Since the credit crisis and subsequent calibration of the level of European non-performing loans, countries have been working hard to tackle their particular challenges around NPL reduction. The firm hand of European regulation has undoubtedly forced many to consider new strategies, alongside changing legislation in individual jurisdictions.
While levels of NPLs have fallen from their heights, the European Central Bank has set aggressive targets for banks to reduce their NPL stock. The journey to cut NPLs will continue apace in 2019. Last year, countries such as Greece and Cyprus captured investor interest, with emerging debt sale and specialist collections markets. Both countries have begun selling debts and legislation is changing to reduce historically-high levels of debt forgiveness. State-of-the-art analytics approaches are being used to transfer knowledge from established markets and better quantify the risks involved. Italy is also a country of special interest for 2019 as it goes through a fiscal transformation program. , According to PwC, the country’s stock of NPLs stood at €264bn at the end of 2017. Italy’s market is fragmented but the banks need to recapitalise and the last couple of years have seen significant transactions take place. Further opportunities are expected to arise as banks sell loans earlier in the cycle as well as those already classed as non-performing.
Meanwhile, Spain will continue attracting attention. Bank asset quality and solvency has substantially improved in the country but there is further to go and a number of transactions in the secondary market are expected this year.
Irish banks have been another source of interest to investors. Overall, the average NPL ratio of Irish banks had reduced from 14.6% in the second quarter of 2016 to 11.2% in the third quarter in 2017, according to ECB data. However, NPL guidelines from the ECB now classify anything over 5% as high, adding impetus to offload further loans. In the established UK market, the industry is seeking to extend its reach in local and central government debt, as well as looking to utilities and other ‘unregulated’ debt types. There the challenges lie chiefly in delivering better customer experiences while fighting off the margin-squeezing that has occurred. Outsourcing at earlier stages in the process is becoming popular, leading some to a BPO-style approach. Uncertainty over Brexit and the impact it could have on the increasingly global debt collection industry remains and is unlikely to be resolved in the short term. Though many are at different evolutionary stages, 2019 will bring added focus in deleveraging in both mature and emerging markets. Getting to grips with analytics as a business staple instead of an add-on innovation is an important step for many lenders and collections businesses in this process. The coming year is unlikely to see revolution in this area, more a continuation of efforts to put analytics at the heart of operational processes. Those who are able to properly embed these techniques will have a head start.