Nonperforming loan (NPL) activity tends to increase during periods of economic uncertainty, and COVID-19 is no exception. Questions remain around how the pandemic, including newly emerging variants, will impact the markets.
In the end, investors wonder: will COVID-19 lead to a massive increase in NPL activity, or will a relatively quick recovery simply mean just a bit of restructuring?
A brief history of NPLs
NPLs are loans in or near default, resulting from the borrower’s failure to make scheduled payments for a specified period. As NPL portfolios increase in size, some banks sell them on at a discounted rate to optimise their balance sheets and focus on performing loans.
Most NPL activity ground to a halt at the beginning of the pandemic, but the second half of 2020 saw regained momentum:
- 2020 marked a significant slowdown in activity, trading roughly 35% below 2019 totals
- Government-guaranteed schemes dominated transactions that did close in 2020, at least in Europe
- The average NPL ratio across EBA banks fell in Q4 2020 to 2.6%, reflecting a reduction in volume and an increase in overall lending
- In Europe, Italy and Greece saw the most significant NPL activity in 2020, thanks to government-guaranteed securitisation schemes
- UK and Irish banks saw instead a moderate rise in distress volumes despite government attempts to soften the pandemic’s impact. Total provisioning levels at top banks in Europe have nearly doubled year over year as institutions brace for expected losses
While these preparations suggest an increase in NPL stock is expected, the full impact of the pandemic remains uncertain, as many banks still don’t know which borrowers will be unable to repay loans.
Our prediction for the future
Given the indicators in Europe and the UK, we expect to see some increased NPL activity in key jurisdictions. Still, we hardly anticipate the tidal wave so many had feared when COVID-19 first arrived. The same holds true for the U.S., where activity has slowed following an initial reactive spike in the back half of 2020. In China, too, despite specific situations such as Evergrande, growth in NPL activity looks to be modest.
IQ-EQ has over 20 years of experience in securitisation services
IQ-EQ’s flexible, agile team is located across Europe, the U.S., and Asia. With localised expertise in key jurisdictions, we are well-equipped to handle anything from private or warehouse transactions to multi-tranche, multi-currency benchmarks.
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