Wind up well advanced
The EAA has disposed of around 90% of the financial products it took over from WestLB in 2009/2010 and 2012. The portfolio has therefore been reduced much faster than planned. This reduction was carried out in a way that preserved value. As a result, the EAA has higher reserves than expected at this time.
The result to date provides a solid basis for driving and optimising the wind-up of the remaining portfolio. The majority is marketable. The quality of the banking book portfolio has improved during the reduction process. As of 31 December 2020, exposures with very good, good and average ratings accounted for 72%. In a market environment where interest rates are low, however, investors have an incentive to buy not only attractively valued holdings but also non-performing, and thus riskier, positions.
Everything remains in place for a continued rapid winding-up. However, the coronavirus crisis is expected to affect the work of the EAA. From today’s perspective (April 2021), there will at least be delays in winding up sub-portfolios such as infrastructure projects.
Banking book portfolio
The loan portfolio is dominated by project financing in the energy sector. This accounts for about one third of the total volume and includes conventional power plants as well as renewable energy projects. The volume of project financing in the infrastructure sector is considerably lower, at around 10%. From today’s perspective, however, the coronavirus crisis could in particular hamper the development of airport, port and toll road projects and delay their completion.
Despite the COVID-19 pandemic, active portfolio reduction continued in 2020, including sales of project finance exposures in the energy sector and the sale of a liquidation portfolio. The EAA continues to focus on reducing the number of borrowers in the remaining portfolio. This is not just a matter of rapidly reducing the volume of the loan portfolio further. Reducing the number of customers mainly results in a significant decrease in the costs of managing the remaining portfolio.
The securities portfolio consists of 83% government bonds. Exposures to countries on the euro periphery predominate. Italy, Portugal and Spain accounted for a total of about 73% as of 31 December 2020, of which around 59% government bonds.
Almost 60% of structured products relate to the so-called Phoenix portfolio – securitised loans which are closely linked to the US real estate market and lost a large part of their value during the financial crisis. A second focus is on securitised US student loans, which are backed by government guarantees and are therefore low-risk from today’s perspective
The EAA’s banking book portfolio is denominated primarily in US dollars (43%) and EUR (53%). Exposures with medium and longer maturities predominate. The regional focus is on North America (53%) and Europe (41%). Five per cent of the banking book volume is in the Near and Middle East.
The EAA banking book portfolio contains 41 direct and 34 indirect participations. The winding-up of participations concentrated initially on exposures where the business might involve operating risks. In 2020, the focus was also on exposures with a high book value, hidden reserves or complex structures: five direct participations were sold or liquidated by the year-end.
The EAA has realised considerable value by restructuring and selling participations.
The EAA was not able to implement the sale of its Irish banking subsidiary EAA Covered Bond Bank (CBB) as planned. CBB is instead now in an accelerated winding-up process. In the second half of 2020, assets were transferred to the EAA following the repurchase of the CBB bonds, which served to refinance CBB. In addition, the return of the full banking licence and the licence as a designated credit institution – comparable to a German Pfandbrief bank licence – was approved by the ECB in March 2021.
The nominal volume of derivative products in the EAA’s trading portfolio fell by 31% in 2020 to about EUR 95 billion, due in particular to active reduction measures. Additional measures for an early reduction will be taken in the current year.