The NPL situation in Europe for Q3 2022 and beyond

Given the financial setbacks of the last two years, this unification could help steer the continent through this new crisis. In fact, Europe has already shown signs of resilience in the face of adversity.

Because, while Europe suffered just as much as the rest of the world in 2020 when it came to debts and non-performing loans (NPLs) brought on by the fallout of the pandemic, the last 12 months have seen some real stabilisation. And with a new EU directive just passed at the start of the year, 2022 looks set to be a year of financial defiance for all Europeans.

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How did we get here?

The NPL ratio in Europe was a problem long before the first cases of coronavirus were announced. Indeed, between the financial crisis in 2008 and 2014, the NPL ratio in the region increased from around 3% to around 8%.

Banks have been working hard to keep credit flowing by selling off their NPLs, with a peak of €208.2 billion being reached in NPL sales in 2018. As a result, the NPL ratio settled back at 3% in 2019. And then, just 12 months later, the pandemic hit and NPL sales fell to a low of €67.7 billion.

Due to the pandemic, many households and businesses were unable to pay their bills, which led to increased levels of NPLs. With NPLs rising and nobody in the market for them, banks were swamped with debt and the outlook for the future was rather bleak. According to the European Banking Authority's (EBA) 2020 Risk Dashboard overall European NPL levels stood at a record low of €510.5 billion in 2020.

2021, however, saw a pretty sharp upturn in events with widespread vaccination rollouts and various government schemes helping markets in the region stabilise. In fact, in Italy, where the pandemic was once at its absolute worst, sales in 2021 made up around €38.9 billion, which represented almost 60% of total NPL sales in Europe.

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Where are we going?

There are already encouraging signs that Europe might be course-correcting itself even further. A new EU directive on NPLs officially took effect at the end of 2021 with a deadline for implementation set for the end of next year.

The directive not only sets out new rules and standards for lenders but aims to develop the secondary NPL market in an effort to encourage the intervention of specialised credit services that might be able to take the burden off the banks. The new standardised data sets outlined by the directive will be required by all NPL transactions relating to credit issued on or after 1 July 2018 that became non-performing after 28 December 2021.

The regulatory framework set out by the directive notes that, in all future NPL transactions, authorisation must be obtained from the home member state to carry out credit servicing activities. Borrowers must also be notified of an NPL sale alongside information relating to the sale such as the date of transfer and contact details of the buyer. Recorded must also be kept for a period of at least 10 years.

This all arrives at a time when bank asset quality in the EU appears quite resilient, with NPL ratios settling into a comfortable downward trend. According to the EBA, the NPL ratio sat at 2.3% in Q2 2021 and reached almost 2% by the end of the year.

Of course, with the war in Ukraine now settling in for the long haul, it’s unclear exactly what the new few months or years are going to look like and the European Central Bank (ECB) believes it’s still too early to dismiss the possibility of material asset quality deterioration in the aftermath of the pandemic. But banks in the region have at least now got a decent crutch to stand on.

What must be done?

If everything goes as planned, the EU directive will significantly help NPL matters. However, it’s far from a catch-all solution to the problem. It might make buying and selling NPLs easier for lenders and other third parties but the right hardware and software still need to be in place to keep things running smoothly and ensure debtors have the best practical opportunities to prevent their accounts from becoming NPLs.

In that regard, digital transformation is comfortably the most valuable tool in the sector’s arsenal. Thankfully, Europe is one of the regions with the most enthusiastic digital adopters, with the number of digital users in the continent increasing by 23% since the start of the pandemic.

It’s the convenience and user-friendliness of the digital banking system that has won so many converts, particularly in a time where social distancing is still being actively encouraged. That’s not to say it’s a guarantee, of course. In fact, the German digital bank N26 learned this the hard way when it was forced recently to pull out not the UK and the US due to poor performance.

But in continental Europe, digital adoption remains high and when more holistic digital platforms are used for everything from organising bank accounts to debt collection, the NPL situation should fall into place as we all start to take complete control of our finances.

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