Stormy weather could be coming in the credit markets. This is the assessment of the Bundesvereinigung Kreditankauf und Servicing (BKS) and the Frankfurt School of Finance. Their current barometer for non-performing loans (NPL) shows that more defaults, outsourcing and portfolio sales are to be expected, says Jürgen Sonder, President of BKS.

The NPL Barometer for Summer of 2024 is at a high level of 0.45 points, and is only just below the record of 0.46 points from autumn 2023. In the survey, BKS distinguishes between current value and expected value. Both figures indicate growing NPL portfolios, falling sales prices for NPLs, and an increase in portfolio sales and outsourcing.

The background to this development is that companies and private households have been heavily burdened by a series of crises. BKS is registering the effects of the strain on the credit markets– with a time lag.

For Christoph Schalast, Chairman of the BKS Advisory Board, the focus is on commercial property loans. „Project developers and property developers are particularly at risk of default due to the market turbulence,“ says Schalast, who is a Professor at the Frankfurt School of Finance. However, experts also expect NPL ratios to rise for consumer loans, residential property loans and SME loans.

The NPL portfolio segments of commercial real estate are already showing a deterioration in credit quality for the credit and collection service provider Intrum. „This is not yet so clearly recognisable for consumer loans and other products in the private customer segment. However, this may change quickly, meaning that specialised credit service providers will play an even greater role in reducing NPL portfolios,“ says Marcus Siegl, Interim Managing Director at Intrum, responsible for Germany and Austria.

Intrum recently published the European Payment Report 2024, a survey of company executives. The data provides an overview of the payment behaviour of European companies, and gives an indication of payment delays, payment practices and general financial risk.

Among German respondents, 59% are more concerned than ever about their customers' ability to pay on time. 48% say they find it difficult to get a clear picture of customers' ability to pay on time and in full. And 59% of the entrepreneurs surveyed see problems in the payment chain because their customers' debtors do not pay on time, which in turn affects their own cash flow. Finally, 81% have been asked to accept longer payment terms in the last twelve months. Although these figures have not changed significantly compared to the last survey, they are still at a high level.

In response to the question „What precautions does your company take to avoid payment defaults?“, „advance payment“ was mentioned in first place (43%). The proportion of companies that rely on credit default insurance has increased significantly over the past two years. While this figure was 18% in 2022, it was 31% in 2024. Bank guarantees and fraud prevention measures are also being used much more frequently to avoid payment defaults. The figures from the survey emphasise that credit risks are likely to have increased and payment behaviour has not improved.

According to the respondents to the NPL Barometer, the NPL volume at German banks could rise to around 40.2 billion euros by the end of 2024. In terms of unsecured consumer loans, BKS predicts an increase in the NPL ratio to 2.1% by the end of 2024 and to 2.4% by the end of 2025, reflecting the rise in the cost of living and the higher interest burden for private households.

The NPL ratio for residential property loans is expected to rise to 1.2% by the end of 2024 and to 1.5% by the end of 2025. According to the respondents, the situation for commercial property loans is also more tense, with an expected NPL ratio of 3.6% at the end of 2024 and 3.7% at the end of 2025.

The data from the BKS survey largely corresponds to the values published quarterly by the ECB in its banking supervision statistics on significant institutions. Under the keyword „asset quality“, the ECB puts the NPL ratio for the first quarter of 2024 at 2.31%. Compared to the previous quarter, the figures are relatively stable and not yet as high as in previous crises. However, the ECB is not providing a forecast until the end of 2024 or 2025.

According to ECB data, the NPL ratio is very heterogeneous when measured by sector. It ranges from 3.55% for loans to non-financial corporations to 0.64% for loans to other financial corporations, while the ratio for loans to private households is 2.24%.

Even though the ECB figures have not yet risen sharply, the market is concerned about a significant deterioration. The EU Directive (EU) 2021/2167 on credit servicers and credit purchasers (NPL Directive) was adopted in order to make the market more effective for the potentially increasing NPL volumes. It is intended to make it easier for banks to remove non-performing loans from their balance sheets. The directive is part of the action plan to reduce non-performing loans in the European Union.

The EU directive had to be implemented by the end of 2023. In Germany, the Secondary Credit Market Act (KrZwMG) regulates the EU requirements. From BKS's perspective, the Secondary Credit Market Act, which came into force on 30 December 2023, provides an important impetus for the NPL market. According to the association, it creates for the first time a clear legal framework for the purchase and servicing of non-performing loans in Germany and the EU.

„The KrZwMG is a milestone for the professionalisation of the NPL market,“ says BKS President Sonder. „It creates legal certainty, strengthens consumer protection and opens up new opportunities for specialised service providers. Especially in a challenging environment, the active management of non-performing loans is crucial in order to preserve value."

The first loan servicers have recently received authorisation as credit service institutions from BaFin. This means that in the future they will be able to act as fully-fledged partners of banks in the management of NPLs throughout the EU. However, the association also points out that the administrative burden resulting from the law and BaFin supervision still needs to be evaluated.

The new law however does not yet appear to be having the desired effect. According to the BKS report, the momentum of portfolio sales is lagging behind the other indicators of the NPL barometer.

It is critical of the fact that the KrZwMG would mean increased effort and higher costs for credit sellers, as they would always have to involve a licensed credit service provider, and use the EBA data templates for transactions with SME borrowers.

According to the association, the processes for the sale of NPL portfolios also still need to be adapted to the new requirements. This could lead to market participants initially waiting to see how they deal with the new legal framework or simply waiting for BaFin authorisations.

Nevertheless, the KrZwMG offers opportunities for credit service providers. The harmonisation of the legal framework and the introduction of a European passport could facilitate cross-border trade. Even if it is not yet clear how the KrZwMG will affect transaction activities, the industry association expects the law to contribute to further professionalisation and Europeanisation of the NPL market in the long term.