By Ben Simmons

European banks are now holding some 2.5 trillion euros of loans (an amount equal to the GDP of Germany) that have been identified as non-core to their business, according to estimates by PwC.

This is almost double our estimate of one year ago of 1.3 trillion euros and has increased as banks have continued to develop their deleverage strategies, and have become more transparent in communicating these to the market. Over the past year PwC has seen an increasing volume of non-core loan portfolio transactions, a trend that is expected to continue.

PwC’s calculation comes as part of its latest European NPL Barometer which analyses the level of non-performing loans (NPLs) in eight European markets. The Barometer indicates that NPLs carried by these European banks are currently in excess of 500 billion euros, with UK institutions accounting for around 200 billion euros of this.

“Despite the difficult conditions in the debt markets, we believe that across Europe loans with a face value of 50 billion euros will be sold in the next 12 months,” says Richard Thompson, PwC’s European Portfolio Advisory Group Partner. “While the main markets for transactions over the next year are likely to be Spain, the UK and Ireland, we expect increasing activity in some of the other European markets, including Germany and Italy. It should be borne in mind that this volume of expected activity in the next 12 months is small in relation to the total deleveraging task, indicating continuing high levels of transactional activity for many years to come.”

While this estimate has changed only slightly from the June 2010 total, it masks a number of divergent country movements. Those most affected by the euro zone debt crisis, such as Spain, Greece and Italy, have seen their NPLs rise, which has served to offset the falling number of NPLs in Germany, Ireland and the UK.

The Barometer also flags up that there has been a small increase in the estimated coverage ratio (total provisions as a proportion of NPL balances) from 48% to 51%. While not all European banks’ NPL exposure will be regarded as non-core, a large proportion will be.

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