2 min read
May 22, 2019
"E depois do Adeus" is the title of a famous Portuguese song that was played on the radio to warn the troops to be ready for the 1974 revolution.
If in 1974 Portugal lived a revolution that changed the Country's Government system, the transformations occurred in the last 10 years were so significant that revolutionized the economic environment.
The 2008 financial crisis led in 2011 to one more financial rescue to Portugal, that time provided by the EU and the IMF.
As a result, there was a significant increase in the Public Debt, a deep economic slowdown (reduction of consumption, increase of unemployment, increase in the tax burden, brake on public and private investment, among others). Consequently, the financial institutions (and not only), saw their assets deteriorate substantially, due to the strong increase of delinquencies on loan portfolios.
Words like NPLs, distressed and non-core, become usual in parallel to the growth of a new industry ꟷ Servicing.
As a result of the strong regulatory pressure financial institutions, initiated a deleveraging process, which in Portugal led to a reduction of about € 90bn in assets between 2008/18, that corresponds to approximately 20% of total assets. During this period, financial institutions operating in Portugal accumulated significant stocks of NPLs, having reached the peak in Jun / 16, when the total amount was approximately € 50.5bn (17.9%).
As part of this deleveraging and cleaning process, financial institutions have been completing sales of distressed assets, which as a consequence are transferred to Servicers ꟷ companies specialized in the management of these asset types.
This strategy led the NPL stock, at the end of 2018, to reach approximately € 37bn (9.4%, significantly behind the European average of 3.5%). Since today we have a much more favorable economic situation, the obvious question is: for how long this sector, that was born and grew with the crisis, will continue to grow?
In my perspective, this sector is still very recent and has a long way to go but plays an increasingly important role in the financial sector and in the economy in general. Regulation on financial institutions is much more active, and one of the lessons from the crisis is that managing NPLs is not what banks do better.
On the other hand, financial institutions are being challenged by Fintechs, which require banks to be more efficient and dynamic (and more focused, I would say).
Because of this, I understand that Servicing professionals will continue to play a key role in the management of NPL's / Distressed Assets. The introduction of new features could be positive for the sector, namely the existence of regulation would be an improvement, among other things, in the clarification on the capacity of each player.
Also, we must not forget the enormous challenges faced today (trade war USA vs. China, Brexit, technological transformation, demography ...) in a context of interest rates historically low, high public debt and family indebtedness.
Being the crisis cyclic, it is important to anticipate the next. Personally, I don't know when it will happen but I'm sure it will come and, by that time, as today, Servicers will continue to play a key role in managing distressed assets.