NPL markets in CEE will attract more investors

NPL markets in Central and Eastern Europe are still benefiting from solid deleveraging activity and sales in recent years. This is said in Deloitte’s latest report about non-performing loans in the Central and Eastern Europe (CEE) region.

Romania, Hungary and Croatia have experienced a strong transaction track record between 2015 and 2017 with just over EUR 9.5 billion worth of deals concluded. In addition, we observed continued interest from international and domestic investors on these loan sale markets based on the volume of transactions completed in 2018 H1 as well as the number of reported ongoing transactions (look at the info graphic).

In the last year deals totaling EUR 4.4 billion in CEE, and the agreements before closure are worth EUR 4 billion. This will be more than double growth compared to 2017 when transactions were only EUR 3 billion, but very close to 2016 levels – then there was sales of EUR 7 billion.

Despite recorded positive trends in terms of asset quality indicators, Bulgaria still needs to face challenges to reduce the relatively high stock of distressed debt. The corporate sector continued to face challenges in terms of the legacy non-performing loans, which hindered lending activity.

NPL deals in 2015-2018

Relatively untapped markets with potential future deal flow are Ukraine with its sizeable NPL market, and also Bosnia and Herzegovina and Albania where no major loan sales activity has been reported so far. International and domestic NPL investors keep an eye on the Ukrainian market mainly due to the material supply of non-performing corporate loans, however the desired stimulus to the legal and insolvency framework as well as the infrastructure of distressed debt market is still awaited. Robust provisioning of NPLs potentially contributes to a reduced pricing gap between the investors and sellers, which could also promote the number of deal-makings.

Deleveraging via disposals remained an important option to address non-performing loans among financial institutions in the CEE region. Although, CEE loan sales markets recorded a subdued activity in 2017 and 2018 H1 compared to record deal-making in 2016 as banks have been gradually decreasing their NPL portfolios to a sustainable level. As a result of continuously diminishing NPL portfolios, competition remained strong on the demand side mainly among investors who have already built their servicing capacity in the region. However, the tools of credit portfolio management also included significant write-offs of bad debts as well as restructuring agreements instead of traditional in-court and collateral enforcement proceedings.

The improvement of asset quality is evidenced in the NPL ratios gradually trending back to single-digit figures or even converging the pre-crisis level in some countries. This was also stimulated by the recovery of lending activity driven by the continued positive trends in the macroeconomic environment. The economic upturn also contributed to a better financial position of both corporates and households, which gave a stimulus to the repayment of legacy non-performing loans.

The improvement of the credit portfolio quality is also evidenced in the declining default rates that are indicative of the inflow of new NPLs. Nevertheless, time since the rebound of lending is relatively short to draw robust conclusions in terms of the NPL formation in the coming years. The expected rise in interest rates from the historical lows may also put pressure on the debtors’ repayment capacity.

The outlook of the CEE loan sales markets envisages a miscellaneous picture. Activity on markets that have already tackled most of their NPLs are likely to gradually subside in the coming years and the trade of other non-core assets– among others performing leasing and loan portfolios, subsidiaries of financial institutions as well as servicing platforms – will gain momentum. This trend will be driven by the consolidation of the banking sector as well as banks’ efforts to reshape their portfolios and divest assets considered as strategically non-core. On the other hand, Deloitte still anticipates some larger transactions on markets considered to enter the final phase of the deleveraging process as newcomers are assessing the option of selling their non-performing loan books in order to accelerate the balance sheet clean-up.