selling an NPL or even a portfolio of NPLs, there are key factors to consider. Firstly, when purchasing a portfolio, assumptions are often made about the quality of the assets within it and the buyer needs to know exactly what it is that they are buying. Full transparency of the assets will be crucial and this is where data plays a vital role.
Commonly data quality is an issue in such transactions, and when a buyer does not have full visibility of the portfolio, it can lead to presumptions; more often than not investors tend to err on the conservative side and underestimate the worst-case scenario. In such instances, the seller will want to diminish and reduce any post-transaction risks, costs and unwanted claims after the transaction. Increasingly, a concern for the seller is to remove the risk of potential warranty claims after the sale, which is known as representations and warranties, which in layman’s terms means ‘you are getting what you pay for’. Access to reliable insights from the portfolio will minimise potential risks.
Visibility of quality data will also affect the overall sale price of the portfolio. Generally, the seller will receive a lower price when there is a high degree of uncertainty around the asset. This will mean the bidding war will not be as tough and the portfolio may not be that sought after. It is in the interests of both the seller and buyer, if they can quickly identify the gaps in data tapes, this can then make a portfolio more appealing to buyers.
In an increasingly digitised environment, technology can play its part in making portfolios more attractive by offering full transparency of the data quality. This is then indicative of its potential value or how much remediation is needed by the buyer to undertake after purchase and offers a better experience all round.
Our partner company, Resolute Asset Management, has been able to generate insights while investing in technology that helps improve data quality at scale to make faster, better portfolio assessments. Recently Resolute supported a bank in preparing a transaction by remediating its asset data and loading that information on our ActiveEstate platform. Not only did this make it easier for bidders to evaluate the investment, but the winning bidder continued to use ActiveEstate to manage the portfolio. In this instance, both the seller and the buyer benefitted from quality data.
The use of such technology also enables much smoother portfolio transactions and achieves higher portfolio prices with fewer buyer conditions being imposed by remediating the poor data quality.
Jon Hodnett, partner for CEE Bulgaria at Resolute Asset Management explains that,
“Resolute represents buyers of NPL portfolios. We often see where asset information is poor, we see investors discounting those assets by 10-50%+, depending on the information defects. Across a large portfolio, this can be a very material number, which is often further exacerbated by onerous representations and warranties imposed on the seller. Having well-organised and high-quality asset information leads to a smoother transaction at a higher price with less conditionality.”
As the current economic climate continues to be an unsettling place, technological-driven analytics will mean ambiguous NPL portfolios become evidently more prosperous to potential buyers.
