Thomas Landschreiber was one of the few managers who dared to take chances in the aftermath of the 2008 financial crisis, a time when most other investors were running scared.
The co-founder and chief investment officer of Corestate Capital, a Swiss asset manager and property firm, snapped up cheap housing in Germany that nobody wanted. He refurbished the properties, brought in higher-paying tenants, and waited for the market to turn in his favor.
Starting last year, it was time to cash in. Corestate sold most of its so-called “distressed” assets, almost €500 million, in 2013. The Swiss investors earned 1.6 times their initial investment.
“We waited until there was strong demand for these kinds of portfolios to then divest,” Mr. Landschreiber told Handelsblatt Global Edition.
A flood of money has moved into Europe over the past year, all from foreign investors who have discarded their crisis-era caution in the hopes of cashing in on a fire sale, just as Corestate did.
According to Deloitte, investors have amassed a war chest of €300 billion mainly from hedge funds, private equity firms and asset managers in the United States and Britain.
“We had many confidential discussions with banks. When will be a good time to sell, if not now?”
But so far, German banks, the sector with the biggest potential to cash in on the demand, are refusing to sell. They have been turning away offers for an estimated €1 trillion non-core assets, including up to €250 billion in non-performing loans, even though buyers are knocking repeatedly on their doors, experts say.
“We had many confidential discussions with banks. You would have thought they would consider themselves in a prime position,” Mr. Landschreiber said. “When will be a good time to sell, if not now?”
There are several reasons why German bankers are balking.
Until recently, the German economy outperformed most of Europe and interest rates were low, which has reduced internal pressures within banks to sell. Also, a large percentage of the German banking sector is in government hands through state-run and community banks and savings and loans, and political overseers don’t want them to consummate sales and realize losses, according to investors. By contrast, financially strapped southern European countries have been aggressively selling unwanted banking assets at a record pace, according to investors.
But this logjam in Germany could soon be broken when the European Central Bank later this month completes its new financial stress tests of euro zone financial institutions, which could expose weaknesses and raise pressure on individual banks to clean up their acts.
Time may be running out and frustrated buyers may look elsewhere. Some are already setting their sights on other markets.
“There are some opportunities, but there are a lot of players chasing them,” said Ahmed Hamdani, a managing director in London of Bayside Capital, a distressed-debt arm of HIG Capital, a private equity firm with more than €13 billion under management.
Other places in Europe are “easier and less competitive” to make money, Mr. Hamdani said.
It’s not for lack of supply.
German banks are holding more non-core assets than any other country in Europe.
Daniel Mair, a partner in Frankfurt at EY, formerly Ernst & Young, said there are about €200 billion to €250 billion in non-performing loans – many the result of bad bets made before the 2008 financial crisis. Another €800 billion are “non-core” assets that banks themselves have targeted for potential sale.
The biggest obstacle to these sales is that most German banks don’t feel an urgency to sell. Unlike their peers in southern Europe, most German banks were not threatened with collapse by the crisis. Many still take a longer-term view, thinking they have time to improve their profits, and that their bad bets will still eventually pay off.
“They’re not under pressure,” said David Edmonds, a London distressed debt expert at Deloitte.
“There has been some movement, but we can only plea with management boards to work harder on this.”
Many German banks insist they are already actually ahead of their own internal targets for winding down unwanted assets. The robust economy means the losses on non-performing loans are not as bad as they used to be – some banks are actually making a profit off their unwanted assets.
What’s the rush? some ask.
Commerzbank, for example, is still losing money on its €92 billion portfolio of risky real estate, shipping loans and public bonds. The bank has made some high-profile sales in recent months and said it will wind down the portfolio faster than expected. Like many other German banks, much of the selling has been on portfolios abroad rather than at home.
“The big NPL (non-performing loan) volume transactions have taken place outside Germany and the volumes in Germany are still not huge,” said Andreas Steck, a Frankfurt partner at the law firm Linklaters. “With respect to distressed assets, many banks argue that market prices do not mirror adequately the existing upside potential.”
Commerzbank’s chief financial officer, Stephan Engels, has said that most of the bank’s remaining bad assets will simply be held to maturity, apart from maybe the occasional “opportunistic” investment. This wait-and-see attitude has been a source of frustration not just for investors, but for some shareholders who want the bank to move faster to improve profitability.
“There has been some movement, but we can only plea with management boards to work harder on this,” Klaus Nieding, a lawyer who represents private shareholders and is a member of Commerzbank’s supervisory board, told Handelsblatt Global Edition.
Mr. Nieding fears German banks may miss a good window of opportunity.
“The problems will come when the situation on the market turns worse,” Mr. Nieding said.
“There are some opportunities, but there are a lot of players chasing them.”
Investors face a waiting game. Many had expected German banks to start selling non-performing loans as far back as 2012. Back then, investors that had left the market in 2009 began to return, flooding German fund managers with money. Most were attracted by the prospect of earning high returns in one of the safest countries in the world.
“Investors came to us again and said ‘Here’s some more money. Please do it again.’ Only this time it was extremely difficult, nearly impossible to find existing properties that offered high yields,” Mr. Landschreiber of Corestate said.
Part of the problem is politics. Many regional banks in Germany, such as HSH Nordbank and NordLB, are state-backed. If bank managers want to write off a bad loan, the mayor of Hamburg is the one who has to write the check, said one investor, who declined to be named.
Commerzbank, Germany’s second largest bank, is also still 17-per-cent owned by the German federal government after receiving an €18 billion bailout to survive the financial crisis.
“In principle, the banks would have gotten rid of these risks faster,” said Hans-Peter Burghof, a banking professor at the University of Hohenheim. “The state has never been as involved in the business of banks as it is the case today.”
Many believe a fire sale could still take place, but there needs to be a trigger.
The European Central Bank could be a catalyst when it releases its stress test results for European banks – including more than 20 in Germany – on October 26. If the ECB says the banks don’t have enough reserves, one way for banks to meet these demands would be to shrink their balance sheets.
“I believe the ECB (stress test) will somewhat speed up and definitely encourage transactions in non-performing loans,” said Andreas Dielehner, a partner at banking consultants KPMG.
Mr. Edmonds of Deloitte suspects the ECB’s examination of bank asset quality could expose as much as €500 billion in additional bad loans on balance sheets, bringing the total number of unwanted assets in Europe to about €3 trillion. This may push even German banks to act.
Shipping loans could especially on the block, according to analysts. Germany’s three major banks involved in shipping – Commerzbank, HSH Nordbank and NordLB – have about €50 billion in outstanding shipping loans on their books. But even this is a drop in the bucket. The big move to sell therefore has to come from the financial institutions themselves.
“If the market does come to Germany, it won’t be because of the ECB. It will be because banks have decided the time is right,” Mr. Mair of Ernst & Young said.
But no one knows if that day will ever come.
“Someone has to fire the starter’s gun,” said Mr. Mair, who said the market may be primed for a push. “Right now, most banks are walking over to the starting blocks – maybe four out of eight runners have taken their place. It’s very hard to say when the starter’s gun will be fired.”
Christopher Cermak is an editor at Handelsblatt Global Edition in Berlin, covering the banking and finance industry. To contact the author: firstname.lastname@example.org