My summary of the the Global NPL 2020 virtual conference hosted by SmithNovak.
Summary of SmithNovak Global NPL 2020
By Rodolfo Diotallevi
Advisory Board Member
Published Monday 2 November, 2020
Last week I attended the Global NPL 2020 conference hosted by SmithNovak. NPL Markets moderated a servicer panel attended by Altamira, Apex, Copernicus, Equifax and Servihabitat. A big thanks to SmithNovak and the speakers on our servicer panel for making this such an insightful event.
My main takeaways from the conference and our panel are as follows. I think this can safely be characterised as a turbulent year. Uncertainty, due to Covid-19, has been the key driver with new concerns over the recent second lockdowns. Banks are clearly entering this phase with expected increases in NPLs with a much stronger capital position than in the past, nonetheless additional provisioning is being made by many, based on the expectation of larger credit losses. The full extent of this wave of new losses remains difficult to quantify, with the full impact from the implementation of payment moratoria and forbearance measures still to be fully digested by the market. The EBA risk dashboard helping to monitor bank NPLs is starting to show a slight increase in the second quarter of 2020 for the first time in many years. Various research reports, including our own, estimate NPLs to more than double in the coming years. Interestingly, this time round, the increase in NPL is expected to be more evenly spread out across jurisdictions, and impacting certain asset classes, like SMEs and CREs, more than others.
According to EY, the number of primary transactions is down significantly from 2019, by at least 60%. The secondary market and sale of single assets has seen even less activity than the primary which has been driven mainly by a few large transactions. Nonetheless, countries like Greece, Italy, Spain and to a lesser extent the UK, have remained active in the primary markets. According to some large bank sellers, some international investors have stepped to the sidelines while local, more specialised investors remained active. Regulators have been accommodative. Hence, banks can afford to wait and better assess the full extent of the crisis and the public support measures before selling. In short, the market has not seen any forced sellers. Investors are monitoring closely the impact of Covid-19 on recovery values and prices overall. Consequently bid-ask spreads have increased and anecdotally prices are seeing a reduction around 5-15%. The consensus across different panels of the conference is that activity will pick up again during 2021 and into 2022, but the timing is uncertain. The expected wave of NPL will certainly offer new opportunities spread over more countries than before the pandemic.
Servicers have faced challenging times in light of the Covid-19 lockdown. Legal processes initially stopped and remained delayed. Sales processes slowed, although stayed above their worse expectations and Q3 saw a strong rebound of activity. External financing is proving more challenging and banks are taking a more measured approach to risk. Payment holidays and moratoriums on insolvencies are delaying the recovery process. Collections have been delayed or reduced in the first few months of the lockdown impacting valuations and exit timeframes for investors. On the positive side, residential real estate prices have remained steady, even if the full economic impact of the pandemic on the economy remains uncertain. For 2020, the IMF in its latest report is now predicting a -8% and -5% reduction in GDP for Europe and North America, respectively.
This has led servicers to rethink their business models in order to adapt to the new uncertain environment. Impressively, servicers have been able to adapt quickly to remote and smart working and have embraced technology to improve processes and reduce costs. As such, despite initial concerns expressed by our servicer panel, recoveries have performed better than expected in all segments during and after the lockdown, particularly in real estate sales and unsecured consumer retail.
Going forward focus will remain on getting further clarity on legal measures impacting debt-postponements and moratoria that could impact recovery cash flows. With legal and regulatory measures varying across jurisdictions, different dynamics will emerge country to country. Certain industries, like accommodation, leisure, and travel will be hardest hit which will impact the related CRE and SME severely. Despite continued attention needed from servicers improving efficiencies and better managing costs, they are well positioned to tackle the crisis, and there is no doubt that their role in improving the market for NPL transactions will be instrumental.