The market for non-performing and non-core loan deals remains in business—but not in the way that many expected after COVID-19 shut down vast swathes of the European economy.
The banking sector's sale of legacy loans revived in 2021 following a marked slowdown in 2020, though the market did not return to the large-scale stocks of non-performing loans (NPLs) that were seen before the pandemic.
This may change if more distressed debt begins to emerge, having been protected by state interventions intended to support businesses affected by COVID-19. The events in Ukraine may also drive an increase in bad debt provisions and NPL volumes. For now, though, sellers, buyers and NPL market participants, such as servicers, are operating in a very different environment.
In this report, we take the temperature of that environment. The first section considers the changing dynamic of the marketplace, covering the outlook for NPLs, the rise of the secondary market transactions and the emergence of new types of NPL investors.
In section two, we take a deep dive into key markets across Europe. As in previous years, the economies of Southern Europe, led by Greece, Italy and Spain, were hotspots for NPL transactions. But other areas—notably Ireland, where NPL numbers were already relatively low—continue to see activity. Even in countries where banks are making very few disposals, the secondary market provides opportunities.
With so many unknowns, including the outcome of the situation in Ukraine and its impact on economics, the future for NPLs remains uncertain. But clear trends are emerging, from the growth of new entrants to the growing importance of data and analytics tools in driving value.
While the spike in bad debt and subsequent tsunami of NPL and non-core loan deals that was anticipated due to COVID-19 did not materialise, the increasingly volatile market trends may lead investors to discover new and unexpected opportunities.
Europe's banks continue to defy expectations that the pandemic would drive a significant increase in NPLs—in fact, according to the EBA, not a single country saw its banking sector's NPL ratio increase in 2021, with the vast majority reporting an improvement.
What does the future hold for NPLs? There's still plenty of business to be done, but buyers and sellers alike will need to change tack to get the most from the available opportunities.
What does the future hold for NPLs? There's still plenty of business to be done, but buyers and sellers alike will need to change tack to get the most from the available opportunities.
Stay current on your favorite topics
It is possible that the year ahead will see banks under even greater pressure to make increased disposals—particularly while state-backed schemes in Italy and Greece continue to provide support in the process.
In our previous report, we pointed to a poll in which 70 per cent of respondents expected to see an increase in European NPL sales in 2021. The majority view would prove to be correct, but making forecasts for 2022 and beyond looks to be fraught with difficulties.
On the one hand, many European banks still hold significant stocks of NPLs, particularly in hotspots such as Spain and Italy, but also in France and in the UK and Ireland. Moreover, as the impact of COVID-19 continues to unwind and the economic fallout of the events in Ukraine grows, not to mention the potential for a recession on the horizon, there is scope for more loans to slip into non-performing territory.
It is possible that the year ahead will see banks under even greater pressure to make increased disposals—particularly while state-backed schemes in Italy and Greece continue to provide support in the process.
The counterargument is that, when it comes to legacy NPLs that banks were required to reduce in recent years, much of the heavy lifting has already been done. What remains is relatively modest by comparison. In 2015, for example, the EBA says the average bank in the European Union had an NPL ratio of 6.2 per cent. Today, the figure is down to 2 per cent.
In other words, even if current market volatility leads to a significant increase in NPL volumes, the need for large-scale disposals remains diminished, at least for the foreseeable future.
This is not to suggest that this is a market lacking in opportunity, just that the dynamics at play are changing. New entrants, including servicers with expertise and experience built on supporting investors, will introduce more competition, both for smaller disposals by banks and in the secondary market. Indeed, that secondary market is thriving.
Equally, growing sophistication in data and analytics technology is enabling buyers and sellers alike to pursue opportunities with greater clarity on price discovery and potential return. The regulatory backdrop is also changing, as we move towards the end of state-support schemes.
The bottom line is that, while the future direction of the NPL market is not set in stone, clear trends are emerging. Existing players and new entrants alike are beginning to position themselves accordingly.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
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.
© 2022 White & Case LLP
