Non Performing Loans - DiVA portal

1 UPPSALA UNIVERSITY Bachelor Thesis Department of Business Studies Fall 2004 Jessica Petersson Isac Wadman Non Performing Loans - The markets of Italy and Sweden Tutor: Joachim Landstr m Abstract Many countries are suffering from Non Performing Loans (NPLs), which are defaulted Loans that banks are unable to profit from. There are two general ways to secure NPLs. One is for banks to handle them themselves, which is common in Sweden where the NPL market is not so widespread.

2 The alternative is for banks to auction them in public to Asset Management Companies (AMCs), which purpose is to dispose of the assets as profitably as possible. This procedure is used at the vast italian NPL market . Our purpose is to describe how these countries secure their NPLs from three aspects; the market , legal and financial aspect. We investigate how Svenska Handelsbanken (Handelsbanken) in Sweden and Morgan Stanley Real Estate Fund (MSREF) in Italy handle their NPLs.

3 The study has been made through interviews at respective companies. Our study reveals that historic actions of the government, credit culture and management decisions have shown to be crucial causes to the spread of NPLs. The Swedish legal system allows banks to secure their own defaulted Loans in a fast and efficient way, while the italian is more unwieldy and does not give banks any incentive to work out their NPLs.

4 From a financial perspective, neither one nor the other method can be stated better since the companies operate in different fields. The main reasons that affect the financial result are the specific national conditions. Credit culture and legal system are two vital factors that benefit Handelsbanken while they obstruct MSREF. However, both italian and Swedish AMCs respective banks must continue to review their routines and adaptation ability in order to excel in the future.

5 Acknowledgements There are several people we would like to thank for their help and support throughout the study. Our tutor, Joachim Landstr m, for his feedback and availability whenever we were in need of advice; Mr. Glenn Aaronson at Morgan Stanley Real Estate Fund, who willingly obliged us to an interview and further guidance in the djungle of NPLs. Thanks to Mr. Bo Kaijser at Svenska Handelsbanken who took the time for an interview which helped us to grasp the NPL processes of his company; Sarah Barton and Robert Paterson at Morgan Stanley Fixed Income Research for your quick e-mail correspondence and supplies of material.

6 Last but not least, thanks to Tabitha Leitner and sa Scharfe who have helped us with the proofreading of our thesis. Uppsala, Januari 2005 Definition and classification of Problem Choice of Data Analyzing Legal The Morgan Stanley Real Estate Fund (MSREF)..13 Due The extension of Gross Book market Legal Financial 5 1. Introduction This chapter introduces background, definition and markets of Non Performing Loans to increase the understanding for the reader.

7 It continues with purpose, limitations and finally disposition for the essay. Background The banking crises throughout the world have contributed to ineffectiveness in the financial systems and have in some countries, depending on the effects, put a delay in the economic development. With the enormous amounts of Non Performing Loans (NPLs) on bank balance sheets, many countries have established public asset management companies that manage the disposal of defaulted Loans .

8 Today, markets are more open and many of these public companies have become privatized. As a result of above, many Asset Management Companies (AMCs) have entered markets where they can see potential profits in handling NPLs. The first NPLs occurred in the USA in 1987 after that one of the most severe financial crises hit the American stock market . (Morgan Stanley, 2004) Surrounded by the Savings and loan crisis, Federal Savings and Loans Insurance Cooperation (FSLIC) was the first company to be created in order to work out defaulted Loans .

9 However, the task of solving these Loans turned out to be too extensive and FSLIC lost considerable amounts of money. In pace with growing problems the US government entered the market and invested huge amounts in the creation of the Resolution Trust Company (RTC). (Aaronson, 2004) Nevertheless, problems with NPLs are not in any way specific for the US market . Defaulted Loans arise all over the world and governments are still struggling to come up with solutions.

10 (Morgan Stanley, 2004) Definition and classification of NPLs NPLs can be defined as defaulted Loans , which banks are unable to profit from. Usually Loans falls due if no interest has been paid in 90 days, but this may vary between different countries and actors. Defaulted Loans force banks to take certain measures in order to recover and securitize them in the best way. (Ernst & Young, 2004) The definition of impaired Loans is Loans that have not expired, but it is uncertain whether the borrowers could repay their debts.