DBRS speaks of a prolonged period of inflation and high mortgage rates that could put the system under pressure, especially given the vast majority of variable rate mortgages in the Portuguese economy.
DBRS Morningstar classifies the Collateral Performance Outlook for 2024 in Portugal as “Stable”. The 2024 Credit Rating Outlook is also classified as “Stable”.
Similarly, the Portuguese securitizations of Non-Performing Loans (non-performing loans) rated by DBRS performed well, with all the notes rated by the agency (relating to four operations) having been repaid in full.
DBRS points to potential risks in future transactions. In particular, the slowdown in residential property prices in Portugal following the rise in interest rates. Property prices still increased by 8.7% in the second quarter of 2023 compared to the previous year, compared to 13.2% in the second quarter of 2022, it points out.
DBRS speaks of a prolonged period of inflation and high mortgage rates that could put the system under pressure, especially given the vast majority of variable-rate mortgages in the Portuguese economy.
Vulnerabilities are becoming visible, with new measures introduced in September 2023 to support families facing greater financial pressure (Portugal – New measures for mortgage credit signal greater pressure on families), says DBRS.
“As pointed out in our commentary on foreclosures and bankruptcies, longer legal deadlines and the accumulation of foreclosure and bankruptcy proceedings may affect performance and give added importance to the manager’s ability to achieve out-of-court solutions,” reads the analysis.
Regarding the European NPL securitization market, DBRS says that “in terms of credit performance, the situation last year leaned more towards the negative, but still without any obvious general trend”.
“Most of the well-performing transactions, such as Irish, Portuguese, more recently Italian and UK, have continued to deleverage, with a healthy level of loan recoveries and note repayments; however, older Italian and Spanish NPL securitizations continue to struggle to reverse their past performance,” says DBRS in its European NPLs 2024 Outlook.
The European market for Non-Performing Loans (NPLs) slowed significantly in 2023, says DBRS, which adds that none of the transactions suspended after the European Central Bank began raising interest rates were resumed during the year.
“With the exception of some concentrated issuance in the final weeks of the year, activity in this asset class was the quietest since issuance resumed in 2016 following the Great Financial Crisis,” says DBRS.
The analysis focuses on Asset-backed Commercial Paper, Residential Mortgage-Backed Security, and Auto.
NPL securitizations outside of government asset protection programs, seen in jurisdictions such as Cyprus, Ireland, Portugal, Spain and the UK, depend on European securitization market conditions. Here DBRS Morningstar expects “public issuance of senior notes during 2024 to be broadly in line with what we saw during the post-pandemic, pre-Ukraine invasion period (2021-2022) at 200 to 400 million euros per year, given that interest rates are now stabilizing.”
As in 2023, the year could also see securitizations of smaller NPL portfolios, portfolios of re-performing loans (which have returned to performing status after ceasing to be so) that can be sold from existing securitizations and other more esoteric mixed asset class transactions involving non-performing loans and loans with a low probability of repayment.
For 2024, the rating agency expects the rating outlook to remain stable in all jurisdictions covered by the analysis, “with stable credit outlooks for most of them”.
“We maintain our negative credit outlook for Spain and Italy – the two jurisdictions where we have seen difficulties in some of the transactions we have assessed over the past few years, including against prospects of delayed recovery and, in some cases, a downwardly revised total recovery amount.”
“An important factor to consider for the European NPL space in 2024 will be the recent renewal of Greece’s Hellenic Asset Protection Scheme (HAPS), which was approved on December 4, 2023 with a total guaranteed amount of €2 billion of securitized bonds and a new expiration date of December 31, 2024 (unless extended by subsequent decree). We believe that many of the Greek banks – both systemic (Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank) and other non-systemic banks – will take advantage of this renewal and securitize some or all of their NPL stocks before the guarantee expires,” says DBRS.
There is a broad consensus among market participants that a renewal of the Italian Garanzia Cartolarizzazione Sofferenze (GACS) is not expected this year and, as such, expectations for Italian NPL issuance in 2024 in terms of volumes remain low.
Other jurisdictions may see the introduction of new regimes similar to Italy’s GACS regime and Greece’s HAPS, an example of which we saw last year in the Republic of San Marino.