Volumes of non-performing loans (NPL), sold by the banks, have increased significantly at the beginning of 2021, compared to the same period of 2019 and 2020, according to the report of consulting company KPMG – “Navigating European distressed markets”. For the first quarter of the year NPL transactions worth nearly EUR 36 bln, and significantly part of them were concluded by the banks in Italy and Greece, which were led by this indicator previously.
Most of the transactions are secured debts and state-guaranteed loans, a result of COVID-crisis and government measures against it. Italian UniCredit and Greek Alpha Bank are among the banks that sold the largest NPL volumes in 2019, 2020 and the beginning of 2021.
The experts of KPMG expect further pressure on corporate financial performance as a result of COVID-19 pandemic. The effect of COVID-19 on asset quality was only partially visible at the time of this report, as defaults will presumably materialize in the next few months. This will likely lead to an increase in loans provisioning and a deterioration in the market capitalization. According to the report, European banks will accelerate their deleveraging strategies and provide a boost to the transaction market.
2020 was a challenging year for the European loan sale market, with a deceleration in observed NPE transactions due to uncertainty. The pipeline is expected to pick up in 2021, with a significant increase in loan loss provisions by the European Banks, depending on asset type, financing conditions and jurisdiction. Generally, deals are expected to decline in size, but deals considering state guarantees are likely to suffer a smaller adjustment in price.
According to KPMG, we are facing a real economic crisis, with unprecedented economic contraction and intense pressure on a broad range of industries and borrowers. While important progress has been made in recent years to reduce the legacy NPL stocks in the EU banking sector from the previous global financial crisis, NPLs remain high in some jurisdictions and banks.
Authors of the report, as many other analysts, believe that regulators and banks are now better prepared to act on overdue debts than during the global financial crisis of 2008-2009. There is also now a well-functioning NPL transaction market across the EU. The credit risk challenges generated by COVID-19 are different, however, with financial pressures rooted in liquidity shortages. This will require some changes in the approach taken by banks, investors and service providers. New European regulations and the guidelines of European Banking Authority will also help the recovery, noted the report.