Covid-19 delaying collections on NPLs in Europe

Measures to deal with the coronavirus outbreak in Europe will slow collections on non-performing loan (NPL) securitisations, according to a new report by Moody's Investors Service.

'Following the outbreak, investor sentiment is deteriorating, which will affect real estate prices, and courts are closed, which will delay collections,' said María Turbica Manrique, VP-senior credit officer at Moody's. 'These developments are negative for NPL transactions.'

The Moody's report shows that court appraisals, property inspections and auctions are frozen. Until courts return to normal activity, recoveries for NPL transactions will be delayed. 'Real estate prices could deteriorate to a varying extent across jurisdictions, depending on the magnitude of the economic slowdown and the circumstances of the different property markets,' Turbica Manrique added.

Italian issue
NPL securitisations start from a weaker position in Italy, which had no house price inflation in 2019, compared with transactions in Ireland, Portugal and Spain, where house price inflation was in the 2.5%-5.0% range in 2019.

Transactions' cash flows depend on the timing and amount of collections, Moody's notes. 'Measures imposed to contain the spread of the coronavirus are disrupting the operations of European judicial systems, which will delay NPL securitisations' gross recoveries,' Turbica Manrique said.

However, the report suggests that 'the expected growth in NPLs in the wake of Covid-19 will reverse the previous trend'. The stock of NPLs at a representative sample of European banks declined to €617.8 bn at the end of the third quarter of 2019 from €714.1 bn a year earlier.

Within the sample of European banks, Italian institutions had the highest stock of NPLs at €127.1 bn, or 7.2% of their total loans. The NPL ratio for Greek institutions was also significant at 37.4%, with a stock of €74.5 bn.