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The state support measures conceal true extent of potential loan defaults

Berlin, March 26, 2021 – The Federal Association of Loan Purchase and Servicing (Bundesvereinigung Kreditankauf und Servicing e.V. or BKS) warns of non-performing loans in the billion range. Due to the state support measures, the overall volume cannot yet be reliably estimated. In the current NPL Barometer, the German credit institutions surveyed thus forecast considerably less loan defaults than expected a year ago. Jürgen Sonder, President of BKS: ” It is certain that the government’s massive aid packages spared German banks from a significantly higher NPL ratio last year. However, it is also indisputable that the resulting follow-up effects will be reflected in the balance sheets of German banks over the upcoming years. “

The banks surveyed expect around EUR 40.6 billion in non-performing loans (NPLs) in the current year. This figure could then rise up to 46.7 billion euros in 2022. In the last NPL Barometer, the respondents were still expecting an increase to EUR 59 billion by the end of 2021 alone, compared with around EUR 33 billion in NPL holdings in 2020. “This year, the assessments of the participants in our survey were much more conservative. While significant defaults have been expected last year under the impression of the first lockdown, it turned out that insolvencies have been delayed due to the aid measures and loan defaults have led to no distortions in 2020. Nevertheless, banks have to take precautions – as the high provisions are indicating,” says Sonder. The measures currently preventing loan defaults include the suspension of the obligation to file for insolvency, liquidity and credit programs of the Kreditanstalt für Wiederaufbau and short-time working allowances. “Only if the politicians decide not to provide any further support, the full implications will become clear,” states Sonder.

The companies in (offline) retail, tourism and food service industry are particularly affected by potential loan defaults. “In these sectors, defaults in larger amounts are almost inevitable,” says Sonder. For example, NPL ratios of around 3.3 percent are expected for small and medium-sized enterprises (SMEs) in 2021. In 2020, the default rate was still 2.5 percent. For 2022, that figure could rise to 3.8 percent. “This is also the highest expected default rate of all asset classes in the second survey of the NPL Barometer during the Corona crisis,” Sonder explains.

The real estate sector, which until now had only very few defaults in recent years thanks to rising property prices and low interest rates, will also be affected. “However, the impact here is comparatively small,” says Sonder. Particularly for residential real estate loans, the increase from 1.1 percent in 2020 or 1.5 percent in 2021 to 1.7 percent in 2022 had actually not been so substantial. For financed commercial real estate, defaults are rising more sharply: from 1.7 percent last year to 2.5 percent this year and up to 3.1 percent in 2022. “Rising unemployment is causing a (moderate) increase in residential real estate loans, while for commercial real estate the reasons are the upcoming difficulties faced by companies,” Sonder says.

Consumer loans show an NPL ratio of 2.1 percent in 2020. An increase to 2.8 percent this year and 3.4 percent in 2022 is here to be expected.

“Banks have significantly increased their risk provisions in 2020 due to the expected loan defaults,” Sonder said. Once the government support measures come to an end and the extension of the time limit regarding the obligation to file for insolvency will expire on April 30, 2021, the NPL management of credit institutions will be particularly challenged in the coming years. “Even if the banks have already taken the expected loan defaults into account in some cases in their risk provisions, there will be an extra effort and expense in restructuring or reorganization of companies at risk of insolvency,” says Sonder. Early recognition and risk monitoring are the most important tasks and instruments at this point. In NPL management, risk managers still prefer a combined strategy for processing non-performing loans. “In parallel with the internal processing, external processing and active participation on the secondary market will have to play a major role,” Sonder emphasizes. Nevertheless, some uncertainty remains.

The NPL Barometer 2020 is now available upon request here.

Wave of bankruptcies: Expected credit defaults threaten to put a heavy burden on the banking system

Berlin, November 23, 2020 – The wave of postponed bankruptcies of small and medium-sized companies, as well as the expected insolvencies of solo self-employed persons, can become a great burden for the state and society – and also place a heavy burden on the entire banking system. Together with a possible restriction of lending, “a rapid economic recovery becomes unlikely,” says Jürgen Sonder, President of the German Federal Association of Loan Purchase and Servicing (BKS). At the NPL FORUM, the industry summit of the NPL credit industry, which took place online on November 25, possible options and alternatives for the future were discussed.

