Demand for non-performing loans (NPLs) in Central and Eastern Europe (CEE) is becoming more active and a number of investment firms and private equity funds are willing and able to invest in this market. This shows the new NPL Monitor for the first half of 2021 of the organization Vienna Initiative, which is prepared every six month. The report tracks NPL trends in 17 CEE countries – three Baltic countries, Balkans, including Bulgaria, but without Greece, also Poland, Czech republic, Slovakia and Hungary. 

In the existing market conditions it is difficult for banks to assess a fair price and a good timing to sell their NPL portfolios. This contributes to delays in putting up new portfolios for sale, says the report’s authors. The market should become attractive when the banks gain visibility on the quality of their assets after the COVID-crisis and part of the loans become overdue, and depending on the macroeconomic conditions from 2022, is the forecast of the experts. 

COVID-impacts

The worst-case scenario from the first half of 2020 was for a significant rise in NPLs as a result of the Covid-19 pandemic ‒ is now unlikely to materialise. Still, the ultimate impact of the crisis on banks’ asset quality remains uncertain. Regulators across Europe and beyond are monitoring the situation very closely. The public measures implemented in most jurisdictions mitigated, at least temporarily, the negative effects of the pandemic on banks’ asset quality. The region saw a decline in the NPL ratio – it remained relatively stable, at 3.5 per cent in the region, down 0.2 percentage points on the year. NPLs are still expected to rise, however, as government measures begin to wane. 

While the extent of the impact remains to be seen, the stage 2 loans, particularly among loans that benefited from payment moratoria, recently increased (see the chart below). The stage 2 loans according to the IFRS 9 classification are those, which are not problematic yet, but are under monitoring and require additional provisions. It can be seen as an indicator of intensifying credit risks in future. Economies reliant on sectors most vulnerable to the crisis (such as accommodation and food, arts and entertainment, commercial real estate (CRE) or transport) are also likely to be particularly affected. In addition, the widespread use of payment moratoria and other forbearance measures creates additional monitoring challenges for banks, putting them under accrued pressure.

At regional level, NPL volumes fell 3.9 per cent in the 12 months from Q4 2019 to Q4 2020. The decline was most significant in Latvia (37%), Hungary (36%) and North Macedonia (26%), where they fell 37 per cent, 36 per cent and 26 per cent during the period. The largest contributor to the decline in absolute terms was Poland, where the stock of NPLs declined by almost €370 million, or 2.8% 

Signs for rise 

According to the European Banking Authority (EBA) at the end of 2020 share in stage 2 loans in the EU rose to 9.1 per cent of total loans in the last quarter of 2020 from 8.2% in Q2 2020. The regional share of stage 2 loans to total loans in CEE countries increased slightly, by 0.8 percentage point, over the course of H2 2020. An increase in stage 2 loans requires banks to increase their provisioning and can impact profitability. 

In December 2020, the ECB and the European Commission published a new action plan on NPLs. This new plan is a follow-up to the European Commission’s 2017 EU action plan on NPLs and aims to continue improving the framework for dealing with NPLs in response to the Covid-19 crisis. The new action plan is structured around four strategic axes: 

• developing secondary markets for distressed assets to facilitate bank balance-sheet cleansing 
• Reforming EU legislation on debt recovery and corporate insolvency  
• Supporting the establishment and cooperation of national asset management companies  
• Implementing precautionary public support measures to keep channelling funds into the real economy. 

The directive aims to foster the development of secondary markets for NPLs by tackling undue obstacles to credit servicing and the transfer of bank loans to third parties across the EU. This is so called “passporting”, used by many financial companies in the EU – it guarantees free capital transactions and business licenses in one EU country, so services can be offered in the rest of the Union.

On Monday European Council and European parliament confirmed that they had agreed to adopt a directive at EU level to facilitate the secondary market for NPLs while ensuring the protection of debtors.