The coronavirus pandemic may lead to the doubling of bad loans in Europe after a five-year continuous reduction of non-performing loans, as noted in a report by JP Morgan Cazzenove.
Greece has the fourth largest NPL stock in Europe, amounting to 61.3 billion euros, as well as the highest rate of NPLs in bank portfolios, which reaches 30% and is ten times higher than the European average (3%).
According to the report, the creation of new non-performing loans had stagnated in recent years in Europe, but there are signs that it will accelerate in the near future and more problem loans will be sold by banks to claims management companies. which, after a difficult 2020, will achieve a large increase in business.
Data from the debt management company Intrum show, as cited by JP Morgan Cazzenove, that European banks upped forecasts for NPLs in the first quarter of the year by 120 billion euros, compared with the same period last year, which means that very soon large loans will be sold to debt management companies. This is the largest quarterly increase in forecasts observed since the 2008 global crisis.
The date as of when the new upward cycle of NPLs will commence will depend on developments in the pandemic and on decisions from supervisors. At this stage, the report notes that much of the stock of non-performing loans on banks' balance sheets is in a state of uncertainty, as temporary measures suspending loan payments are in effect, delaying loan write offs from lenders.
Bain & Co estimates that the total stock of NPLs in Europe may exceed levels seen during the global crisis by double. The worst case scenario of the European Central Bank, as Business Daily has reported, sees bad debt rising to 1.4 trillion euros, 400 billion euros above the highest level seen during the global crisis.
Although conditions created by the new crisis will cause serious problems for banks and borrowers, the unprecedented recession and the increase in soured loans offer new opportunities for investment in NPL portfolios for debt management firms, as estimated by JP Morgan Cazenove.
According to JP Morgan estimates, Arrow Global and DoValue stand out among the listed companies investing in non-performing loans and loan management, for which it has an "overweight" ranking. For DoValue, which recently strengthened its position in the European market with the acquisition of Eurobank’s FPS, JP Morgan Cazenove gives a target price of 11.6 euros, ie indicating an upside of 38%.
DoValue is the largest independent listed credit and real estate manager in Europe with a regional focus in Italy, Spain, Portugal, Greece and Cyprus. It has negligible risk in its balance sheet, as noted by JP Morgan Cazenove, as its revenues come from long-term contracts and 70% of them expire after 2025. Acquisitions are a key part of the company's growth strategy and the most recent was FPS, last May, while earlier (in the third quarter of 2019) it had acquired the Spanish Altamira, increasing its exposure to the important markets of Greece and Spain.
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