European NPL Industry Forecast for 2022/2023 in 249 Characters
Gifford West, Alpine Tremont, 13th of May 2022
Few NPLs this year, lots of NPLs next year (but not what the industry wants/is geared to), everyone loves NPL securitizations (except for me), servicing platforms consolidating/prepping for this next phase but there is no proven SME servicing model.

I don’t tweet; I’ve never seen the attraction. Call it a character flaw. But as a writing challenge, the previous paragraph summarizes last week’s excellent conference run by SmithNovak in London. For those with short attention spans, stop here. [248]

SmithNovak did an outstanding job of gathering the great and the good of the European NPL industry and organizing an excellent program. The sponsors presented some insightful material – especially an industry survey that Ashurst authored.

I measure the success of these events by the number of people in the first and last sessions. My rough estimate was 400+ at the first session and 200+ at the final session of the second day. This is outstanding. The panels were well balanced and the panelist all came ready to make candid comments.

The consensus of the attendees was that the lending industry is headed into a perfect storm of adverse factors. A global recession. A supply chain crisis. The knock-on effects of the war in Ukraine and the related sanctions. The withdrawal of COVID support across every economy causing the failure of many businesses that were just holding on. Rising interest rates/inflation. With all of these factors, how could we not be seeing a spike in NPLs?

That being said, for the balance of 2022, few expected the trouble to really get started. Payment holidays are still in place for most/many of the government relief programs. Consumers still have a stockpile of cash from two years of watching Netflix and not shopping/eating out. The seriousness of the fuel shock is still trickling through the system. Central banks have yet to really turn the screws. Translation for the NPL industry: that dry powder will still be dry in Q4.

The European NPL industry is ready for a massive wave of non-performing commercial real estate and residential loans. Servicers are in place, AI valuation models have been developed, and the governments have adapted foreclosure law to make pricing much more straightforward. Unfortunately, the consensus is that this is not where the spike will initially hit. The majority of speakers see the next NPL spike in Northern Europe as being in the SME sector -- similar to Italy and Greece in the last cycle. There is some agreement that servicing SME NPLs is challenging and actually suffers from diseconomies of scale -- bigger does not necessarily mean better. Some floated the idea that regional bad banks would be the answer -- others thought that that would make the problem worse. The industry needs some new tools if this is what happens.

Securitization of NPLs with government guarantees (GACS, etc.) was viewed as the panacea for all of these upcoming sorrows-- especially by those who manage and structure these vehicles. As put graphically by one commentator, “we need to get the zombie companies off the banks’ balance sheets -- securitizations are the fastest cleanest way of doing it.” The flaw in this argument is that until the zombies are removed from the economy, they prohibit healthy companies from recovering. Securitizations just shift the zombies to a different balance sheet -- the economy still suffers and the government is still left holding the unrecognized losses.

Finally, proven servicers will be the kingmakers of the next NPL crisis. The big PE funds have created massive stores of funds, but they do not want to get back into the servicing business. In the background, the consumer servicing platforms have been consolidating. The gap remains for the scale SME servicer, if such an entity can be built.

The SmithNovak conference proved once again that there are brilliant people in the NPL industry that do their best work when brought together to brainstorm on the problems of the banking industry in a single venue for a structured discussion.

Zoom conferences are a poor substitute.

Gifford West is the co-founder of Alpine Tremont, an international advisory firm working with governments, lenders, and borrowers to address liquidity issues.

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