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NPL Outlook 2020

What we can expect

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In recent years, nonperforming loans (NPLs) have

become an attractive market for hedge funds and
private equity funds. They have also been the focus of
governmental scrutiny, with local and regional
organisations looking at ways to ensure banks keep
them off their balance sheets. With another busy year
behind us and further uncertainty expected in the face
of COVID-19, what does the future look like?

NPLs have become a focus for investors and regulators alike.

With the global economy showing signs of a continued slowdown,
NPLs will likely remain a critical issue in 2020.

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Nonperforming loans
in a nutshell 
LOAN
A loan will essentially become nonperforming when the borrower fails to make payment
within 90 days or 90 days past due for commercial loans and 180 days past due for
consumer loans. A debt can attract an NPL status in a number of ways.

Examples of nonperforming loans include those in which: €

90 days’ worth of interest has been capitalised, refinanced or delayed due to
an agreement or an amendment to the original agreement

Payments are fewer than 90 days late, but the lender believes the borrower
will not make future payments

 he maturity date of principal repayment has occurred, but a fraction of the

T
loan remains outstanding

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NPLs are considered in default or close to default. The odds of the debtor
repaying the loan in full are substantially lower than for normal loans. If the
debtor resumes payment on the nonperforming loan, then the loan becomes a
re-performing loan, regardless of whether the debtor has actually caught up
with all the missed payments.

NPL build-ups tend to happen when financial crises and stress episodes
occur. They can also be the result of protracted low growth and structural
imbalances in the banking sector. In fact, the off-load of stock from bank
balance sheets has attracted major buyers over the years, such as private
equity funds and hedge funds. As banks look to dispose of NPLs, investors
often take advantage of credit-servicing to realise the value of the loans.

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NPLs prior to COVID-19

According to Deloitte, in the United States loan portfolio sales
from 2009 to 2014 are estimated to have stood at around
USD 188 billion with NPL transactions accounting for 40%.
EU loan portfolio sales were estimated at about EUR 104 billion.
In comparison, a Debtwire report from 2018 showed disposals
associated with the European non-performing loan market
totalling EUR 205.1 bn in gross book value (GBV).
Implementing measures to offset associated risk has
been a major focus for the European Commission (EC)
and governments alike. In 2018, the European Central
Bank published the final version of its Addendum to the
ECB Guidance to Banks on NPLs.

In recent years increased NPL activity has been witnessed in

Southern Europe particularly Italy, Spain and Portugal.
Relatively high NPL ratios were also present in Greece, Cyprus
and CEE countries.

LOAN

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The European Central Bank’s (ECB) ‘Risk assessment for 2020’ highlighted continued
concern over the high levels of NPLs. While the ECB noted a drop in the average NPL
ratio from 4.7% to 3.7% in the first quarter of 2019 compared to the previous year,
the ratio in the euro area remained above pre-crisis levels and was higher than in
other significant industrialised economies. The bank also warned against the
continued inflow of new NPLs and called for banks to continue increasing their
resilience by cleaning up their balance sheets. Overall, the bank warned against the
“risk of an abrupt and significant repricing in financial markets” which continued to
be noticeable.

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Previous predictions
Fitch Ratings argued against a sharp rise in nonperforming loans
in 2020. When it came to western European banks, the credit
rating agency had a negative outlook overall but did not think that
NPLs would increase dramatically in the near future given
improved borrower affordability in a low interest rate environment.
KPMG shared a similar view believing that while challenges
persisted they could be overcome particularly with
increased co-ordination of European bodies. The alignment
between the prudential and supervisory backstop was certainly
considered to help banks develop a more strategic approach.
would remain popular where stock volumes and ratios were
high. Greece has already witnessed high investment in recent
years but 46% of surveyed investors stated they would likely
invest more in the next year. Outside the European market,
investors were expected to turn to China in 2020.
Emerging markets continue to impose regulatory and practical
challenges however, which is something interested parties
were advised to consider.

Ashurst research from 2019 highlighted the likely supply of

transactions in Europe and beyond. According to their report,
68% of sell-side institutions were very likely or certain to bring a LOAN
portfolio to market in the next 12 months. Furthermore for 44%
of institutions, reduction of NPLs was a primary strategy for the
coming months. A strong appetite for securitisation was
predicted, driven largely by the growing legislative narrative.
Securitisations and joint ventures although offering a plethora of
advantages normally require complex structuring.
In terms of market interest, the focus rested in Southern
Europe. According to Ashurst’ survey, Italy Greece and Spain

CHINA
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Preparing for the future
European banks who were looking at 2020 as another opportunity
to further clean-up their balance sheets will have to wait a little
longer. The COVID-19 health crisis, which has effectively halted
NPL portfolio sales in Europe, is likely to trigger a surge in bad
loans depending on the severity of the projected recession.
The basis of any successful NPL sale is accurate and thorough
preparation of sale documents. Lack of preparation can indicate
poor levels of commitment from the seller and causes confusion
for the investor.
NPL asset sales can be a hefty task with transactions easily
worth billions of dollars. Their effective management requires
investment in the appropriate infrastructure. A platform that
enables unlimited fast upload of documents in various file
formats, preferably in bulk, with the capacity to scale is a must.
The likes of virtual data rooms (VDR’s) provide exactly that while
also facilitating cooperation and streamlining workflows between
Learn more about
Drooms’ virtual data rooms
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key stakeholders. Certain providers offer dedicated project
support available around the clock in various languages reducing
time and labour spent in house.
Many virtual data rooms also have an added security benefit.
This is particularly advantageous given NPL sales involve
sensitive information, which, if accidentally released, can obstruct
an entire transaction. Drooms for example focuses on a ‘security
first’ approach and commits to the highest security, encryption
and data protection standards available. The majority of market
players also provide platform administrators with the capacity
to regulate, at scale, viewing, saving and printing rights.
Monitoring activity within the data room and generating reports
to gain insight on a deal is also possible.
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