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A changing environment
In a financial market where non-performing loans (NPL) represent a challenge for credit institutions, our industry plays a key role by providing debt management solutions and contributing to the reduction of overall NPL volumes across Europe. In 2019 the industry environment experienced lower NPL transaction activity, less price pressure and a legal change that is expected to give more frequent sales of non-performing loans in the future.
The year of 2019 was a year with lower activity in terms of the total volume of non-performing loan transactions compared to the previous year. This was partly due to the relative high volume of non-performing loan transactions in 2018 contributing to reduced NPL ratios across Europe, but also a result of what seemed to be a more cautious approach by the established players in the industry.
The trend of less price pressure on non-performing loan portfolios continued in 2019. This trend was observed in most markets where B2Holding has presence. As a result, IRR levels have developed positively, but variations are observed depending on market competitiveness. The reduction in prices on portfolios can partly be explained by access to capital becoming more costly for most players in the industry compared to the previous year, which also seems to have caused the industry as a whole to develop a more selective approach to new portfolio acquisitions.
As a result of the introduction of the prudential backstop in April 2019, the industry expects to see more frequent sales of non-performing loans going forward. Unsecured non-performing loans will be most costly for European banks going forward, and this asset class is typically acquired by the industrial players, as opposed to secured claims where private equity funds also are potential buyers of portfolios. In addition, we expect that the current Covid-19 pandemic will generate larger NPL volumes in the latter part of 2020 and the years ahead.
Transactions in the industry
The changing environment in the industry is driving further consolidations. In terms of large transactions in the industry, Intrum’s strategic partnership with Piraeus Bank in Greece stood out as the main event in 2019. An increased share of NPLs were purchased by non-bank financial investors, causing an increase in the demand for third-party debt servicers. Thus, going forward we expect to see more debt purchasers and debt servicers consolidate and establish integrated platforms that are able to both invest in portfolios and provide third-party servicing on other investors assets.
Legal changes
The introduction of the prudential backstop with effect from April 2019 was the main regulatory event in the industry in 2019. The purpose of this reform is to ensure that banks set aside sufficient own resources when new loans become non-performing and to create appropriate incentives to avoid the accumulation of non-performing loans. Different coverage requirements will apply depending on the NPLs being unsecured or secured and whether the collateral is movable or immovable.
Our markets:
Gross ERC incl. the Group’s share of portfolios in JVs (NOK million)
Cash collections (NOK million)
Industry abbreviations and definitions
| Term | Definition |
|---|---|
| Cash EBITDA | Cash EBITDA consists of EBIT added back depreciation and amortisation of tangible and intangible assets and added back amortisation and revaluation of purchased loan portfolios. Cash EBITDA is a measure of actual performance from the collection business (cash business) and other business areas |
| Cost to collect (CtC) | Actual variable and fixed costs related to collection or recovery of assets |
| EBITDA | Earnings before interest, taxes, depreciation and amortisation |
| Factoring | Financing of receivables through arrangement between a financial institution and a client (company), where the client gets advances from the financial institution in return for receivables |
| Forward flow agreement | Agreement where B2Holding agrees with a vendor over a fixed period to acquire all non-performing loans within pre-agreed characteristics and limitations |
| EPS | Earnings per share |
| ERC | Estimated remaining collection (ERC) expresses the gross cash collection in nominal values expected to be collected in the future from the purchased loan portfolios owned at the reporting date and the Group’s share of gross cash collection on portfolios purchased and held in joint ventures. ERC includes ERR. The Total ERC is a common measure in the debt purchasing industry; however, it may be calculated differently by other companies and may not be comparable |
| FTEs | Employees measured in "Full-time equivalents" |
| Face value | Unpaid principal balance plus interest and fees |
| Gross cash collection | The actual cash collected and assets recovered from purchased portfolios before costs related to collect the cash received |
| Invoice purchase | The business of purchasing issued invoices from companies |
| IRR | Internal rate of return; The interest rate that gives a net present value of zero |
| Net IRR | The expected net return before tax on a portfolio investment based on gross expected cash flow less cost to collect |
| NPL | Non-performing loan. A loan will be defined as non-performing when a certain time (usually set to 90 days) has passed without the borrower paying the agreed instalments or interest. |
| Profit margin | Operating profit expressed as a percentage of total operating revenues |
| Single ticket | A large individual claim, usually secured |