What does the future hold for NPLs? There's still plenty of business to be done, but buyers and sellers alike will need to change tack to get the most from the available opportunities.

In our previous report, we pointed to a poll in which 70 per cent of respondents expected to see an increase in European NPL sales in 2021. The majority view would prove to be correct, but making forecasts for 2022 and beyond looks to be fraught with difficulties.

On the one hand, many European banks still hold significant stocks of NPLs, particularly in hotspots such as Spain and Italy, but also in France and in the UK and Ireland. Moreover, as the impact of COVID-19 continues to unwind and the economic fallout of the events in Ukraine grows, not to mention the potential for a recession on the horizon, there is scope for more loans to slip into non-performing territory.

It is possible that the year ahead will see banks under even greater pressure to make increased disposals—particularly while state-backed schemes in Italy and Greece continue to provide support in the process.

The counterargument is that, when it comes to legacy NPLs that banks were required to reduce in recent years, much of the heavy lifting has already been done. What remains is relatively modest by comparison. In 2015, for example, the EBA says the average bank in the European Union had an NPL ratio of 6.2 per cent. Today, the figure is down to 2 per cent.

In other words, even if current market volatility leads to a significant increase in NPL volumes, the need for large-scale disposals remains diminished, at least for the foreseeable future.

This is not to suggest that this is a market lacking in opportunity, just that the dynamics at play are changing. New entrants, including servicers with expertise and experience built on supporting investors, will introduce more competition, both for smaller disposals by banks and in the secondary market. Indeed, that secondary market is thriving.

Equally, growing sophistication in data and analytics technology is enabling buyers and sellers alike to pursue opportunities with greater clarity on price discovery and potential return. The regulatory backdrop is also changing, as we move towards the end of state-support schemes.

The bottom line is that, while the future direction of the NPL market is not set in stone, clear trends are emerging. Existing players and new entrants alike are beginning to position themselves accordingly.

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