NPL Europe 2022: Highlights from SmithNovak’s two-day conference
Participants throughout the European NPL community gathered last week in London for the NPL Europe 2022 conference, hosted by SmithNovak. The two-day event was packed with panel discussions across an extensive range of themes, ranging from the outlook for individual NPL markets, to discussions on NPL securitizations, artificial intelligence and data analytics, ESG in the NPL market, servicing, technology and innovation, and much more.
In this short summary, we highlight the opening panel discussion – which offered a European market update – in which Debitos founder and CEO, Timur Peters, was a panelist.
European market update
The panel discussed the impact of inflation, the weakening economic outlook and the war in Ukraine on the NPL markets across Europe. Key takeaways included:
- The next wave of non-performing loan (NPL) sales and workouts will commence in 2023 or 2024 with SME-orientated assets. Andrés Rubio, managing partner at IMAN Capital Partners, said: “Once [the coming NPL cycle] gets going, it’s going to move very quickly, but transaction volumes will not reach the peaks of the last cycle because the system is better equipped to absorb [NPLs].”
- Operationally-capable NPL investors will have an advantage with SME assets in pricing, restoring cashflows and maximising returns. Rubio added: “It will be the servicers with their operational capability who will have the advantage in buying NPLs over the large funds. As a consequence, I believe we will see consolidation among servicers and some fund/servicer strategic partnerships.”
- Italy: “Most of the potential impacts expected starting from the second half of the year,” according to Katia Mariotti, chief NPL officer at Banca Ifis. Italy is yet to see higher inflation, energy costs, and the consequences of the war in Ukraine feed into loan book performance, according to Mariotti. Higher energy costs will hit both corporates and individuals. Ultimately, the impact of the war and inflation on banks and corporates will depend upon the degree of government intervention. “We expect the government to intervene,” said Mariotti.
- Germany: “The Ukraine crisis hits Germany far more than the pandemic,” Timur Peters, founder and CEO of Debitos, told delegates. “The German economy is heavily dependent on globalised supply chains and Russian oil and gas in sector – such as in the manufacturing and the automotive sectors – both will be hit hard by the disruptions caused by the war.
- On vulnerable borrowers, Timur Peters said: “Companies that survived the pandemic because they benefited from loans under payment moratoria policies over the last two years and have no cash reserves will be the first candidates for loan defaults and bankruptcy. Also, banks with significant exposure to Russia are under pressure right now.
- Late loan payments and some delinquency will emerge across Europe in the second half of the year. However, George Georgakopoulos, managing director, Greece at Intrum was optimistic that Greece would not have the problem to the same degree as other parts of Europe mainly due to the reduction in unemployment and an anticipated strong upcoming tourist season. “The chances are that we will not see a huge NPL wave in Greece.”
- The economic environment is such that there will be a strong correlation in performance between UK and other European economies, driven by affordability constraints and impacts of changes in interest rates, according to EY’s Strategy and Transactions Associate Director, Carlos Gimeno. “The market is still very liquid. We haven’t seen yet increases in base rates translate into a reduction in investor’s risk appetite. Whilst it’s true risk is building in the market, for now investors seem willing to take on that risk and are still pricing portfolios keenly.”
- NPL investor and vendor intensions: The preferred strategy for NPL resolution was internal workouts, followed by workouts with joint venture parties, according to a survey by Ashurst and FTI Consulting. Panel chair and Ashurst partner, Mark Edwards, said: “Traditional sale structures were, perhaps surprisingly, less popular. It is a sign of the market’s maturity that sellers have established third party contracting partners after a decade of activity with whom they can rely upon to enter into meaningful JV arrangements on a long-term basis.”
- The survey also showed the most significant barrier to bringing forward an NPL transaction was transparency concerns related to declining asset values which could be perceived as damaging to an institution’s business reputation, followed by transaction costs. The survey showed that vendors are most keen to sell commercial real estate backed loans, followed by covid-era SME loans and non-ESG-compliant loans. By jurisdiction, investors were most likely to invest in UK NPLs in the next two years, while Italy, Spain and Portugal also came out strong.
Highlights from the wider conference
- In the Spanish discussion, panelists debated the impact of the Sareb tender on the servicing market and the possibility of consolidation (a theme also discussed in the European market update). In the Italian session, the strategies required to workout pandemic era loans and unlikely-to-pay loans was explored.
- In the German panel, the effect of the moratoria on NPL stockpiles was discussed, as well as the asset classes most at risk of default. The UK panel discussed the evolution of NPL ratios over the last two years, the impact of the NatWest shopping centre NPL as a catalyst for further portfolio deal flow, and the impact of the unwinding of the furlough scheme on the UK regions.
- In the NPL securitizations session, panelists talked about the role of technology in complex transactions. In the separate session on AI and data analytics, panelists pondered the use of AI in the NPL market and whether it can truly power investment decisions.
More SmithNovak NPL events this year click here.