Again, many segments of the economy are facing a crisis that could lead to an increase in non-performing loans. How do they see the situation, especially compared to the crisis of 2007-2008, which brought big waves of falls?
Marwin Ramke: 2007-2008 will start primarily from banks, including the US mortgage market. This was followed by a significant increase in the volume of non-performing loans in Europe, which had to be written off for many years. EOS alone has purchased some € 10 billion in non-performing loans since then, and has only been involved in the handling of receivables on a mandated basis. At the beginning of the coronavirus epidemic, in early 2020, we indicated that a similar situation would arise again, but state and central bank measures artificially kept the system alive, keeping the ratio of non-performing loans low. However, the long-term effects of the coronavirus are not yet clear, and this uncertainty is compounded by the economic uncertainty caused by the Russo-Ukrainian war and the acceleration of inflation. The ECB is also stepping up with the Fed, and it is only a matter of time before the volume of non-performing loans will increase again due to the expected interest rate hikes. I expect we will see the consequences in the last quarter of 2022,
In Hungary, for example, we expect an NPL rate of over 10% in 2023.
Tamás Lencsés: I’m a little more pessimistic. The coronavirus has led to significant disruptions in supply chains, the effects of which on the solvency of debtors are not fully seen. Inflation and the MNB are constantly raising interest rates, so 35% of mortgage loans have variable interest rates, and an increasing proportion of loans with 5 interest periods are also affected by interest rate increases. Based on this, we expected an NPL rate of 8-10% at the beginning of the year, but then came the war and higher inflation, food prices and fuel and gas prices, so I now expect an NPL rate above 10%. Banks now face the dilemma of dealing with the problem that is expected to recover by rebuilding their own capacity or outsourcing. We offer opportunities for the latter.
However, in Hungary the government is trying to protect households from rising interest rates on floating rate loans with an interest rate halt. Is it possible to imagine other countries interfering in market processes in this way to the detriment of banks?
MR: In Germany, the situation is similar in many ways, it is enough to think only about regulating fuel prices, and the state provides tax breaks against rising prices, for example. It is true that this is not yet the case for mortgages, but it may not be necessary because the reference rates will remain better so far. I do, however
I can imagine that governments in other countries in the region will introduce similar diseases: Hungary was one of the first to act during the foreign exchange credit crisis,
and only followed in other countries in the region. In many areas, the fight against inflation is taking place somehow in every country.
LT: In Hungary, in addition to fuel prices, the price of natural gas is also limited, deviating from the market price. Maintaining low overhead costs will cost public finances about HUF 1,500 billion this year. However, price stops are unsustainable in the long run, so unfortunately some shock will have to occur later in the year.
Marwin Ramcke, CEO of the international EOS Group
What is the share of loans managed by EOS and what are the telecommunications, utility and other receivables?
Most of our portfolio and our customers come from banks, so the same is true for revenue.
The role of telecommunications and utility receivables is more significant than the revenue side in terms of the number of receivables. Within bank receivables, it is worth distinguishing between mortgage and unsecured loans, and their relative proportions always depend on market supply. In 2015-2017, significant mortgage loan portfolios were sold in banks, before that unsecured loans dominated, but after 2017 the market dried up as no new portfolios were built up. The current composition of our portfolio depends primarily on credit market cycles.
LT: In Hungary, most of our portfolio and revenues come from bank ambassadors. In recent years, not only bank receivables but also the utility market has largely dried up, leaving the state to manage itself through its own receivables manager. The price of receivables in the banking sector rose sharply due to strong demand and low supply. There are hardly any new transactions on the market, and the cheap source is almost out of stock. In many ways, the situation is different than it was a decade ago.
How is the impact of the credit moratorium assessed in European countries and Hungary?
MR: In other countries, the period of the credit moratorium was not so long, Hungary is considered a top performer in this respect. However, the stock of non-performing loans did not escape even where the moratoriums had been lifted. Now, however, it is only a matter of time before that happens.
LT: The credit moratorium was a good initiative at the time, as it protected many creditors from the effects of temporary insolvency, and the most vulnerable debtors really needed support.
The credit moratorium will end in principle in the middle of this year, but the big question is whether it will actually end with the moratorium on evictions and auctions. The latter have a greater impact on the market.
In order for market participants to have confidence in the credit market, it is necessary to have confidence in the market and to restore the normal functioning of the market.
Hungary has special regulations in many respects. Are they dissatisfied with the market here or are the higher returns able to compensate the EOS Group as a major European investor?
