Waiting for the NPL wave – when, how much and which sectors

NPL waveBulgaria 🇧🇬 and Europe 🇪🇺 are preparing for growth 📈 in the volume of the non-performing loans (NPLs). When could we expect this? What would be the volume? Which sectors would take the biggest hit? We are reviewing the most important regarding this topic in the rows below.

On the one hand, the current crisis is due to the forceful closure or limitation of some businesses which require from the governments in the EU to compensate financially the companies and households for their lost revenues and income. Additionally, since the summer of 2020 the central banks and financial regulators implemented a temporary moratorium on loan repayments under which people and companies were allowed to postpone servicing their bank loans without additional expenses and burdens. This mechanism allowed credit institutions not to classify these loans as restructured or non-performing exposures. The loan holiday was a move aimed at helping diligent borrowers 💨hurt by the coronavirus crisis and to some extent supported businesses and households in mitigating the impact of the pandemic. This is exactly the reason for the paradox we have seen – a decline 📉 of the NPLs during this absulutely unprecedented coronavirus crisis.           

Bulgarian banks have allowed businesses and individuals to postpone payments on loans worth BGN 8.2 billion as of the end of November – BGN 6.5 billion to firms and BGN 1.7 billion to households, central bank data showed. The sector’s gross NPL ratio decreased to 6.1% at the end of September from 6.5% at the end of 2019. The sales of NPL portfolios acquired by debt purchasers contributed to the decline too.  

On the other hand, the government payment schemes and aids as well as the payment moratorium couldn’t last forever. The moratorium on bank lending in Bulgaria will continue until 31 March. At the end of last year many bankers warned it was only effective as a temporary measure. Some of them even claimed the moratorium had already been ineffective and in case it would be extended further it would not generate any benefits. “Moratoriums are effective only in the very short term. Solvency problems couldn’t be solved by deferring loan payments as in the long term such measures turn out to be ineffective”, said Kalin Hristov, deputy governor of the Bulgarian National Bank (BNB), quoted by Capital weekly. Moreover, after the loan repayment holiday expires, the postponed payments would be added to the new ones thus further increasing the volume of the debt.    

In addition to this and considering the current situation and the extended lockdowns, the European economy will hardly recover quickly. So will the employment rate and the incomes of the households. A total of over 400 000 unemployed people registered themselves with the labour offices in Bulgaria from the spring of 2020 up to December. Bulgaria ended last year with an unemployment rate of 6.7%.      

The aforementioned is a factor for a significant increase of the share of NPL portfolios. In its regular quarterly economic review, the BNB warned that if the Bulgarian economy didn’t start recovering rapidly or the economic activity continued to slow down, we can anticipate an increase in the NPLs. There has been no forecast in this direction yet but according to the European Central Bank (ECB) estimates, in a severe but plausible scenario, NPLs at euro area banks could soar to around €1.4 trillion 💶, well above the levels of the financial and sovereign debt crisis and more than two times higher than the volume in June 2019 (see the chart 👇). 

The impression of significant growth in NPL volume is confirmed by the expectations of the debt purchasing companies. The post-COVID NPL volumes in the markets where B2Holding operates will rise 2-3 times, from close to €500 billion 💶 to €1.2 trillion 💶, estimated in its last quarterly report (Q3 2020) the Norway-based debt purchaser, which is among the largest players in this sector in Europe and owner of Debt Collection Agency EAD (DCA). The holding operates in 23 European countries. Previously, in its annual report B2Holding published expectations that the NPL volume will grow due to the COVID-19 pandemic and subsequent measures and the effect will be higher growth in volumes than the investor’s appetite. Even excluding the influence of the crisis and coronavirus, the holding anticipates that banks will start selling portfolios earlier and in larger volumes than historically due to the regulatory changes initiated by the ECB in 2019 that implemented additional provisioning requirements.   

Not surprisingly, leisure and hospitality industries have been hit hardest among all industries and the recession has a severe impact on the businesses in the two sectors and the industries related to them. This is confirmed by the latest European Payment Report.   

One thing is certain – similarly to previous years debt purchasers will play a key role in the recovery of the European economies, turning back cash in them and providing their clients with liquidity.