Non-performing loans in ASPAC report

Is the region prepared for what lies ahead?

Is the region prepared for what lies ahead?

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Non-performing loan ratios are on the rise in ASPAC. And the market is expected to remain highly competitive for sellers. Banks will likely need to build strong asset management competencies if they hope to generate higher bid prices and improve recovery rates.

In this report, KPMG's ASPAC Portfolio Solutions Group explores the key trends driving NPL ratios across the region, unpacks the various options available to banks, and provides insights and ideas to help banks enhance their existing asset management capabilities.

Get the highlights below. Then download the full report to read more.

Expect NPL ratios to rise

Banks in ASPAC will need to monitor their asset portfolios closely -- it is highly likely that NPL ratios will surged exponentially over the coming year. The magnitude of this increase will vary, with some countries and territories hit worse than others.

  • Government COVID-19 programs unwind
    As governments begin to unwind the relief packages and payment holidays, a wave of problem assets arising from COVID-19 is likely to besiege banks and flood the capital markets.
  • Uneven / slow economic recovery post COVID-19
    While a few ASPAC economies began to bounce back in the second half of 2020 after an initial slump, most of the countries are yet to see a full-fledged recovery in terms of either output or growth momentum. The pace of recovery will continue to be slow and uneven, going forward.
  • New accounting standards
    The requirement to meet International Financial Reporting Standards (IFRS 9) has brought about an increase in terms of credit impairment.
  • Ongoing trade tensions
    Trade tensions between the US, China and Europe have placed pressure on financially indebted companies in industries such as oil and gas, airlines and tourism-related sectors.

Banks have two options

Banks can choose from two approaches -- find a sustainable organic fix to monitor and manage NPLs AND/OR transfer identified NPLs to non-bank market participants. Both options may be complex, tricky to manage and requires asset management expertise.

  • Internal Management
    Usually an Asset Management Company with an intensive focus on the top percentile of NPLs to achieve rehabilitation and restructure through negotiation and management of NPLs, and/or bankruptcy (or some other form of enforced, statutory recovery) of NPLs without hope of reform.
  • Sale of Loans
    The strategic `quick-fix' of packaging NPLs for future sale and/ or securitization. This involves a variety of techniques, usually packaging certain loans into tranches with a view to making each tranche more attractive to the prospective bidder.

Getting prepared

Banks will likely need to build strong asset management competencies to generate higher bid prices and improve recovery rates. A quick fix would be to hire advisers with expertise in packaging NPL tranches and assessing valuations, particularly the ones who have access to this deep pool of capital. Regardless, these four tips should help you prepare.

  • Find the right solution for your organization
    Banks should carefully look at their restructured or NPL portfolios, assess their internal valuation and consider the long-term cost to manage and work out versus the more immediate market valuation.
  • Get the right data and process
    Having a solid, well-managed process and data quality can help reduce information and valuation asymmetries, provide reassurance to investors, and potentially generate higher bid prices and recovery rates for the selling bank.
  • Build from experience
    Banks may also need the right and timely expertise, often provided by expert advisers, to identify eligible NPLS and recommend a strong network of buyers to execute the transfer of assets.
  • Leverage technology
    Managing NPLs is time sensitive, and therefore a data analytics and AI-driven digital infrastructure can help banks save time and costs associated with the process.

Five Predictions for NPLs in the ASPAC region

  • The overall NPL ratio is likely to rise across ASPAC over the next 12 months.
  • The market is expected to remain highly competitive for sellers.
  • Regional AMCs are expected to emerge, with specialized knowledge in managing and working out NPLs.
  • Banks in ASPAC will work towards developing a seamless NPL sales process.
  • Market entry and participation should become easier, particularly for small and mid-sized sellers.
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Wilson Pang

Wilson Pang
ASPAC Head of Portfolio Solutions Group,
KPMG in China

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