Banks have halved non-performing loans and are set to crack down on long-term arrears
A research paper co-authored by Central Bank deputy governor Sharon Donnery published last week showed that, from a peak of 32pc in 2013, non-performing loans had fallen to “only” 14pc of domestic Irish bank lending by the end of 2017. In money terms that was a drop from €80bn to €30bn, a reduction of €50bn.
However, the fact that a seventh of all loans are still categorised as non-performing a decade after the 2008 crash indicates that the Irish banks still have a lot more work to do before this problem is finally resolved.
“All the banks are now making significant progress. Non-performing loans didn’t peak until 2013. The whole process of engaging with customers took time to work though and it is only in the last two or three years that we have seen very material reductions in non-performing loansas banks engage more actively with customers,” says Goodbody Stockbrokers banking analyst Eamonn Hughes.
He expects further significant progress in reducing non-performing loans this year. He is pencilling in reductions in PTSB’s non-performing loans from 26pc at the end of 2017 (the highest of any of the Irish banks) to 11pc by the end of this year. He reckons that AIB will cut its non-performing loans from 16pc to 9pc over the same period while he forecasts non-performing loans of just 5-6pc at Bank of Ireland by the end of this year, down from 8pc at the end of 2017.
While all of the banks have made significant progress in reducing their non-performing loans, a hard-core of arrears cases remain unresolved.
Approximately two-thirds of all non-performing loans, almost €19bn, are mortgages. Loans to SMEs account for a further fifth (about €6bn), while loans to larger companies and non-mortgage lending to households make up most of the remainder.
Inevitably, it is non-performing mortgages that have attracted most attention. One startling number in Donnery’s paper stood out. That is that there were almost 29,000 non-performing mortgages on principal dwellings in arrears of at least 720 days (ie two years) at the end of September 2017.
Shocking as this figure is, it – if anything – understates the seriousness the situation. This is because there were a further 13,100 of mortgages on buy-to-let properties also at least two years in arrears. Between them this adds up to more than €10bn of mortgages more than two years in arrears, well over half of all mortgages in arrears.
When a mortgage, either on a principal dwelling or a buy-to-let property, goes more than two years into arrears it is a reasonable assumption the borrower either can’t or won’t repay the loan.
The suspicion that most or all of these loans will never be repaid is reinforced by the fact that almost half (44pc) of the mortgages on principal dwellings more than two years in arrears at the end of September 2017 are in fact five or more years past due, up from 34pc 12 months earlier.
This opens up an appalling vista. No politician wants to be seen urging the banks to repossess homes, even where the borrower is several years in arrears. Donnery and her co-authors tip-toe around this sensitive topic writing that: “As part of a functioning mortgage market, it must be acknowledged that there will be cases where no viable modification is possible and the realisation of collateral by the lender is the only viable outcome.”
Translated from Central Banker jargon that means that the banks are going to have to adopt a harder line with borrowers who are in arrears, even if it means that they end up losing the roof over their head. Donnery is chairperson of the ECB’s High Level Group on non-performing loans.
Despite the very high level of long-term mortgage arrears lenders have, up to now at least, been remarkably slow to move against borrowers. Since the crash, the banks have repossessed fewer than 8,200 principal dwellings. Only a third of these repossessions were as a result of a court order with the remaining two-thirds being surrendered voluntarily by the borrower.
Irish lenders are coming under increasing regulatory pressure from the ECB to clean up their loan books. This is one of the factors triggering the sale of mortgage books by the Irish banks to so-called “vulture funds” At the end of December 2017 almost 48,000 mortgages on principal dwellings, 7pc of the total, had been sold to so-called “non-bank entities”.
While the non-bank entities own just 7pc of all mortgages on principal dwellings, they own 25pc of loans more than 720 days in arrears. Expect the percentage to rise even further in the near future. With the ECB breathing down its neck, part of PTSB’s strategy to reduce its extremely high proportion of non-performing loans involves selling off a large chunk of its problem mortgages.
Although more loan sales and repossessions are inevitable, the Central Bank’s preferred method for dealing with mortgage arrears is restructuring. At the end of December a total of 118,000 mortgages on principal dwellings owing a combined €16bn and 22,000 buy-to-let mortgages owing €5.1bn had been restructured.
Most of these restructures seem to be working with 93,000 (almost 80pc) of restructured mortgages on principal dwellings and 17,500 (80pc) of restructured buy-to-let mortgages complying with their new terms at the end of December.
In their paper, Donnery and her co-authors claim that restructured mortgages are gradually being put on a more sustainable footing, pointing out that by the third quarter of 2017 23pc of restructured mortgages were split mortgages, where a portion of the loan is “parked”, with arrears being capitalised (added on to the mortgage) in another 33pc of restructured mortgages.
By comparison only 8pc of these restructured mortgages are now either interest-only or reduced interest payments. “In 2012, short-term offers such as reduced payment arrangements and interest-only periods represented the majority of mortgage restructuring arrangements”, writes Donnery. “The importance of these has declined over time, while durable restructures such as split mortgages and term extensions have become much more prevalent”.
With the ECB set to start increasing interest rates within the next 12 months it is vital that as many mortgage restructures as possible are put on a sustainable footing. With one-third of all principal dwelling mortgages and two-thirds of buy-to-let mortgages being trackers, where the interest rate is tied to the official ECB rate, it could still be some time before the banks completely extricate themselves from the mortgage arrears morass.