Market Spotlight: The New NPL Landscape in Europe

By Suzy Bibko, Content Marketing Manager, EMEA

Although the last financial crisis was over a decade ago, many European countries are still dealing with the resulting burden of NPLs that built up during that time. Will the current crisis see something similar for NPLs? Likely not, as today’s problems are the result of something very different. So, what lies ahead for NPLs in Europe? Victoria Birch, Daniel Dejanovic, Gonzalo Gasos, Biagio Giacalone, and Merlin Piscitelli recently discussed how COVID, capital, and computers are shaping the NPL landscape in Europe.

Working constructively to reduce NPL exposure
As stated above, today’s crisis is something much different from the last. And overall, countries are in a much better position to deal with the fallout from COVID: whether because of experience, timing, available capital, regulation, or willingness to work together to reach viable solutions.

“This is a crisis that is clearly out of the control of both people and businesses,” explains Dejanovic. “I think it’s still a bit early to fully assess the magnitude and lasting implications of COVID. In terms of the approach from our side, it is to work constructively with regulators, governments, and other stakeholders in multiple jurisdictions to understand how we can help in the process of reducing NPL exposure levels to where you have a more functional banking system that isn’t hindered by high ratios of NPLs.”

In fact, a lot has been done to reinforce the regulatory framework and resiliency of banks since the last crisis, and banks are in a much better position to help those businesses feeling the effects of COVID. What can banks do to help their clients this time?

“I think the best balance would be struck to let banks work with their clients to carry on their business,” says Gasos. “Business continuity should be the main objective over the next year or 18 months, and banks should point every client to the best possible solution. Debt refinancing could be the best case, but there will be a need for more capital out of the banking system that should be provided by those investors. We need to give a chance to a lot of viable businesses to come back to normal. And that’s very much how the bank managers will deal with this crisis.”

Taking stock of fresh stock
But that doesn’t mean NPLs won’t occur – COVID is having severe effects on businesses across Europe. “What we have now is that NPLs are not yet there – they are presumably NPLs at this stage,” continues Gasos. “Those that end up being NPLs will be completely different than the ones we have been dealing with in the past because they will be fresh NPLs, meaning that a lot of businesses had a very clean track record, but COVID has been like an earthquake for them. Many of those customers don’t have a bad loan record. So, it will be more difficult in terms of analysis for the banks to give a second chance to many viable businesses so they can remain clients of the bank and continue the long-term relationship that features in the traditional European banking system.” 

And what about for some of the biggest NPL markets traditionally? Many are still working out the effects of the last crisis and haven’t been spared by COVID.

“Italy still has the highest NPL stock after France and the highest NPL ratio compared to European peers,” says Giacalone. “And because Italy was one of the hardest hit countries by the pandemic, we expect banks to see an increase of inflows from performing to non-performing credit stage. An extension of the moratorium on borrower’s debt, which many of Italy’s major banks put in place early in the pandemic to mitigate  the expected increase of inflows , could play a crucial role, even if the banks have already  implemented initiatives to accelerate derisking. So, looking ahead, it seems as if the pandemic has had no impact on the number of transactions. But, we may still see a significant increase in NPL transactions, considering that some banks continue to manage NPL disposals to be in a better position when the market could become overcrowded with the next wave.”

Improving your position with tech and data
Is there anything dealmakers can do to improve their position and their deals this time around? Data and accessing it has always been crucial when buying large loan portfolios. Has it taken on increased importance during this pandemic?

Piscitelli says three things have jumped out at him in terms of how people are doing things differently than a year, or even 10 years, ago.

The first is portfolio preparation. “People are using tools like Datasite Prepare to bring data ahead of process into a centralized location and utilizing AI to categorize that information and decide what is going to make up that package that goes to market,” explains Piscitelli.

The second is GDPR regulation, which didn’t exist to the same extent before 2018. “We’ve seen a massive increase in how to manage redaction of personal information,” continues Piscitelli. “Utilization of our integrated redaction tool, including AI technology that can find names, email addresses, and personal information that is required to be blacklined, used to be done by third party tools or outside that dataset. We’ve really seen that move into Datasite, with all the work being done on that one dataset in one place.”

The third is increased importance of analytics. “As the speed of these NPL packages come to market, dealmakers are trying to get deals done faster, with more precision,” stresses Piscitelli. “So, analytics and custom analytics are needed by the people running these processes to predict who is the most interested and who they’re going to engage with, and who they can bring to the finish line.”

Birch agrees, but argues that the use of technology and data starts even earlier in the process. “Data is one of the most relevant areas here, but it starts much earlier in the lifecycle of the loans with the management of the portfolio itself before it even gets to the NPL stage. It is all part of sellers being more prepared for a transaction. Sellers need to create a portfolio with useable data sets that investors can come in and due diligence, particularly as one of the biggest transaction costs can be the due diligence workstream. Improving the quality of the data available and using technology to help put that into a better, readable, accessible form can lead to a better end result for both sides of the table.”