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The Spanish NPL market under the spotlight, at SmithNovak’s Global NPL Conference

What is the situation of the NPL market in Spain, and what impact will increased levels of defaults have on the real estate market? How has new regulation impacted the market, what NPL volumes will emerge in the coming years, and will there be a wave of NPLs similar to the one that occurred during the previous crisis of 2008?

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Manuel Enrich, Chief Investor Relations Officer at Ahora Asset Management and Gunther Haltermann, Country Director for Iberia at Debitos, analyzed the current situation in the Spanish NPL market, together with, Media Partner of the Global NPL Conference.

Both Ahora Asset Management and Debitos are part of the list of companies sponsoring SmithNovak’s Global NPL Conference, which will be held in London on October 5 and 6, 2022.

What impact will delinquencies have on the market?

With a ratio of 4.5%, Spain ranked third in Europe in 2021 by volume of non-performing real estate loans, behind only France and Italy, according to Axis Corporate, but what factors place it in this top 3?

Gunther Haltermann believes that the current situation of the Spanish real estate market is good. He bases his answer on the market data, which “show that we are at the top, both in terms of volume and ratio with respect to total investment”. In his opinion, this is due to a combination of the volume of credit granted to individuals and SMEs for the purchase of real estate, together with the economic situation that Spain is going through.

At the moment, a significant part of the total volumes granted to SMEs is in phase 2 or phase 3, he explains. “The new insolvency law adopted in Spain will mean that “zombie companies” will become true NPLs, a situation that has not occurred before. Although the new NPL entries in Spain are not as tragic as expected, this, together with the existing stocks from the pre-crisis period, will mean that we will continue to be at the top of the list,” says the Debitos executive.

However, the outlook is favorable. “An NPL ratio of 4.5% is a very low ratio compared to the peaks we have experienced. For example, in the previous crisis of 2008-2013, the NPL ratio reached levels close to 15%,” argues Manuel Enrich.

In 2013, the transfer of assets with a gross value of 107 billion euros to Sareb meant an unprecedented clean-up of the financial system’s toxic assets. He believes that this, together with the economic recovery from 2016, explains the low NPL ratio.

He agrees with Haltermann: “If, despite this, it is one of the highest in Europe it has to be due to the not yet cleaned-up stock from the previous crisis as no new NPLs propitiated by the pandemic crisis have been detected yet,” the professional explains. From his perspective, this is due to the protective measures on the capital ratios of financial institutions provided by the banking authorities and the aid and moratoriums imposed by government authorities on debtors.

Will the volume of NPLs in Spain increase or decrease?

Enrich believes that the level of NPLs has remained stable up until the first half of 2022. Although, due to COVID-19, the monetary and governmental authorities have implemented protective measures that have artificially slowed down NPLs, Haltermann recalls that some of these measures expired on June 30.

AAM’s Chief Investor Relations Officer believes that delinquency will increase significantly, a trend that he links to the fact that there are no plans to extend these measures and/or implement new ones. He bases his conclusion on market studies: “Just before the pandemic, we started with a level of NPLs of 80 billion; in a non-intervened market, this figure could double to around 160 billion,” he adds. However, Enrich does not believe that this peak will occur in 2022, but probably in mid-2023.

Haltermann also points to the external macroeconomic variables – such as inflation or the war in Ukraine – that influence our economy, thus affecting individuals and SMEs in their ability to pay their debts.

Currently, the European Banking Authority (EBA) foresees an increase in NPL levels in Spain: from the current 83,500 million (total volumes, not only related to banks), to approximately 102,000 million by the end of 2022. According to the Country Director for Iberia at Debitos, the scenario places Spain at the top of this ranking, which will mean that NPL transactions will continue to occur.

The outlook will lead to a continued flow of primary deals, not large deals, but more regular and medium-sized deals, as well as a flow of secondary deals from investors looking to reallocate their capital, the executive believes.

What could lead to the decline in non-performing sales volumes by banks? Haltermann believes that one of the effects will be “inevitably that the secondary market for NPLs will become proportionally more important, at least in the short to medium term”.