“The restrictions imposed by the pandemic are depriving many solo self-employed persons as well as small and medium-sized companies of the basis for their business,” says Sonder. But the extension of the obligation to file for bankruptcy postpones the insolvencies until 2021 and 2022. Therefore, the BKS expects a significant increase in over 100,000 private bankruptcies in the upcoming year. In addition, a further strong increase in private bankruptcy applications is feared once the planned reduction of the residual debt discharge procedure to three years will come into effect.

With the extension of the obligation to file for bankruptcy, the German economy is also putting off an insolvency problem in corporate bankruptcies. There are currently around 4,500 corporate insolvencies per quarter. “Even if the state continues to provide a buffer here, we expect to see an increase of 40 percent to 6,000 to 7,000 bankruptcies per quarter starting with 2021. This puts the capital situation of the banks into an exceptionally stressful situation,” says Sonder.

The problem: If too many companies or private individuals are unable to service their loans at the same time, the banks reach their limits in terms of capital and processing. “This not only affects the risk capital to be provided, but also the real costs of loan defaults,” says Sonder. “The banks are faced with enormous challenges merely from restructuring tasks and the settlement of non-performing loans”.

The crucial factor here is that the banks remain capable of acting. Sonder: “The secondary market for non-performing loans can be a building block for the financial market stability in the efforts to manage more effectively the post-COVID effects in the financial industry”. Prof. Dr. Christoph Schalast, Chairman of the Advisory Board of BKS and Professor for Mergers & Acquisitions, Business Law and European Law at the Frankfurt School of Finance & Management: “In the next few weeks, it is absolutely necessary to set the course for efficient secondary markets at the EU level. At the NPL FORUM on November 25, banks and supervisory authorities have discussed European rules for the credit market and NPLs”.

Pandemic Impact: Risk managers in the financial industry expect a doubling of credit defaults by 2021

Risk managers of German credit institutions expect a significant increase in loan defaults in 2021 due to the corona crisis. Both private consumer and real estate loans as well as loans to small and medium-sized enterprises will be affected. The NPL ratio (non-performing loans) will reach a record level. “We continue to expect the absolute figures to triple to more than 100 billion euros in the next three years,” says Jürgen Sonder, President of the  Federal Association of Loan Purchase and Servicing (Bundesvereinigung Kreditankauf und Servicing).

In the run-up to the survey as part of the annual NPL barometer, the BKS had already predicted an increase in the volume of non-performing loans from 33 to around 100 billion euros, depending on the course of economic development. This increase affects all credit segments equally. “The increase in NPL portfolios will be seen in both consumer and real estate loans as well as loans to small and medium-sized enterprises,” says Sonder. Germany’s first ever quantitative survey of risk managers shows that NPL portfolios are expected to double to around EUR 60 billion by 2021.

“According to the expectations of the risk managers interviewed, it can be assumed that the stocks will increase by about one third in 2020 to about 45 billion euros and then again to about 60 billion in 2021; this would already be almost doubled in the next two years – a really significant change,” says Prof. Dr. Christoph Schalast, Professor of Mergers & Acquisitions, Business Law and European Law at the Frankfurt School of Finance & Management and Chairman of the Advisory Board of BKS. “This assessment can certainly still be described as moderate,” says Sonder.

The value of the NPL barometer, which reflects the expectations of market participants and always lies between -1.00 and 1.00, has never before been as high as this year considering the expected increase in NPLs. While the expectations for the following year were -0.02 in 2019, which shows that no noticeable change was anticipated, the value in 2020 is 0.42. The risk managers surveyed therefore expect the market for NPLs to grow strongly over the next 12 months. “German banks face a problem when too many loans become non-performing,” says Sonder. “This has a direct impact on their balance sheet and risk ratios, and the possibility of granting new loans decreases.” And all this happens in the middle of a phase in which the banks, according to the will of politicians, are supposed to provide the economy with enough amount of money.

One possibility to release bank balance sheets from these loans is to use the secondary market: “Banks are practicing outsourcing on a larger scale, and the sale of NPLs on the capital market will become significantly more important as a result,” says Sonder. The NPL problem has not only been recognized by the supervisory authorities. The issue has also reached the political arena. Several federal states are already calling for the conceptualization and design of various NPL scenarios. With regard to the development of stress scenarios and solution models, the establishment of an expert panel including all parties involved should therefore be initiated promptly.

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