NPLs are declining in Europe - what efforts are bearing fruit?

In a press release from mid-June, the European Commission announced that the ratio of NPLs held by EU banks has fallen by more than half since 2014. The 2008 financial crisis led to a sharp uplift in the number of non-performing loans across the continent. And while in some member states high NPL ratios do remain, others are achieving healthy reductions. 

The EC - as part of the EU Action Plan - outlined a detailed package of measures in March 2018, designed to tackle these high NPL ratios. These policy actions cover four different areas, namely:

• Bank supervision and regulation
• Additional reforms of national restructuring, insolvency, and debt recovery frameworks
• The development of secondary markets for distressed assets
• Fostering (where needed) the restructuring of banks

But that’s not all. Member States have benefitted from case-specific solutions for individual banks - and these solutions have seen certain banks in Italy, Portugal, and Cyprus remove around €112 billion of gross NPLs from their balance sheets.  

Not every EU nation is demonstrating the same success, though - and tactics to reduce NPL balances vary from state to state. Here’s a snapshot of how the situation differs across Europe. 

How are EU countries reducing NPL ratios?

Let’s start with Italy - a real success story. At the end of 2015, the country’s NPL stock totaled €341bn (GBV) - a figure which declined to €180bn at the end of 2018. 

Their tactic is to sell off bad loan books. In this respect, 2018 was a big year. Total disposals reached a record figure of €103.6bn across 64 deals - over double the total from 2017, according to Deloitte. These disposals are thanks to the government’s Garanzia sulla Cartolarizzazone delle Sofferenze (GACS) scheme, which was originally due to end in March 2019 but that is now likely to be renewed for up to three years. GACS ensures that commercial banks can purchase a guarantee from the state, enabling them to negotiate with potential buyers to offload bad assets through securitized transactions. 

In Portugal, NPL ratios may still exceed the European average, but they’re on their way down. Since the number of NPLs in the country peaked in 2016, Portugal’s banks have managed to slash non-performing loan values by around 10 billion Euros per year through a combination of debtor agreements, portfolio sales, and write-downs.

The other European country performing particularly well in terms of reducing NPL ratios in Spain. This, though, is a result of the law change. During the country’s property boom in the late 1990s, controls on mortgage documentation were relaxed, and notarial deeds - required in the country’s foreclosure procedure - were often misplaced or misfiled. However, in May 2018 the Spanish General Directorate of Registries and Notaries ruled that NPL purchasers may now obtain such a deed without this documentation if: 

“1. An enforcement deed has not previously been obtained by the purchaser for the purpose of enforcing the relevant mortgage.

2. The purchaser evidence that it is the legal owner of the relevant debt and security.”

It certainly seems to have increased the appetite of investors, with Spain ranked second in Europe for NPL sales in 2018. 

Despite all these efforts, non-performing loans are “still putting the European Banking Union at risk”. The headline figures for certain nations are positive, but NPL ratios in Europe still remain high. What can the EU as a bloc do to combat the problem?

Lowering the NPL ratio: bloc-wide plans

The onus, say EU officials, is on banks to ensure that the number of non-performing loans goes down, rather than up. New legislation agreed by the European Parliament and the European Council in December 2018 dictates that banks must set aside funding to cover any losses on loans that become non-performing in the future. 

At the time the legislation was passed, Valdis Dombrovskis (EC Vice-President for Financial Stability) stated, “Today’s agreement will ensure that banks will have fewer NPLs on their balance sheets, which should increase their solidity and allow them to finance our businesses”. 

In March 2019, the EU subsequently approved a directive facilitating the transfer of NPLs both from banks to non-credit institutions and across member state borders, while still adhering to EU safeguards. The aim of this directive is to prevent high levels of NPLs from accumulating in the future - and to help to reduce existing ratios still further. 

Conclusion

Across Europe, all manner of efforts to reduce NPL ratios is bearing fruit - although some nations are seeing more success than others. With the issue one that spans the whole of Europe, it is reassuring to see that the EU is working to put bloc-wide plans in place to combat the issue. Will these measures - and those of individual member states - eradicate the issue completely? Only time will tell. What is vital, though, is that individual banks monitor borrower behavior as closely as possible throughout the credit lifecycle, reducing the risk of further delinquent loans in the future.