Sale of "bad debts" triples in 2021 and continues to rise

Sale of "bad debts" triples in 2021 and continues to rise

This is one of the main conclusions of the 2021 edition of the Investing in NPL in Iberia study, presented this Thursday, in which the consultant analyzes the performance of the Non-Performing Loans (NPL) transactional market in Portugal and Spain.

According to Prime Yield, the sale of this type of assets did not reach 1,000 million euros in 2020, reflecting a drop of 56% compared to the 8,000 million euros registered a year earlier, in 2019. A severe brake caused by the pandemic , as many of the entities that lead this type of operations chose to suspend sales and investment processes; but that now seems to be part of the past, conclude these specialists who, between deals already concluded and the processes currently under way alone, estimate the conclusion of sales of bad debts worth 3,500 million euros by the end of this year. And, «expectations for 2022 are quite optimistic, forecasting a sharp growth in transactions as the market continues to accelerate its reactivation and new portfolios appear on offer».

Following the European trend, over the last year, the volume of "bad debts" on the balance sheets of Portuguese banks continued to reduce, “cleaning” 5,400 million euros between June 2020 and June 2021, that is, from 14,200 million euros to 8,800 million euros in those 12 months. Likewise, the NPL ratio, which reflects the weight of non-performing loans in the total volume of credit granted, also continued to compress, falling from 5.7% to 4.2% in the period under review. However, and even despite these improvements, at the end of the 2nd quarter of 2021 our country continued to hold the 5th highest NPL ratio in Europe, being only surpassed by Greece (14.8%), Cyprus (9.1%) , Bulgaria (6.4%) and Poland (5.2%), and almost doubling the 2.3% of the European average.

Regarding the placing of NPL portfolios for sale, the study concludes that it is not yet possible to assess the real impact of the end of the moratoriums on the Portuguese financial system and to what extent this will result, or not, in a new massive wave of bad debts in the market . Although this impact will only be clearer next year, at the end of June 2021 there were 27 billion euros of credit under default in our country, equivalent to 13% of the total loans granted by the national banks. Additionally, Prime Yield also notes, at this stage a set of macroeconomic factors also persists, based on the current crisis in the supply and production chain of raw materials, goods and services, whose end is not yet to come, which should have a negative impact on this scenario, contributing to an increase in the volume of bad debts.

The combination of these indicators shows “that there is still a long way to go towards improving the quality of credit portfolios held by Portuguese banks, and that one of the most effective solutions will continue to be, precisely, through the sale of NPL portfolios ». A projection that supports the estimates of a sharp acceleration in transactional activity next year, confirming that 2020 was an atypical year, as a result of the pandemic situation. In addition, this analysis underlines that a race to the market is evident in this final stretch of the year, with several sales processes to be launched that raise expectations for 2022, when it is estimated that transaction levels may resume or even surpass the pre-Covid standards.

"We have no doubts that the transactional activity of bad debt portfolios will increase steadily in 2022 both in Portugal and in Spain, confirming that this is a sector that continues to attract investors", begins by saying Nelson Rêgo, CEO of Prime Yield. “There is clear evidence that the drop in activity in 2020, which in Portugal was 90%, resulted from the pandemic stoppage. This year there is a very strong reactivation of the market, albeit at levels lower than pre-Covid, and 2022 should bring a new impulse to this market in our country”, he says.

Thus, «the dynamics observed in this final stretch of the year is a sign of this possible acceleration. In these last two months, we have registered many NPL portfolios entering or studying the market entry for sale, being evident an effort by the Portuguese bank to sell the NPL that still has in stock, a legacy of the pre-Covid. This strategy will allow the banks to pursue their bad debt reduction targets, but it also acts as a prevention for a possible new wave of NPL that may arise in the next two years due to the moratorium and the weakening of economic conditions. That said, in 2022 we anticipate a strong increase in the volume of NPL sales in Portugal, which may reach the levels observed in pre-Covid or even surpass them”, concludes the responsible.

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