DBRS on European NPL Performance
The Rating Agency provides an update on differen jurisdictions
DBRS Morningstar released the annual commentary on the performance of its publicly rated European nonperforming loan (NPL) securitisations.
Following the outbreak of the Coronavirus Disease (COVID-19) in Q1 2020, the European NPL sector sustained significant disruptions. The pandemic's effects on the judicial system, for instance, delayed the recovery process and negatively affected the performance (measured against the servicers' initial expectations) of existing NPL portfolios leading servicers to formulate more conservative views on their recovery expectations.
In general, the performance trend of NPL securitisations is influenced by a number of factors. Besides onboarding-specific matters that might affect the transaction upon issuance (e.g., the time that the special servicer requires to onboard new portfolios and the potential complexities linked to the migration of the recovery activity), upturns and downturns in real estate market prices and the lengthiness of the judicial recovery process have historically been among the main factors that caused performance variability.
Despite the local governments' efforts to streamline the legal framework as observed over the last few years, timing differences among courts in different locations can be material because of procedural overloads. Following the spread of the pandemic, the backlog in the judicial systems increased further as a result of the restrictive measures imposed by local authorities (e.g., court closures) which, in combination with other extraordinary measures (e.g., moratoria on certain foreclosure actions, etc.), caused considerable disruptions in the legal recovery process, with consequent effects on resolution timing.
Barring a few exceptions, the performance of European NPL transactions issued prior to the pandemic witnessed deterioration as the pandemic spread. Although the performance deterioration continued in 2021 and in the first half of 2022, it has occurred at a much slower pace, with a few transactions even reversing their downward trends during this period.
Conversely, transactions that closed after the pandemic began have generally displayed a very strong performance since closing. As portfolio composition for these transactions has remained consistent compared with prior transactions, one of the driving factors behind the relevant difference in performance has been how servicers have adjusted their expectations. The expected timing of the judicial recovery assumptions has been generally increased to reflect the slower speed of legal proceedings and real estate auctions. Additionally, residential real estate values have experienced a recent increase in the jurisdictions relevant for European NPL securitisations.
Overall, at a gross collections level, 28 out of 46 DBRS Morningstar publicly rated NPL transactions covered in this report (34 Italian, three Spanish, three Portuguese, four Irish, one Cypriot, and one UK, rated up to the first quarter of 2022) have exhibited negative performance against servicers' initial expectations based on the latest available information as of the date of this report. However, if we look only at the transactions issued since the start of the pandemic, out of a total of 20 transactions (13 Italian, two Spanish, two Irish, one Portuguese, one Cypriot, and one UK), just five are exhibiting underperformance against servicers' initial expectations.
In Italy: all transactions rated prior the pandemic are underperforming and have generally continued to underperform in the past 12 months but at a slower pace. Transactions rated after the start of the pandemic are on average overperforming. For most transactions, however, profitability ratios are still higher than 100%, so given the recovery levels on closed loan files are still positive, the underperformance is mainly driven by unforeseen delays in the recoveries.
Following the continued disposals implemented by local banks, the Italian NPL stock on banks' balance sheets reduced over time to EUR 59.9 billion as of Q1 20221 , accounting for approximately 15.6% of the total European NPL exposure. Consistent with this trend, we observed an improved NPL ratio of 3.0% as of March 20221 compared with the ratio of 4.0% as of March 2021 and the average ratio of 1.9% at the European level for the same period.
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