NPL outlook: €200 billion in new bad loans across Southern Europe over next three years
Europe’s non-performing loan (NPL) market will bifurcate between legacy and covid-era exposures in 2022. Legacy NPLs will continue to run off this year with the deleveraging led by the same top active markets in 2021 – Italy, Greece, and Spain. But 2022 will differ from previous years in the emergence of new non-performing exposures (NPE), which have arisen from covid-era financial weakness. doValue, the loan servicer, has forecast that there could be up to €87 billion in new NPEs across Southern Europe in 2022, followed by €64 billion in 2023 and €46 billion in 2024. But new NPEs will spread more broadly than legacy NPLs, with sectors, rather than markets, the key drivers. Catalysts include (i) banks’ reduction in loan provisions, (ii) expiry of covid-era fiscal government stimulus and support schemes, accommodative monetary policies and temporary laws, and (iii) the end of lender forbearance.
Many variables will affect the outturn for new banks NPEs across Europe. It will be aligned to the evolution of the pandemic (e.g., the possibility of new resurgent infection waves), the economic recovery (e.g., inflation, employment, and GDP outlook), the behavioural response by people and governments (e.g., consumer, business and government spending), and the idiosyncrasies of individual sectors (e.g., trends in travel for the hospitality and aviation sectors). The surge in Omicron infections looks close to peaking, which will ease mobility restrictions, border closures, and health impacts on economies throughout Europe. Infection surges suppress industrial and manufacturing production, slowing the pace of investment. The emergence of new virus variants poses further downside risks for the economic outlook.
Macro
Economies across Europe remain fragile. Inflationary pressures have broadened out from supply disruptions and rising energy costs to wage and food price increases. These forces will weigh on already decelerating growth and weakness in real consumption growth in 2022. The European Central Bank (ECB) announced in mid-December the end of net asset purchases under the Pandemic Emergency Purchase Programme (PEEP). However, interest rates will be held at current or lower levels until inflation stabilises at 2% over the medium term. The ECB says the asset quality of loans under public guarantee schemes and under moratoria is a source of concern as an increasing share of these loans are being classified under stage 2 or as NPL.
Meanwhile, the hawkish pivot by the Federal Reserve towards tighter monetary policy will ricochet through global markets, pushing up borrowing costs around the world. The effect will increase debt burdens on nations and corporates for years to come. It is possible that a more accommodative monetary policy in the eurozone, relative to the US, may encourage a capital flight to the bloc, which could be supportive of NPL investor demand.
Pandemic-sensitive industries – such as retail, hospitality and leisure, aviation, and tourism – are already starting to show signs of stress. Further disruption may jeopardise the viability of already weakened businesses, increasing banks’ credit risk and impairments for loans secured by pandemic-sensitive assets. Continued deterioration in market conditions will prompt banks to scrutinise borrowers’ ability to make loan payments. It may also prompt asset value readjustments and a spike in banks’ NPL ratios. Ultimately, rising NPL ratios will either trigger a spike in NPL activity, restrict new lending, or some combination of the two.
In this outlook, we consider the road ahead for legacy and new NPE exposures across major markets throughout Europe.
Italy
The volume of NPLs on Italian banks’ balance sheets is on the rise. After seven years of unbroken quarterly declines in NPLs, culminating in an all-time low of €15.3 billion last September, the trend has started to reverse. Net bad loans climbed to €17.6 billion in November 2021, according to Italian Banking Association (ABI) data published in January, up from €16.7 billion the prior month. December’s data, published in mid-February, is expected to continue the reversal. At peak, Italian net bad loans reached €89 billion in 2015, according to Pricewaterhouse Coopers (PwC) data.
The catalysts for the late 2021 NPL rebound included government covid-era support measures for the Italian economy, notably public guarantees (for banks) and the moratoria on debt repayments (for corporates), as well as the duration of the pandemic’s disruption to cashflows. A limited extension to the moratoria expired at the end of last year, further exposing weakened companies to the burden of resumed debt interest payments.
The market consensus for new non-performing exposures (NPE) over the next 24-30 months is around €80 and €100 billion, according to PwC data.. Separately, doValue, the Southern European loan servicer, has forecast approximately €44 billion in new NPEs and up to €90 billion in new NPEs over the next three years to the end of 2024. The NPEs will be driven by SME loans most affected by the pandemic. Currently, as many as 130,000 Italian companies currently hold loans classified as unlikely to pay (UtP). These exposures will weigh heavy on banks’ balance sheets and prompt NPL activity throughout the year. Deal flow will be supported by the resumption of courts and judicial processes, triggering a wave of bankruptcies and insolvency proceedings. The Italian government is reportedly in talks with the European Commission to secure a multi-year extension to its state guarantee scheme which supports bank deleveraging beyond the current June 2022 deadline, according to Reuters. The proportion of Stage 2 loans in Italy was 12.6% as of the third quarter of 2021, according to the EBA, down from 13.4% in the prior quarter.
The Efesto Credit Fund, which comprises corporate UtP extended by Italian banks and managed by Finint Investments, has grown to €710 million, up from €450 million when launched back in October 2020. The fund now comprises UtPs from nine banks, secured by more than 150 Italian SME companies in real estate, construction, agriculture, packaging, energy and utilities, and food & beverage. Italfondiario, a doValue subsidiary, is the fund servicer. In December, another €80 million in UtP SME loans were transferred to the Illimity Credit & Corporate Turnaround fund. The new loans, contributed by existing and two new banks, increase the fund’s total to €280 million across 40 corporates from a diverse sector base. Separately, Illimity Bank has acquired a €1.8 billion two-part portfolio of loans in dispute from Apollo Global Management. The first tranche, consisting of €546 million in loans, was acquired solely by Illimity; while the second, a €1.2 billion tranche, will be purchased via the senior notes in a new securitisation, alongside junior noteholder, Apollo.
In the second part of this NPL outlook, we will explore Greece, Spain, Germany and Austria, and the UK.
Timur Peters is the founder of Debitos GmbH. He holds a diploma in finance and law. He has more than 10 years’ experience in the range of finance.
Before Founding Debitos Timur Peters was responsible in the distribution of Software for Banks and Financial Institutions for Comarch for the D/A/CH Region. Next to this he has worked for several years as a self employed Project Consultant in the area of Financing of Litigation cases, Peer2-Peer Credit Marketplaces and other online projects for financial institutions.
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