Lenders are enjoying the fruits of their labours. Having offloaded their most toxic bad loans, in 2022 banks were instead able to focus on smaller, strategic NPL disposals, even as macroeconomic hardship began to mount.
Europe's banks have been on quite a journey to get their non-performing loans (NPLs) under control through NPL disposal tools including portfolio sales and securitisations. While disposals of toxic debt were interrupted by the COVID-19 crisis, this work has been unrelenting. In last year's edition of this study, we described how NPL sales in Europe in 2021 had bounced back from pandemic disruption; 12 months later, we can report that sales continued in 2022, though at much reduced levels.
That slowdown reflects the extensive progress already made by banks. Most have reached a point where the imperative to further trim their NPL volumes is much diminished—they are free to make disposals according to their strategic and tactical priorities, rather than to avert disaster. That remains true despite the mounting economic and geopolitical volatility that Europe has faced over the past 18 months.
In this year's report, we examine the outlook for Europe's NPL market, including for secondary sales, over the months and years ahead. The first section considers the changing market dynamics, including the latest NPL data and analysis of what is driving activity. The second section offers a deep dive into key markets across Europe.
The future is highly uncertain. There is a case to be made both for a resurgence in NPL volumes and deal activity, and for a continued slowdown. Much will depend on the economic outturn, where uncertainty levels are even more elevated. The good news, however, is that these are precisely the market conditions in which new opportunities abound.
Despite broad economic turmoil, countries across Europe have so far avoided recession. Banks have been able to catch their breath with the NPL market shrinking steadily post-pandemic. But looking forward, Europe is hardly anxiety-free.
Total NPL volumes across Europe are down and ratios remain stable, with countries such as Italy and Greece having worked especially hard to deal with toxic assets. Even with economic growth set to slow, banks have reason to be broadly optimistic about their NPL levels.
Declining NPL ratios have put banks in a somewhat more comfortable position than they were this time last year, but the threat of macroeconomic hardship looms over borrowers.
Declining NPL ratios have put banks in a somewhat more comfortable position than they were this time last year, but the threat of macroeconomic hardship looms over borrowers.
Some investors are looking further afield, with new deals completed in the Nordics in recent months, and even signs of a new market emerging in the Middle East.
In the previous edition of this study, we painted two possible pictures for European NPL sales in 2022. One possibility was that the aftereffect of the COVID-19 pandemic, combined with new shocks such as the outbreak of war in Ukraine, would see NPL volumes increase, and banks come under pressure to step up disposals of their toxic assets. Alternatively, we suggested, the heavy lifting done by banks over a number of years to get NPL exposures under control would diminish both the scope and the imperative for further sales, even amid a deteriorating macroeconomic climate.
In actuality, the second of these scenarios dominated. NPL sales were sharply down in 2022, and there has, in any case, been little sign so far of a new wave of bad debts at European banks. NPL volumes have continued to fall, with even modest levels of sales sufficient to counteract the income of debt newly designated as non-performing.
Where will the market go from here? In many respects, the possibilities are little changed compared to 12 months ago. The sharp economic slowdown now expected across much of Europe may see NPL volumes increase; certainly banks have, in aggregate, increased their provisions. Equally, however, NPL ratios have fallen to comfortable levels, providing banks with some degree of comfort even if more borrowers do begin to struggle. In the short term at least, the level of NPLs remaining on banks' balance sheets is not sufficient to drive a significant increase in sales. The end of guarantee schemes in Greece and Italy also mitigate against a sharp spike.
This is not to suggest that the NPL market lacks opportunities. Some investors are looking further afield, with new deals completed in the Nordics in recent months, and even signs of a new market emerging in the Middle East. The secondary NPL market is also seeing significant levels of actively, as a broad range of market participants trade in and out of portfolios according to their changing appetites.
The headline numbers, in other words, may be misleading. On the surface, the NPL market looks calm—underneath, however, there is plenty of activity.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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