COVID-19 CEE banking sector impact survey

Being several months into an economic downturn brought by the emergence of the COVID-19 pandemic, all market players need to face unprecedented challenges and this makes no exception to the banking industry either. Banks need to face the possible acceleration of new defaults, thus an increased level of loan losses as well as a decline in interest, fee and commission income due to the contraction of economic activity, not to mention the already experienced and potential future operational concerns. – says Albert Marton, Partner, Regional Head of Portfolio Lead Advisory Services at Deloitte.

Banks in the CEE region have significantly improved their asset quality since the global financial crisis of 2008-09, built up larger capital buffers and strengthened their liquidity positions, therefore entering the economic slowdown in a better state than they did at the time of the previous financial crisis. The combination of economic upturn over the past years, the supervisory and political attention as well banks’ commitment to tackle non-performing assets contributed to the considerable decrease of NPL volumes over the past years. These challenging years also required banks to develop their NPL management and best practices as well as to tackle the build-up of non-performing exposures. The loan repayment moratorium introduced in many countries across the CEE region can temporarily mask the actual damage that restrictions can cause to the economy. Therefore, no robust conclusions can be drawn in terms of the NPL formation in the coming years. The NPL strategies implemented prior to COVID-19 might need to be adjusted now, potentially affecting the servicer universe as well as the buyers’ market.

Key findings of the survey

Economic recovery

A prolonged economic recovery is expected over the next 12 months, with the majority of the respondents expecting a U-shaped (39.1%) or L-shaped economic recovery (21.7%). The view of respondents on the application of moratorium is positive overall, with 75% of the respondents considering it as an effective measure to maintain financial stability.

Loan dynamics

Unsurprisingly, new loan disbursements are expected to slightly or significantly decrease in 2020 compared to 2019, whilst the expectations are more optimistic for the year 2021. New loan disbursements can rebound in 2021 on the back of fiscal and monetary measures aiming to stimulate the lending activity of banks. Credit standards of loans for both households and non-financial corporations are expected to tighten somewhat mainly due to the deterioration of economic outlook, the elevated credit risk as well as banks’ lower risk tolerance.

Asset quality

The asset quality is not expected to deteriorate considerably over the next 12 months as almost half of the respondents anticipate the retail NPL ratio to increase by 0-3% points, whilst two-thirds expect the corporate NPL ratio to rise at the same pace. In contrast, the investors seem to be more pessimistic regarding the development of the asset quality, with nearly half of them expecting the retail NPL ratio to increase by 3-5% points, whilst one-third anticipate the corporate NPL ratio to deteriorate at the same pace over the next 12 months. Nevertheless, there is still some uncertainty from 2021 onwards regarding the real debt servicing capacity and willingness of borrowers when the moratorium relief stops.

NPL transaction activity

Almost a quarter of the respondents plan to dispose of non-performing loan portfolios over the next 6 months. The majority of investors stated intentions to continue buying despite the pandemic situation but selecting deals more cautiously.

There were contemplated or already ongoing deals in the CEE region which were postponed by banks due to the coronavirus outbreak. However, in case of some of these deals parties have started to negotiate the possibility of continuing the transaction. We foresee a few smaller portfolio transactions as well as corporate single ticket deals come to the market in the following months. – added Albert Marton.

Retail unsecured portfolios will dominate the NPL transaction market, with more than one-third of banks expecting to dispose of non-performing loans in the largest amount in this asset class. A fifth also consider the disposal of corporate single cases. This could be attributable to the increase of retail unsecured loans in banks’ portfolios over the past years as well as the fact that banks have already disposed of the vast majority of their corporate non-performing exposures. In contrast, the majority of investors expect banks to dispose of corporate unsecured assets in the largest amount.

Restructuring and workout

Nearly one-third of respondents think that 5-10% of debtors in the retail segment with liquidity difficulties will require restructuring over the next 12 months. One-third expect that even more, 10-20% of households will require restructuring. In case of corporate debtors, nearly a quarter of participants anticipate that due to liquidity difficulties 10-20% of borrowers will require restructuring overt the next 12 months.

The majority of respondents believe they have sufficient human resources to handle the increased need from debtors for restructuring and the potentially increased amount of workout cases in-house. Banks tend to allocate resources internally from departments experiencing less workload recently and to some extent also standardise processes. A fifths of respondents indicated that in-house resources are not sufficient to handle the extra workload in case of workout and more than 40% are ready to outsource workout activities to external servicers.