NPLs and the role of the valuer The Spanish experience Iñigo Amiano | Member of the board of AEV CEO of The Krata Group

The regulatory framework in the EU The specifities of the Spanish normative What have Spanish Appraisals Firms accomplished so far? Current situation of the Spanish banking industry The challenges to come

THE REGULATORY FRAMEWORK IN THE EU 2 main regulation sources for NPL management within the EU ECB’s guidance to banks on non performing loans EBA’s guidelines for the management of non performing and forborne exposures

THE REGULATORY FRAMEWORK IN THE EU EBA’s Guidelines   The Guidelines specify sound risk management practices for managing non-performing exposures, forborne exposures and foreclosed assets. The EBA aims for implementation by 1 January 2019 The Guidelines are very similar to the European Central Bank’s (ECB) guidance to banks on nonperforming loans that was finalized a year ago. Banks supervised directly by the ECB (118 significant institutions) will therefore already be familiar with the substance of the EBA’s Guidelines

THE REGULATORY FRAMEWORK IN THE EU EBA’s Guidelines – Property valuation  

THE REGULATORY FRAMEWORK IN THE EU EBA’s Guidelines vs ECB’s Guidance  

THE SPECIFITIES OF THE SPANISH NORMATIVE NPL has no direct effect on the valuation of the property, but on the sequence of valuations to be issued NPL can lead to two situations: Renegotiation of debt conditions. It gives rise to a new mortgage loan, and in Spain it is necessary to issue a mortgage appraisal under the same conditions as the original. LTV must be recalculated Liquidation of the credit, either by paying the principal, or by adjudicating the property at auction, or by agreeing to a "payment in lieu” In the case of auctioning the property, an assessment of the market value is necessary to establish the bid price in the auction, but it is the transaction value that determines the part of the debt that is amortized. In Spain, the debtor responds of his debts with his present or future patrimony In the auction, if declared void, the creditor is obliged to win the guarantee for a % of the bid price, so the appraisal value determines the amount the bank must face to acquire the property

THE SPECIFITIES OF THE SPANISH NORMATIVE In the payment in lieu, it is convenient (although not essential) to make an appraisal of the property prior to the transfer of the property. It is a transfer in which the debt is canceled “as a certain body" by the transmitted property. It is true that, since it is voluntary for the bank, the bank wants to be sure that the amounts are similar... the pressure in this case is that the amount "matches" The tools to carry it out are the market value and the mortgage lending value. Circular of the Bank of Spain 4/2017 (which replaces Circular 4/2016) establishes specific and additional guidelines in relation to the calendar, modality and basis of value to be applied in the valuations of NPLs and FA (foreclosed assets)

CURRENT SITUATION OF THE SPANISH BANKING INDUSTRY Non-Performing loans (NPL) have been materially reduced and most Spanish banks have NPL ratios approaching the European bank average. Nevertheless, a few Spanish Banks still have high levels of FAs and NPLs for the banking sector remain above pre-crisis levels. In the last twelve months, Santander, BBVA, CaixaBank, Sabadell and Liberbank announced or completed transactions with institutional investors to remove FAs from their balance sheets. These transactions were supported by the positive performance of the property market and increased investor appetite for Spanish real estate assets. In total, Spanish Banks have reduced FAs (Pro-forma), to EUR 16.9 billion at end 1S-18, this figure compares to EUR 79 billion of FAs in the Spanish banking sector at end-2016 Credit agencies agree on considering it less likely that Spanish banks will close sizeable NPL sale transactions, and expects banks to seek the foreclosure of assets as the main way to recover NPLs

CURRENT SITUATION OF THE SPANISH BANKING INDUSTRY NPL ratios of main Spanish banks as of October 18 Main transactions in the past 12 months 4.1% SAN 4.6% BBVA 5.4% CAIXA 4.7% SAB 7.9% BANKIA 3.4% BANKINTER 4.7% Average Spanish banks 3.8% Average EU banks

WHAT HAVE SPANISH APPRAISALS FIRMS ACCOMPLISHED SO FAR? In terms of figures, their involvement in the management of NPLs has been very significant:

WHAT HAVE SPANISH APPRAISALS FIRMS ACCOMPLISHED SO FAR? There have been serious threats over the independence of appraisals firms: Banks press according to their interests, since they are the ones who instruct the valuations Banks often request the application of basis of value not recognized by EVS or IVS, such as "stressed sale price” Therefore, appraisals firms have been forced to enable tools for withstanding these pressures: Powerful databases Reinforced control and review procedures before issuing valuation reports Use of automated valuation tools to help “control valuers” take criteria on the property value proposed by field experts System of recovery of antecedents and very similar properties so as not to endanger the coherence of the firm Develop surface normalization tools to prevent pressures on physical parameters by the client Mortgage lending value calculation system, based on Past performance of prices in the area Anticipation of the demand and the real estate cycle

WHAT HAVE SPANISH APPRAISALS FIRMS ACCOMPLISHED SO FAR? Other relevant measures adopted: Adaptation to the requirements of Bank of Spain's Circulars 4/2016 and 4/2017, particularly with regard to the expansion of capacity to meet the new valuation calendar Strengthen the technical base of companies, by establishing technical criteria (standards) that prevent competition in values between firms (and help avoid illicit pressures by clients) When a clear technical instruction was needed and not provided by BoS to apply the Circular with regard to the use of AVM, appraisals firms were able to produce an standard of their own Reinforce the capital structure of Appraisal Firms through capital injection, shareholder renewal, or mergers. It is a guarantee of resistance to pressures as it diversifies risks. Exploration of new business niches linked to the dynamics of "sanitation" of NPLs by financial entities and their real estate branches Technical due diligence of properties Project monitoring of unfinished developments and of new projects from recovered assets (soils) Tools for the identification of significant market drops, soil observatories, etc. New housing market studies against foreclosed assets Real estate risk assessment of collateral in NPL

WHAT NEW CHALLENGES ARE FORSEABLE? Radical adjustments of capacity in response to the strategy of banks of getting rid of their FAs in the bulk (as opposed to previous focus on detail selling of properties) Develop new company structures to efficiently provide valuations to banks in an scenario of unbalanced situations of NPL ratio - for entities with very different circumstances, balance situation, size, and ability to take on challenges. Offsetting the loss of economies of scale is the real challenge here Develop specialized teams in NPL prevention services within appraisals firms. The aim is to provide banks with niche services for performing loans (or under vigilance) before their decay, allowing bank teams to prepare Prepare for the new bear cycle: FAs which have been subject to valuation by appraisals firms before their sale, become collateral of new mortgages, and fall back to "underperforming“. The challenge here is to develop indexes and knowledge to re-value effectively these properties when needed

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