23 May 2018

Taking stock of the NPL Action Plan

While there has been a reduction in the size of the European NPL stock since its peak in 2013, NPL volumes have remained higher than pre-crisis levels. At the end of 2016, NPL volumes were still estimated at around EUR1 trillion. The EU’s NPL ratio has also remained higher than those of other jurisdictions such as the US and Japan.

In order to help tackle this problem, in 2017, the European Council introduced an Action Plan to speed up the reduction in NPL stock and prevent new build ups of NPLs in future.

Today, the work of the banking industry, together with the investor community and EU institutions, is starting to bear fruit. Encouragingly, NPLs have fallen by a third over the last 3 years – reaching EUR813 billion at the end of 2017. But the number remains onerous and if we look at EU as a whole – 11 Member States have NPLs at a level of 5% of loans (according to the EBA threshold for high NPL countries). So what are the European institutions doing to help tackle this problem?

At AFME’s NPLs conference in Brussels this week, panellists discussed how the main authorities are prioritising action. Among the solutions, the Council’s NPL Action Plan includes various complementary policy actions. It not only focuses on dealing with the current problem of NPL stock, but also aims at preventing the problem from happening in future.

However, the Action Plan cannot be considered as a one-size-fits-all solution since problems vary across jurisdictions. While insolvency regimes in some countries are problematic, the functioning of secondary markets are at the root of the problem in other countries. Therefore, it is not so much one key action the authorities need to take, but the overall set of measures they all need to work together on to implement.

If the NPL Action Plan works, we should start seeing the transparency and quality of balance sheets improve, which could encourage banks to consider merging. At the same time, it could also reveal the need for some banks to raise more capital. Therefore, the question was also raised by panellists about whether the Action Plan could be a catalyst for bank consolidation.  According to speakers, there are parts of the European banking sector where restructuring and consolidation could still go further. And with structural changes related to regulation looming, such restructuring may be needed. Banks may also be driven to further adjust and raise capital as certain business models based on substandard loan underwriting and excessive forbearance become less tolerated by markets and supervisors than in the past. If they are unable to adjust, then they may be driven to leave the market.

Panellists at AFME’s conference concluded that we now know the size of the problem in the EU and clearly, there is a greater handle on the NPL-carrying ability of banks. However, the test will be when we see more market sales of NPLs. Market value is a true value and there will still be instances in some cases of banks having to take a further capital hit while they sell NPLs.