Evolution of European NPL market could change geography of ABS opportunities

The European NPL market is poised for change this year, as Italy sees volumes decline and government-backed schemes coming to an end. Yet, while the evolution is likely to be gradual, NPL stocks are rising in less fancied geographies, offering some promise for prospective ABS issuance – as demonstrated by iQera’s recent closure on a private NPL ABS deal.

Banks in jurisdictions with traditionally high NPL stocks saw a 10.2% year-on-year reduction of NPL volumes in Q3 2023, according to Morningstar DBRS data. This has included reductions of 16.7% for Italy and 24.7% for Greece, reflecting the success of the countries’ respective Garanzia sulla Cartolarizzazione delle Sofferenze (GACS) and Hellenic Asset Protection Scheme (HAPS) schemes. Similarly, there have been reductions of 21.4% in Portugal, 17.5% in Ireland and 2.5% in Spain, where stocks were previously among the highest in the continent. 

In contrast, banks in other jurisdictions assessed by Morningstar DBRS have seen 6.7% growth on aggregate, indicating a shifting NPL landscape. Indeed, increases have been observed specifically in the markets that have historically had the lowest NPL ratios. The greatest increases have been in Germany and France, which are up 12.5% and 6.6% respectively in Q3 2023 versus Q3 2022, raising the question of whether we are likely to see an increase in NPL ABS in those markets.

“There have been some private securitisations in France,” states Paula Lichtensztein, senior structured finance analyst at Scope. “The high stock of NPLs in France is not new, but NPL ratios have been relatively low. As of now, the French banks have managed their NPL stocks in-house, so we’ve not seen the flow of securitisation activity as we have in Italy due to the GACS scheme.”

However, despite this shift in dynamics, NPL ABS activity is expected to remain limited in France – as it is in Germany – as stocks remain far off the numbers seen in Italy and Greece during the peak of NPL securitisation activity in 2015-2016. This also means schemes such as Italy’s GACS and Greece’s HAPS – which were introduced during that period – are unlikely to be replicated elsewhere.

“Germany is still far away from the levels seen in Italy in 2016 when the GACS scheme was introduced, with stocks around the €20bn mark,” says Rossella Ghidoni, director, structured finance at Scope. “France is much closer at €100bn, but it’s still a matter of political alignment, and what the preferred method is of the banking industry to deal with NPL stocks. There are several moving factors that need to be aligned for the schemes to be in place, so it’s not easy.” 

“At least in the short term, it doesn’t seem that there will be any other country setting up these kinds of schemes,” adds Lichtensztein. “Italy hasn’t renewed the GACS scheme, so it seems highly unlikely.”

The ECB issued warnings late last year regarding the potential surge of NPLs going forward, advising lenders to bolster their NPL provisions. However, on the securitisation front, changes in European NPL ABS issuance are likely to be restricted to a continued gradual slowdown resulting from the expiration of GACS in Italy.  

“The GACS scheme definitely boosted securitisation activity,” confirms Lichtensztein. “Since GACS was not renewed, securitisation activity has – not stopped – but significantly slowed down, which is what we anticipate for this year.”

Despite that slowdown, NPL ABS issuance is expected to continue in Italy and Greece, as well as other active jurisdictions like Spain, Portugal and Cyprus. And despite the fact that French and German NPL volumes have now surpassed those of Spain and Cyprus, that is not expected to bring about significant geographic changes in ABS issuance in the short term.

“In Spain, there’s never been a scheme, but there has been some securitisation activity also,” says Lichtensztein. “In Portugal and Cyprus there has been some securitisation activity, but the levels have been commensurate with the size of the market.” It is also, she says, partly due to a lack of Italian-style activity-boosting schemes.

The challenging macroeconomic environment may continue to negatively impact borrowers – and thus affect NPL performance. This is a potential cause for concern in jurisdictions such as Germany, which have seen rising NPL stocks.

“A further sign of the German situation was given recently by the Bundesbank, when its vice president called for increasing provision levels for NPLs given the increasing stocks and increasing credit risk,” explains Ghidoni. “However, even if Germany began showing signs of crisis and communicated it publicly, we still don’t see any particular movement from that side.”

She adds: “It’s worth noting that in 2022, for example, the NPL stock in Germany was lower than in other countries, such as France, Spain or Italy. The volume of NPL disposals was also much lower than in Italy and Spain.”

NPL performance will continue to be influenced by broader macroeconomic and geopolitical forces, with ongoing uncertainties surrounding growth, inflation and monetary conditions having the potential to keep peak rates skewed to the downside.

“For Italy, we still expect that servicers will continue to fall short on initial expectations, and we’ll monitor asset sales this year to see if the trend of increasing discounts since the Covid-19 outbreak stabilises,” says Lichtensztein. “Since the pandemic we’ve seen increasing discounts and asset sales, but with moderating inflation and normalising monetary policy, this should have a positive impact on distressed asset sales in the medium term.” 

She continues: “We’ve seen support from the liquidity side from note sales due to the pandemic too, so servicers have sold big tickets or portions of portfolios to support the flow of collections. But this has generally come at the expense of higher than average liquidations.”

In Italy, the ReoCo structure continues to be explored as a potential solution to improve NPL performance this year, despite past disappointment with the structure’s successes (SCI 25 January).

Although a return of the Italian GACS scheme seems unlikely given present NPL stock levels, its proven success means it could return in the future if necessary. Meanwhile, hope for a GACS-like scheme for Italian unlikely-to-pay (UTP) loans in Italy also remains alive. Discussions for UTP ABS are ongoing and awaiting a government decision, as UTP stock levels surpass NPL volumes.

Claudia Lewis