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

2. 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

3. 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

4. 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

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

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

7. 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

8. 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)

9. 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

10. 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

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

12. 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

13. 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

14. 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

15. THANK YOU