European NPLs 2023 Credit Outlook

This commentary highlights our view that the new issuance slowdown in nonperforming loans that began in 2022 is likely to reverse during the course of 2023, with the public issuance volume broadly in line with the volumes of 2020/2021, as central banks’ interest rate policies become more stable and the government asset protection programmes are renewed. Expectation for 2023 issuance remains dominated by the performance of peripheral economies and, in particular, Southern European jurisdictions; however, considering the systemic scale of the problem at the European level, it is possible that we will see rated transactions in new jurisdictions and, considering the limited cost for governments as compared with other solutions, the introduction of schemes similar to Italy’s Garanzia Cartolarizzazione Sofferenze (GACS) scheme (which expired in June 2022) and Greece’s Hellenic Asset Protection Scheme (HAPS) (which expired in October 2022) in other jurisdictions might be possible.

From the second half of 2022, uniformly across Europe, increased borrowing costs, high inflation, and elevated energy bills are contributing to slowing economic growth and putting additional burden on households and corporates. Rising interest rates exert downward pressure on real estate values. On the positive side, unemployment rates continue to be low since the pandemic highs and household savings have increased during the pandemic. Banks are well capitalised and further de-risked in the past couple of years, reducing the risk of a funding squeeze. Next Generation EU (NGEU) funds anticipated in Italy, Spain, and Cyprus should positively affect the respective macroeconomic performance. Court closures and the subsequent bottlenecks at courts are clearing (with the exception of Spain).

For the early Italian GACS transactions most affected by the timing delays, the increasing GACS fees over time are likely to make the effect of delays in recoveries more pronounced, which could result in further rating migration in 2023. In 2022, DBRS Morningstar upgraded its ratings on the senior notes in two Irish transactions to the AA category after significant deleveraging resulting from sizeable portfolio sales. In the current climate, the positive trend of reperforming loan sales of previous years may be difficult to maintain.