In very broad terms NPLs in the banking system peaked at around €1.2 trillion following the financial crisis and by the end of 2019 were roughly half that. Over the last 10 years, PwC data shows that NPLs with a face value of around €700bn have traded as portfolio transactions. Our estimate for the year just ending is that even with the massive slowdown in transactions as a result of the COVID-19 pandemic, around €50bn will trade. For investors and related parties a key question is what does the future hold for investment opportunities?
It is too early to say where NPL levels will peak following the pandemic - according to the ECB, banks are “all over the place” on provisioning for the likely rise in NPLs, noting that this is a concern to supervisors. In earlier blogs we have commented on the expectation that NPLs in the banking sector could return to the peak levels seen in 2012. The ECB has also expressed concerns that NPLs will clog up banking balance sheets which will reduce their ability to support a recovery. This call to action will lead to a continuing reassessment of banking balance sheets and trading not just of NPL portfolios, but there will also be investment opportunities for buyers of performing assets and non core businesses.
Focusing on NPL trades, looking forward we estimate that NPLs with a face value of around €150bn will trade in 2021 and 2022 - with probably around a third of this in 2021 and the remainder in 2022. During 2021 we expect much of this trading to be of legacy stock whilst thereafter likely to be newer stock arising from the current crisis.
It is interesting to compare provisioning levels around Europe. It appears that banks in Spain and the UK are taking greater provisions. Much like after the 2008 financial crisis we therefore expect banks in northern Europe and Spain to lead the way, but unlike the financial crisis we expect a greater emphasis on SME lending rather than consumer debt.
A major consideration for banks selling will be when is it best to sell - is there benefit in going earlier when there will be lower volumes competing for the attention of the big funds who account for the vast majority of all trades or will pricing improve as the impact of the pandemic on borrowers becomes clearer?
One thing is certain - transaction volumes will increase - and there will be continued activity for quite some time.
Please note that the data set out in this blog concerning transactions is based on publicly available information concerning portfolio transactions involving the sale of financial institutions’ debt, supplemented where appropriate with information derived from such transactions where we have acted as an adviser. This data will therefore not include the large number of transactions which have been unannounced for example, forward flow or spot trades from financial institutions to their panel of debt purchasers. This data also does not include securitisations.