Underperforming loans reach record levels

Stage two underperforming loans have reached record levels, according to the latest figures from JLL. The consultancy said stage two loans, which are classified as underperforming loans with increased credit risk relative to origination that are not yet “non-performing”, had increased to 9.5%, up from 8.9% at the end of 2021. Its December 2022 European banking credit portfolio update revealed that while the average non-performing loan ratio had fallen to 1.8%, the increase in stage two underperforming loans was now at the highest level since January 2018. The firm said Europe was experiencing multiple strong headwinds and these were more acute in comparison to other regions.  Ian Guthrie, senior managing director of loan advisory and restructuring services at JLL, said: “The European NPL ratio falling to a post-GFC low belies a more concerning deterioration in asset quality among banks with stage two underperforming loans, increasing to record levels at a time when provision levels, measured in terms of ‘cost of risk’, is at its lowest level since records began. “It is noteworthy that this data is taken at the end of Q2 2022, before we witnessed a marked increase in volatility and sharp reduction in sentiment in Q3, and despite significant overhang in Covid-linked regulator approved moratoria.” He added: “Real estate corporates with near-term debt maturities will universally experience higher reference rates, spreads and hedging costs and so, against the backdrop of a dysfunctional bond market as well as higher all-in funding costs, many will be forced to consider more expensive debt, recaps, asset sales or, perhaps more palatable, consider joint ventures with private capital investors. “Within JLL, we see interesting opportunities arising in 2023 across many geographies including in the less obvious countries such as Turkey, particularly on the back of recent changes in regulations designed to both encourage and facilitate foreign investment into the NPL market.” JLL said a key challenge facing many real estate corporates, which historically have been reliant on the bond markets, is the amount of near-term maturities – including the Nordics, where the firm estimates circa 32% of real estate corporate bonds are due to mature within the next two years.   To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews