Who lit the spark under the NPL bonfire?
By Alison Swonnell, Director of Fund Operations, LCM Partners Limited
– Non-performing loans are getting attention from the highest of places. Search for the term and you will find a deluge of publications about NPLs from the ECB, ESMA and EBA as well as pretty much every management consultant and accounting firm. Open the financial press and almost every day there is an announcement of an asset manager, such as LCM Partners, buying portfolios of bank loans, many of which represent eye-watering figures of outstandings, hundreds of individual companies or many thousands of consumers. A decade on from the start of the global financial crisis of 2007, why only now is there quite so much coverage and interest in NPLs as an asset class?
It is a question that is worth some reflection. In part the answer is in the question: “A decade on….” It is hard to believe, but, yes, it was ten years ago that the markets tumbled; Northern Rock and Lehman Brothers catapulted the European banking sector into a state of turmoil not seen since the early 20th century. Europe’s politicians, supervisory bodies and regulators declared that this could never be allowed to happen again.
At a macroeconomic level there are clearly factors that persist from that time. Combine that reality with an artificially low interest rate environment and we are back to a point at which consumer and corporate lending volumes and standards are starting to be questioned again. Having said that, employment levels are high or recovering and there are few indicators that things are about to change for the worse. Indeed, unemployment is at historically low levels in the core economies such as the UK (4.4 per cent) and Germany (3.8 per cent).
The Eurozone as a whole is averaging unemployment at 7.7 per cent which is back close to its pre-crisis low of 7 per cent and below its longer term average which is more like 9 per cent. Even countries such as Spain and Greece, which were particularly badly hit, with jobless rates peaking at over 25 per cent, are now over the worst. So Europe presents a fairly healthy consumer and business climate at least in the short to medium term in most countries.
This indicates that the loans that are defaulting today are part of normal cycle of credit: flow business being generated by missed payments due to an individual’s life events, such as divorce, redundancy or illness or from a business over-trading or simply losing control of its cost base. In the ordinary course of ‘flow’, financial institutions aggregate these individual defaulting loans into portfolios representing many thousands of individual accounts to be managed or sold. Read the complete article …