DBRS on Servicer Evolution in Europe
Diversification, Expansion in New Market and Purchase Distressed Assets
DBRS Released a commentary on European Servicer Evolution. Key highlights include:
the diversification of servicers to offer additional products and services; the expansion of servicers into new markets in terms of geography; in some jurisdictions, the progressive move to purchase and manage distressed assets.
Based on observations from operational reviews and our own research, the commentary examines how servicer consolidation (whether in the nonperforming loan (NPL) or performing loan market) has enabled servicers to expand and benefit from synergies in their shared operations. This, in turn, leads to increased servicing capabilities across multiple jurisdictions.
In DBRS Morningstar's opinion, such harmonisation of operations should improve processes and procedures following best market practices and regulation. Harmonised regulation across Europe will also further aid servicers' operations throughout European Union (EU) member states. Ther Rating Agency believe future consolidation is likely, particularly following recently announced bids and deals, but it remains to be seen whether the increased harmonisation will lead to particular jurisdictions becoming outliers in the future.
Following the global financial crisis and a period of calm, at the end of 2017 that there were no pan-European servicers or servicers transitioning into other product areas. However, since then, a significant change in the market has occurred—several servicers began operating in multiple jurisdictions, not only servicing groups operating in Europe but also those operating with a global footprint.
In January 2018, DBRS Morningstar published its European NPLs and the Rise of Special Servicers commentary, in which we examined the third-party and servicing market in Europe and focused on the rise of special servicers. At that time, banks across Europe were seeking to address their increasing portfolios of NPLs and loan portfolios. To that end, these banks sold such portfolios to investors, thereby giving rise to a need for special servicers with the expertise to work out this particular type of asset.
In October 2018, a new commentary was published on UK Mortgage Servicers Enter Lending Arena, which looked at servicers moving into mortgage lending—a shift that began primarily in the UK, but subsequently occurred in other jurisdictions, leading to servicers' increased coverage of markets and products.
Over the last few years, the key evolution in the servicing market has been the expansion of servicing groups into new markets, both in terms of geography and services offered. This is particularly noticeable for NPL servicing where infrastructure and knowledge is essential to manage distressed assets.
In the northern European markets, servicers have transitioned from working out portfolios of loans originated before the financial crisis to supporting new entrants into the mortgage lending markets. In the markets of southern Europe, where working out NPLs is still a priority, there have been progressive moves into real estate and asset management to manage assets flowing from recovery activity.
Although it is possible for an investor to purchase portfolios, it is unlikely that an inexperienced servicer would be responsible for managing the workout process. Therefore, across Europe, the servicer consolidation that has resulted in a pan-European servicer market as well as servicers operating globally have led to a more consistent approach to recovery.
For example, the merger of Intrum, Justitia, and Lindorff in 2017 created Intrum. At that time, Intrum was known as a debt purchaser that serviced its own portfolio. Since then, the company has entered into partnerships with banks across Europe to service portfolios of NPLs, including Intesa Sanpaolo S.p.A. in Italy and Piraeus Bank in Greece to give it a pan-European presence. Intrum has also pushed into third-party servicing, managing early- and/or late-stage collection activity from other lenders.
DBRS Morningstar believes that the consolidation of servicers provides the opportunity for servicers to benefit from synergies in their operations which, in turn, increases servicing capability across multiple jurisdictions. Future consolidation seems likely and, while there will be larger servicing groups with specific jurisdictional knowledge and representation, smaller bespoke servicers will continue to exist and appear, offering their own brand of skills and services.
Overall, such harmonisation of operations will lead to improved processes and procedures that follow an approach of best market practices. In theory, harmonised regulation across Europe will further aid servicers' operations throughout EU member states but, in certain jurisdictions, implementation remains a challenge due to diverging national regulations or practices.
Following recently announced bids and deals, it remains to be seen whether the increased harmonisation in Europe will lead to the UK becoming an outlier in the future or whether the servicing markets will align.
Reference Links
https://www.dbrsmorningstar.com/research/400785