Survey: NPL Surge to Begin In Q1
In an informal survey of market professionals that I conducted over the past week, 65% believe that the NPL tidal wave will begin for real in Q1, 2021. At that time, the expectation is that government liquidity programs will begin to run out of dry powder, and various modification/loan leniency programs will come to an end. In addition to loans that have already defaulted, banks will face the challenge of separating loans likely to survive from those that will not from their ‘performing’ book. Regulators will begin to move the pressure from leniency on borrowers (save businesses & the economy) to risk management (save the banks & the banking system). All of these forces can only result in an NPL surge that could dwarf the last crisis.
Banks are not sitting idle, but their tools are limited. Staffing cuts have left risk departments and work out areas understaffed for the likely volume of problems. Covid/WFH makes recruiting/retasking/retraining more difficult. Consulting budgets have been cut/suspended. Many banks are hesitant to take the additional losses to exit positions unless absolutely necessary.
While there are many potential risk identification and risk process modification strategies that can be implemented in the next six months, only one strategy appears to mitigate risk: loan sales. Banks and PE funds are identifying those loans that are likely to cause the most brain damage in 2021 and selling them to specialist investors with the time frame, expertise, and capital to fix their problems.
The question that appears to be driving actions at many credit committees is “Do we really want to be a downward spiraling mall/energy/hotel operator for the next five years? Or do we want to be a bank?”
#distresseddebt #npl #creditriskmanagement #banking #workout
Gifford West is a veteran international financial service executive with extensive knowledge of the secondary REO and distressed & performing loan market. He has led DebtX's efforts in Europe since 2002.
The views expressed on this website are Gifford's alone and do not necessarily reflect the views of DebtX.
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