March 30, 2023 4:18 pm

News, Press releases

NPL 2023 outlook: banking sector jitters will weight on Spanish lending while Greece NPL activity hots up

Confidence in the European financial markets have been rocked by the rapid rescue of Credit Suisse in March, which is expected to trigger a tightening of financial conditions and liquidity across the eurozone which will restrict refinancing and new lending liquidity throughout 2023.

Prior to recent events in the banking sector, Southern European economies were starting to benefit from favourable developments in energy supply and security risks (i.e., particularly in the gas market). Receded energy inflation eased economic slowdown concerns, while EU subsidies helped improve the outlook for households and businesses. However, inflation has shown signs of re-acceleration which keeps upward pressure on interest rates. In the wake of Credit Suisse Swiss-government backed recue by UBS, the European Central Bank’s (ECB) raised rates by 50 basis points in mid-March, taking its deposit rate to 3.0%, as the effort to tame inflation continues. Euro area annual CPI inflation was 8.5 % in February, down from 8.6 % in January, according to Eurostsat.

The decision came despite calls for the ECB to pause to assess how the banking sector turbulence unfolds. Markets are pricing in a high probability that the ECB will pause rate hikes at its next policy meeting on May 4. ECB president, Christine Lagarde, said eurozone banks had “very limited exposure” to Credit Suisse, but admitted the banking sector turmoil could force the ECB to stop raising interest rates, if market jitters cause lending to the eurozone’s businesses and households to freeze up. Rising and prolonged elevated interest rates will put pressure on real estate values and increase refinancing risk, reducing expected recoveries in current and future NPL transactions.

In this article, we will explore how the macro environment and the ECB monetary policy impacts the NPL markets for Spain and Greece, two banking markets with among the highest NPL ratios in the euro area, although both have recorded continual improvement in recent years.

 

Spain

Spanish banks further de-leveraged balance sheets in 2022, driven by net NPL disposals that offset new NPLs inflows, according to Scope Ratings. However, the stock of Stage 2 loans remains above pre-Covid levels. “We deem Spanish banks to be well capitalised,” wrote Chiara Romano, analyst at Scope Ratings. “Looking ahead, buffers will remain solid, despite the recent increases in requirements affecting several institutions.”

The pass through of higher interest rate to cost of borrowing for companies has accelerated in the first quarter, according to Spain’s central bank, Bank of Spain (BoS). Demand for credit grows in the context of higher refinancing needs for working capital and inventories, while credit supply contracts in the aftermath of the Credit Suisse’s rescue and the collapse of US lender Silicon Valley Bank (SVB). “It seems likely that the uncertainty that has already arisen regarding the strength of the international financial system will exert some adverse effect on the development of economic activity in the coming quarters and also contribute to weakening inflationary dynamics,” the BoS said.

Spanish GDP – which grew by 5.5% in real terms in 2022 – is projected to rise by 1.6% in 2023, according to BoS. GDP is forecast at 2.3% and 2.1% in 2024 and 2025, respectively.

There is an estimated €75 billion in outstanding commercial real estate (CRE) debt held by banks, insurance and pension funds and debt funds, according to a pilot study on European CRE debt markets by Bayes Business School.

Residential real estate loan origination standards remain prudent with low LTV ratios and loan stringent debt-to-income limits. For vulnerable borrowers, the government has reached an agreement with the banking sector to shield them from excessive debt repayments via amendments to the code of good practices, according to Scope Ratings. Domestic commercial real estate exposure has declined to below 6% of lending to the private sector, at the lower end of large European countries. Scope Ratings suggests exposures to SMEs and consumer finance remain at the highest risk of deterioration.

The performance of existing Spanish NPL securitisations face macro headwinds (e.g., GDP below pre-pandemic levels, high inflation, slow-moving courts delaying foreclosure rate compared to pre- pandemic). In addition, creditor repayments are often delayed relative to servicer’s expectations, according to DBRS, which have implications for future transaction demand.

Creditor-friendly reforms to Spanish pre-insolvency regulations came into effect last autumn, providing greater speed, flexibility, and the ability to cram down all classes of creditors, including the debtor’s shareholders. New developments governing insolvency proceedings further simplify and strengthen the processes involved.

