NPL volumes forecast to rise after ratio falls to a decade low

JLL report suggests uneven recovery across sectors and countries with Greece, at 25%, not unexpectedly recording the highest NPL ratio in Europe

juli 05, 2021

The volume of non-performing loan (NPL) disposals are set to rise according to JLL’s inaugural European NPL Market Update report, which analyses the areas of stress and opportunity across the European banking sector. Drawing on the latest data from the European Banking Authority (EBA), JLL’s analysis predicts an uneven recovery across the European market with pockets of stress soon anticipated to emerge.

Current data suggests that NPL volumes are set to rise over the coming quarters, though it’s unlikely to surge in the near term. As a result of lender forbearance (forborne loans increased by 7.6% in Q1) and government-backed pandemic loan schemes, the NPL ratio fell by 10bps to a decade low of 2.5% in Q1 2021. While NPL ratios remained stable for non-financial corporates (NFCs) and household exposures, the biggest increase was among accommodation and food services (up QoQ from 8.4% to 9.0%) as well as arts, entertainment and recreation (up from 7.2% to 7.9%).

Ian Guthrie, Senior Managing Director, Loan Advisory & Restructuring Services, JLL, commented: “Notwithstanding the Q1 EBA report painting an improving picture, we expect pressures on the banking sector to rise next year, and for this to result in an increase in both underperforming and non-performing loans due to an uneven recovery across countries and sectors.

We expect that an emergence of opportunities will soon prevail for buyers of credit, as stress derived from the withdrawal of government support and moratoria turns into distress and European banks, already under regulatory pressure to reduce NPL levels, offload risk weighted assets. This combination of factors should provide fruitful opportunities for investors from 2022 onwards.”

The report highlights that early signs of stress are beginning to appear in the European banking sector. IFRS 9 Stage 2 loan ratios for EU bank balance sheets rose to 9.1% in December 2020, up from 6.5% in December 2019, and most recently held steady at 9.0% in Q1 2021. Loans in Stage 3 remain largely static but there are significant headwinds as moratoria and government support tapers off.

Greece holds the highest NPL ratio in Europe, at 25%, albeit Greek banks are making inroads into deleveraging their portfolios following implementation of the Hercules asset protection scheme (HAPS) in late 2019. In contract, NPLs in Germany are consistently among the lowest in Europe at 1.2%, and considerably lower than the EU’s 2.5% average. Whilst French NPLs volumes remain the highest in Europe, disposals remain subdued and have been for over 10 years.

Spain was one of the hardest hit countries in Europe during the first wave of the pandemic. In terms of the economic impact, GDP declined by 10.8% in 2020, a deeper contraction than the 8.6% total drop seen over the five years following the global financial crisis. Spanish banks are proactively selling off NPLs to prepare for a potential rise in Stage 3 loans as moratoria on mortgage and non-mortgage debts expire. Santander, for example, reduced its NPL ratio in Spain at the end of the first quarter of 2021 from €13.5bn of NPLs, a ratio of 6.18%, down 70bps YoY, from 6.88% Q1 2020.

In the UK, most loan portfolio transactions were stalled in 2020 due to the Covid-19 pandemic but disposals started to pick up at the end of 2020, with the largest deal of the year, Metro Bank's sale of a performing residential mortgage portfolio for €3.3 billion to NatWest, crossing the line in December.

Guthrie adds: “From a UK perspective, the moratoria extension presents a number of challenges for the banking sector as forbearance appetite wanes. While loan impairments appear prudent, with a number of banks releasing general provisions in Q1, 2022 remains uncertain and a new wave of stress could materialise.”

Register to download the full report here.

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