JLL predicts post-pandemic NPL surge

An uneven recovery may lead to a divergence in sector-specific NPL ratios.

A new report from JLL is predicting a rise in non-performing loans across Europe as governments begin to scale back programmes and supports that have helped property owners and tenants.

“The covid-19-related moratoria temporarily supported cashflows and helped to manage default ratios, reducing temporary liquidity difficulties for borrowers,” the report reads. “With moratoria winding down, the worsening financial position of many borrowers could lead to a significant deterioration in credit risk.”

Additionally, government restrictions may be re-introduced as the number of cases rise in the region and beyond, reducing consumer and business confidence, weakening bank balance sheets and hampering overall economic growth. This premise, according to JLL’s Q3 European NPL market update report, is a crucial consideration when assessing the current European NPL market.

Sectorial and geographic deviation

The report also found that an uneven recovery may lead to a divergence in NPL ratios by sector, with retail and hospitality emerging as main areas of stress in Europe.

“We are beginning to see that worsening financial conditions are evident in some sectors across Europe, including in nonessential retail, hospitality and other contact-intensive services,” JLL stated. The report, published this month, was put together by senior managing director Ian Guthrie, managing director Graeme Henry, capital markets research EMEA director Christian Denny and chief economist EMEA David Rea.

The report took a close look at the European NPL ratio, which reached 2.3 percent in Q2 2021, a decrease from 2.5 percent in the previous quarter. At the same time, the NPL ratio for non-financial corporates fell from 4.7 percent to 4.4 percent, and the composition of corporate NPLs exposed a deviation in sectoral performance, with notable increases in distress for accommodation and food services, arts, entertainment and recreation.

The trend has been accelerated in Spain, Ireland and France, where NPL ratios for leisure and arts, entertainment and recreation continued to rise as ongoing restrictions and varied pandemic management resulted in a slower-than-expected recovery in these sectors.

On top of this, nearly half of Europe’s largest banks booked a reversal of loan provisions in Q2 2021 compared with the previous quarter, the report highlighted.

“This rapid unwinding of loan provisions assumes that we are over the worst of the pandemic and the economic contagion,” the report stated. “However, the economic consequences still remain uncertain, particularly as we are only now seeing government support and moratoria being unwound, and so an unexpected shift in credit risk could expose certain banks to future impairments.”

Inflation concerns

Rising input costs as a result of the pandemic are driving up inflation, causing central banks to consider near-term interest rates rises. With this in mind, JLL expects inflation to peak in early 2022 before falling back as one-off factors and recent price rises fall out of the annual comparison.

From a debt perspective, net borrowing has been subdued in 2021 compared to last year. Net issuance of debt securities in the year to July stood at €55 billion, less than half of the volume from last year’s total.

Additional borrowing has not been substantial but overall debt levels remain highly elevated and the burden of debt-servicing costs will only rise as government covid payment holidays and interest support expires, the report stated.

To add to this, some central banks are predicting the first upward movement in interest rates to come next year, a much earlier move than expected one quarter ago.

Still, the report was not all gloom and doom. “Overall, the economic situation is positive and conditions are on an improving trend, albeit not uniformly, and there are risks including from a growing debt-servicing burden and rising cost perspective,” it said.