MR: It cannot be said that yields would be higher here than elsewhere. And the regulation is constantly changing, we have to live with it. The development of the market is interesting in terms of how much investment we can make, but in this respect we have not been really satisfied in recent years, as supply has been very low.
Along with inflation, the yield environment is also changing. How much do investors expect yields in the receivables market?
MR: There are a lot of uncertainties in the market now in terms of profitability and return, and these may change our risk calculations and, consequently, our return expectations overnight. At present, investors are taking on more risk than before and are therefore expecting higher returns.
LT: As an investor, we also have the ability and willingness to be active in the market, so there is no problem with that. It all depends on the offer:
an increase in the supply of non-performing loans, or more precisely, a return, would really help to reduce and normalize our yield expectations and risk premiums.
Too much uncertainty cannot be priced in.
It took many years after the 2007-2008 crisis for banks to start selling their mortgage portfolios in large numbers. How different will the situation be now? Can they clean up bank balance sheets faster?
LT: I was still working in the banking sector 15 years ago, so I can’t draw a direct parallel, but I’m sure the industry has changed a lot in the last decade. While operating as a professional financial investor and seeking agreement with debtors, the MNB regulates our market in a recommendation. It is true that the claims management law is still missing, but a new EU directive must be transposed into Hungarian law by the end of 2023. Market players already know, in part, and even better, what they can and should do. Thus, the market is much faster and in short supply, and receivables managers can act as quasi-professional “branches” of the banking sector.
MR: Across Europe, the receivables management sector has improved and tightened, the powers of supervisors have grown and the market has undergone tremendous technological development. One consequence of this is that for more than a decade, our investments have been characterized by returns above 20%, but this will not return.
Tamás Lencsés, Managing Director of EOS Faktor Zrt
How do you see M&A opportunities in the receivables market?
Overpriced portfolios, a fragmented market, too many small market players characterize most markets, including Hungary. I think we can expect consolidation in the market.
The number of market participants is too large and the supply of claims is too small, and although it will grow, the sector needs to be concentrated in the long run. This can drive M&A transactions so that we see settings on the customer side.
MR: We are present in more than 20 countries in Europe, including 14 in the Central and Eastern European region. We are a family-owned group of companies, which is a comparative advantage in terms of strategic commitment. We plan for a maximum of a hundred years, approx. Although we are not listed on the stock market, our goal is continuous growth, and to do so we can buy portfolios and have greenfield investments. Previously, we also bought the Hungarian subsidiary in the framework of an M&A transaction, which is not the case with our custom, so we have recently bought in Spain and France.
You are now talking about the EOSC Group changing its image in Hungary now. What is this renewal about?
MR: When I joined the EOS Group in 2007, most of our revenue was still generated in Germany, but it didn’t happen anymore and we grew into a real international group of companies, and eventually a debt management profession underwent a huge change. With this change, we want to convey our important professional vision, according to which the EOS Group has become a key player in the European market as a financial investor in addition to debt management and strives for a customer-friendly settlement of creditors’ financial situation.
LT: EOS also has other types of investments in Hungary, such as real estate investors. The new image also reflects this adaptability, flexibility and ability to change.
The entire financial sector is under constant pressure to innovate and digitize. As far as financial innovation is concerned, they are at the forefront of introducing advanced financial innovation in the Hungarian market. Do you still see room for similar innovations?
LT: The introduction of forward flow shows that we are thinking “out of the box”. Although we started in Hungary, we use it in other countries anyway, it is not a Hungarian specialty, but it has proven itself everywhere. Digitization is a necessity for all financial actors, and one of the bright proofs of this was the transition that became necessary at the beginning of the coronavirus epidemic, which was so rapid that we did not think it could happen.
How difficult is it to improve efficiency and innovate with GDPR regulation?
LT: It is necessary for a debt management company to be data-driven, which is a difficult path for the GDPR, but I would not complain about it at all, as this is the case throughout Europe.
However, the new EU directive will help, as it will clarify on a number of points what we can and cannot do,
primarily in dealing with creditors and managing their data. Our professional organization, MAKISZ, has a significant task in ensuring that the best possible results are achieved for the market in the Hungarian implementation.
As a receivables manager, what can they say to debtors in financial difficulty?
MR: We are saying that there is no difficult situation that cannot be resolved, and we are always at our disposal even in difficult situations.
LT: We are here, we are available and we are ready to help and discuss the financial situation, find a solution together. We only ask for one thing in return: be open to cooperation!
Marwin Ramcke from left, Tamás Lencsés from right
Photos: Márton Mónus / Portfolio