 

Greece

Investor demand for secondary sales of Greek non-performing loans (NPLs) is below the steady stream of supply in the first quarter, as servicers are seeking to front-load recoveries for securitization business plans with the major market investors unable to submit bids for all available transactions. This has led to an increase in joint venture deals with other investors or servicers so as to share the risk, according to Greek financial reports.

 

NPL activity accelerates in 2023

Greece’s restructured loan market is forecast to accelerate this year as many non-performing loans “upgrade” and become performing, according to S&P, who expect a new wave of NPLs to surface due to high inflation, and macroeconomic pressures. “We have started to see some appetite in the Greek market for reperforming loan transactions. Potentially, after the large volume of friendly settlements for NPLs, we expect the RPL market in Greece to grow significantly as restructured NPLs become performingagain,” S&P wrote.

Already this year, Intrum has put up the Ermis portfolio for sale (comprised of seven sub portfolios) and doValue has launched the sale of Heliopolis and Suez portfolios. These sales follow the completion of doValue’s Project Souq transaction sold in mid-February through doLook, Debitos’ digital NPL trading platform jointly developed with doValue. Furthermore, Attica Bank have also launched secondary sales out of their non-HAPS loan securitizations with Astir 1 and Metexelixis queued up, according to Banking News, while it remains unknown as to whether Omega will follow. More transactions are expected to follow in the second quarter.

The Greek market needs to diversify its NPL investor universe further in 2023, which the Debitos/doLook platform is helping to achieve. In 2022, five major NPL transactions closed with a combined gross value of €2.4 billion. The largest buyers were Fortress, Bain, and Davidson Kempner.

 

Supreme Court rules in favour of servicers

Greece’s Supreme Court ruled in favour of servicers, granting their legal authority to initiate enforcement proceedings and conduct auctions related to assets secured by overdue bank loans. The legal precedent allows servicers to proceed to foreclosures on behalf of the funds without the funds initiating the action under their name. It was an important ruling for the market as it prevents borrowers from pausing all secured secondary sales and speeds up the resolution of legacy loans.

There are huge political pressures building within Greece on this issue, including calls on the regulation of the Total Legal Claim following a loan portfolio acquisition as well as ways to protect those that might lose their primary residence.

 

Resolution over Eurostat public debt classification unblocks pending securitizations

The European Statistical Authority, known as Eurostat, has decided not to include HAPS guarantees in the calculation of Greek public debt. Previously, Eurostat suggested it would examine securitizations individually to assess risks assumed by public buyers of senior bonds. This pending decision had unblocked the pathway for Frontier II and Sunrise III securitizations to benefit from HAPS guarantees. Greece’s Ministry of Finance is now responsible to ensure that the two securitizations, amounting to a combined €1.5 billion will not burden public debt levels, based on the revised Eurostat criteria.

 

Greek elections

Greek elections are planned for after Orthodox Easter following the latest tragic events. However, recent changes in the election system raise the possibility of an election deadlock and need for a repeat election. Investors and banks are cognisant that a prolonged period of pre-election rallies and elections will have negative consequences for the Greek economy and on planned secondary sales activity. Depending on the result and the eventual coalition government formed, this might lead to headwinds for Greece and its economic outlook.

 

SYRIZA, the dominant left-wing party, has announced changes if they are elected. These include:

• The restoration of the protection of primary residence, with a regulatory framework for servicers.
• Filing a new framework, a new different platform for out-of-court settlement.
• To give an opportunity to prioritize arrangements, through an easy platform with social criteria that will be widely accepted, for those who cannot face and are not covered by this process.
• There should be the possibility of appeal to the courts, as with the Law 3869.
• Repeal of the bankruptcy law.

 

Elsewhere, Attica Bank has reportedly agreed a €490 million capital increase with major bank shareholders. A memorandum of understanding has been signed alongside the Bank of Greece (BoG), representatives of Thrivest, the Financial Stability Fund (TFS) and the Greek Engineers and Public Works Contractors Fund (TMEDE), allowing the new bank to claim its position as the fifth pole of the domestic financial system. Attica Bank is merging with Pankritia Bank, which itself is in the process of absorbing both the Cooperative Bank of Central Macedonia and the Greek “arm” of HSBC.

 

(Image rights: https://www.istockphoto.com/de/portfolio/ultramarine5)

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