It could also be driven by the EBA’s proposals to standardize the information requirements that NPL sellers must provide to potential buyers. Haltermann says that at Debitos they are following that path “to help our clients improve the value of their sales through increased market competition and an efficient sales process.”

Will there be a wave of NPLs similar to the one during the previous crisis?

Whether or not the economy will sink again is a question that worries all sectors, but especially real estate, which was one of the focal points and protagonists in the crisis almost 15 years ago now.

This is probably why professionals in the sector dare to distinguish between one crisis and another: if the previous one (2008-2013) was a financial and real estate crisis, explains Enrich, the current crisis has a different nature: “With its origin in the pandemic and now extended by the invasion of Ukraine and the geopolitical situation in the Pacific, it has very different consequences that will also be reflected in the type of NPLs that may originate”.

Debitos does not expect such a serious crisis to break out either. They see the fundamentals of this wave and the previous one as completely different. Haltermann believes that banks and financial institutions “are doing their homework in terms of risk mitigation and credit loss recognition”. His view, in short, is that “the whole ecosystem is much better prepared than last time”.

And how about Spain in this regard? Haltermann believes that Spain “is a mature market in terms of NPL sales, with an industrial and professional approach to buying debt.” On this point, he points to the activity of the secondary market, which is more active and present than ever. Our ecosystem of sellers and buyers is well balanced to enable financial institutions to deleverage their existing stock of non-performing exposures, he says.

Moreover, the stock of non-performing loans still remaining on banks’ balance sheets means there is room for further deleveraging. And he insists that much of the legacy work has already been successfully completed.

According to AAM, the wave of NPLs related to unsecured consumer, and some marginal transactions related to “tails” still held by banks from the previous crisis will follow. The difference? The previous NPLs were mainly linked to real estate, while the new NPLs will be related to companies, especially SMEs.

Among these NPLs, he notes that there will be secured and unsecured assets, and in all areas of activity. “Depending on the intensity of this crisis, there could be a new wave of mortgage delinquencies, mainly in residential retail,” Enrich said.

The impact of the new regulations on the Spanish NPL market

How the new laws have impacted and what changes we may find in recent months is another issue to be discussed at SmithNovak’s Global NPL Conference. It should be noted that, for the moment, the credit services market is not regulated in Spain as it is in other mature markets, for example, the UK market.

For his part, Haltermann believes that the impact of the EU Directive on credit managers and buyers “has not been visible in Spain, [and] it is likely to be transposed over the course of 2023”. He believes it will mean that small and medium-sized operators will have to dedicate additional resources to managing their current operations.

In parallel, this scenario will result in disclosure requirements for European banks to sell their loans and other implications for the European market and its participants.

Both Enrich and Haltermann welcome the transposition deadline of December 29, 2023. The AAM executive believes it could be even earlier, and adds: “We can anticipate that the purpose of the regulation is to have a common standard across Europe with respect to NPLs, to increase transparency for both the credit holder and the debtor, the creation and promotion of a secondary market that increases the liquidity of these assets and the possibility of cross-border trading in the EU”.

What is the forecast for expected NPL portfolio sales in 2023?

Enrich already guessed: it is expected that the level of NPLs could double the existing pre-pandemic stock of more than 160 billion. In his opinion, the volume of NPLs in 2023 will depend on whether the banking and government authorities withdraw (or do not withdraw) the measures to protect debt holders and debtors”.

At the very least, primary market volumes could increase by 50% (30 billion), with portfolios focused on lending to small and medium-sized enterprises, according to his calculations. As for the secondary market, he explains that the expected portfolio volumes and securitizations, although highly anticipated portfolios, have not yet been consolidated in Spain.

Haltermann points out that the different market players agree that credit quality during 2022 is more stable than expected, influenced by the current context. He believes that the situation may change in 2023 and recalls that the Bank of Spain has yet to reformulate its expectations for next year, taking into account the current socioeconomic situation.

“This will lead to more regular sales in the market, with new players in the game, driven by the ECB’s intention to sell debt through secondary markets,” he adds.

Finally, Haltermann highlights the type of debt buyer profile distinguishing between industrial players, with proprietary collection platforms, focused on unsecured/consumer loans, and opportunistic, higher volume profiles, more focused on secured NPL and REO portfolios.

Source: Press release


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