Bank of Valletta said on Tuesday it has sold a portfolio of non-performing loans for a consideration of €26 million.

In a statement, the bank said it sold the portfolio following a strategic review of its book of non-performing loans.

This was done to strengthen the bank's capital and liquidity buffers and to ensure that the bank’s resources are focused on servicing loans with a better prospect of recoverability.

BOV had announced it would be selling these loans in October.

On Tuesday, it said it selected the portfolio, made up of 707 non-performing loans, using pre-defined criteria and supported by external advisors.

The loans are spread across 245 borrowers, the majority of whom have been granted commercial loans to finance business activities.

It also includes personal loans, credit card loans, home loans, encroached savings and current accounts and other debts. It is biased towards loans and facilities that have been in default for a long time, with 90% of it made up of loans and facilities that have been in default for five years or longer, BOV said.

The bank will send a letter to all impacted customers with all relevant details. If customers are not contacted by the bank, then their accounts are not affected and there is no need for them to contact the bank.

The primary purpose of the transaction was to generate income from loans that may have either been completely written off or provided for, in large part, in previous years. 

The current net book value of the portfolio reported in the bank’s balance sheet is in the region of €5 million.

The transaction will improve the bank’s NPL-ratio in line with regulatory requirements, aligning itself better to peer European banks.

It is also expected to render other benefits to the bank, such as an improvement in the asset quality of the bank’s credit portfolio as well as removing the need for further provisioning against these debts.

It said the transaction will improve its operational efficiency due to a release of resources currently dedicated to lengthy debt collection processes, court proceedings and the ongoing management of the collateral held by the bank, including their eventual disposal.

The portfolio was sold by way of assignment to a Malta-registered public limited liability company established as a securitisation cell company in terms of law. As a result of the transaction, the acquirer has replaced the bank as creditor in respect of the relevant loans.

What is a non-performing loan?

A non-performing loan is a loan where the borrower is no longer making regular payments on the loan and is therefore in default. This can be due to a variety of reasons including but not limited to situations of financial difficulties or bankruptcy.

What type of loans is Bank of Valletta transferring?

The portfolio is comprised of 707 non-performing loans across 245 borrowers.

The portfolio also includes personal loans, credit card loans, home loans, encroached savings and current accounts and other debts. It is significantly biased towards loans and facilities that have been in default for a long time. 90% have been in default for five years or longer.

Who is Bank of Valletta transferring these loans to?

Bank of Valletta will be transferring the loans to a Malta-registered securitisation cell company and the transaction will be financed predominantly by an investment fund, established in Malta and licenced by the MFS, to invest in the acquisition of non-performing assets.

If a home loan, personal loan, a credit card loan or a business loan defaults on a few payments for justifiable reasons, will the bank transfer the relationship to another party through an NPL sale?

If there is a default on a payment, the bank approaches the customer within a few days to investigate the reasons behind the missed payment. Customers who have only a few payments in arrears are given a chance to get back in line with their repayment schedule.

If a customer has long-term issues the bank thinks are justified, it grants the customer a new repayment schedule, reducing the amount to be paid on each installment or granting a moratorium.

If the bank has lost communication with the customer or the customer is not cooperating, it may call in the facility after 90 days from the first default, demanding immediate payment of all facilities.

But even beyond this stage, the bank continues to seek a workable solution but eventually, unless the customer agrees to a repayment plan, it will pursue the matter in court.

The portfolio only includes loans that have defaulted on multiple occasions and in respect of which the bank has no clear and acceptable repayment plan by the debtor and/or there is an expectation that the recovery of debt will take longer than originally intended.

What will happen to the relationships that the bank has with the customers whose loans are being transferred?

The acquirer will replace Bank of Valletta as lender/creditor. The bank expects that the loan agreements between the bank and the borrowers will be honoured and adhered to by the acquirer in line with laws and regulations.

Will the banking relationship of the impacted customers cease, and all their accounts closed?

The bank does not necessarily intend to stop providing basic banking services to such customers as long as the conditions set by the bank around the provisions of those facilities are met. 

What information will be shared with the third-party entity taking over the NPLs?

The bank will only be transferring the information required by the acquirer for it to enforce its rights as the new creditor. 

What is an NPL sale transaction and who buys these assets?

NPLs can be transferred by the original lenders to third-party entities. This transfer would effectively result in the third-party entity replacing the bank in the relationship with the debtor.

Why do banks enter in such a transaction?

The transfer of NPLs to third-party entities helps banks reduce their risk exposure and free up capital to use in other areas of their business by recovering some of their lost capital and reduce future provisions on these NPLs.

It also helps banks improve their financial standing, maintain regulatory compliance, and may lead to a positive impact on a bank's credit rating.

How do financial services regulators look at NPL sales?

In recent years, the sales of NPLs by European banks have reached tens of billions of euros. This was in part driven by targeted efforts by some European governments to facilitate such transactions in a relatively new market. 

How do banks ensure successful completion of such transactions?

Banks can ensure a successful transfer of such loans by conducting thorough due diligence on the acquirers, having a clear understanding of the value of the NPLs, and having experienced legal, regulatory, and financial advisors to support the process.

How are NPLs valued?

Banks can use various criteria to value their NPLs, such as the age of the loan, the expected time to recovery, the borrower creditworthiness, and the collateral securing the loan. 

Is the bank transferring these loans at a lower amount than the balance due to it and why?

Yes. Against a cash consideration, Bank of Valletta will be relinquishing the amount that may theoretically be recovered from the loans in future, at a discount which reflects the current creditworthiness of the underlying borrowers and the inherent recovery risk, together with the cost to acquire and manage the NPL portfolio over the recovery period.