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The sharp sell-off in European bank shares in recent weeks is an indication that the credit cycle is turning. That shift would be a long time in the making given the gravity-defying economic conditions of the past five years. Now, with signs of weakness proliferating, especially among consumers, loan losses are likely to rise faster.
That is bad news for banks and their shareholders. But it could be the lifeline that Europe’s struggling debt collectors have been waiting for.
Italy’s doValue is a prime example. The company’s shares are down more than 80 per cent since the start of 2020 and took a further hit after results on Thursday. Weaker collections in the first half of the year prompted it to cut its full-year outlook. It is no better over at Swedish peer Intrum. It is locked in a tussle with bondholders to reduce the debts it took on to buy up bad loans.
The lack of new non-performing loans coming from the banking sector also has not helped. But there are signs that this flow will start up again.
Collections have become harder thanks to the same issues that are stifling consumers — inflation and higher living costs. At doValue they fell 14 per cent year on year in the first half with the collection rate falling to 4.2 per cent from 4.4 per cent. At Intrum collections were 4 per cent lower over the same period.
Non-performing loans have started to tick up at banks this year. The recent 10 per cent drop in bank stocks in part reflects a 0.1 percentage point rise in expected provisions, thinks JPMorgan. That would only take Europe-wide cost of risk next year back to levels in line with historical averages.
It would be fodder for growth-starved debt collectors nonetheless. Increasing non-performing loans would test how effective Intrum’s capital-light growth plans actually are, notes UBS’s Johan Ekblom. Historically the company grew using its own balance sheet. The new model, where it will share the purchase of new NPLs with US investor Cerberus, could generate faster growth than doValue, which relies on winning new servicing mandates from owners.
Intrum must first, however, get through a restructuring, opposed by some of its shorter-term bondholders. Its bombed-out shares are up 30 per cent since the start of July on hopes that a resolution is close. DoValue’s share price meanwhile remains the lowest it has been since listing in 2017. A bearish view of Europe’s economic outlook could spell rosier times for either.
