[ASK 2021] European NPL market growth creates investment opportunities  

Global asset managers will see great opportunities in the European non-performing loan market amid challenges facing the EU banking industry, such as the fragmented banking market and margin pressure, UK-headquartered asset manager Arrow Global’s Chief Executive Zach Lewy said at ASK 2021, The Korea Economic Daily’s alternative investment forum held in Seoul last month.

The European banking sector is 2.5 times the size of the US market and represents one-third of the global banking market. However, the lack of adequate systems and infrastructure have been obstacles to local banks, the asset manager CEO said.

“In the EU banking industry, you have a complete fragmentation of local languages, local customs, local regulations, local client relationships. The reality of the European banking institutions is a struggle to build the large pools of homogeneous assets that are needed to feed the capital markets. It’s much more difficult to create securitization when you split everything into 44 EU countries, different sets of laws and asset bases,” he explained.  

Low profitability is another major challenge faced by the EU banking sector, he said. European banks’ average net interest margins hit a record low of 1.1% in 2020, compared to 3.1% earned by US banks. Also, the average return on equity for the 187 biggest European lenders was 7.2% in 2018, compared with close to 12% for US banks, he added. 

He believes non-performing loan (NPL) sales represent a key opportunity for the investment market. “Amid ongoing margin pressure and historically low return on equity, the need to sell assets will boost the market. These are exciting opportunities for investors like us,” Lewy said. “Merger and acquisition volumes have halved since their 2010 peak and further consolidation is needed, which typically drives further NPL sales.”
   
He expected both the primary and secondary NPL markets are forecast to grow significantly. Particularly, in the EU secondary market where Italy, Portugal, the UK, Ireland and the Netherlands are the main players, there will be €40 billion ($46.2 billion) to €60 billion NPL sales per annum between 2021 to 2024. This creates vibrant secondary market assets that have been sold but not yet resolved, he said. 
 
Additionally, COVID-19-induced economic dislocation will lead to a further wave of NPL creation, he said. “In the European NPL and non-core credit market, the addressable market size in 2019 reached €1 trillion, and the additional forecast NPL creation between 2020 and 2022 is estimated at €500 billion."

He added that the pandemic is forecast to increase the European NPL and non-core credit market by over 50% in the next two years, including the UK’s NPL ratio reaching the peaks of the global financial crisis in 2008.  

Founded in 2005, Arrow Global is servicing €69 billion of assets in the global credit and real estate sectors. Its funds under management in 2020 were €4.3 billion, up 15.7% from €3.7 billion in 2019.

Write to Chang-Jae Yoo at yoocool@hankyung.com
Jihyun Kim edited this article.