Forecasting NPL Ratios after COVID-19

By Burkhard Heppe


Published Monday 4 May, 2020

The COVID-19 pandemic has caused a sudden slump in economic activity across most countries. The first quarter of 2020 saw the steepest decline in economic output for decades. The IMF published their forecast for the depth of the expected recession and its predicted recovery in 2021. The forecasts are uncertain and several other economists predict even steeper declines than the IMF. We forecast the ratio of non-performing bank loans (NPL) to total loans by country for the macroeconomic scenarios described by the IMF. We compare the predicted NPL ratio with those observed in the last recession and aim to identify those countries with the most severe impact.

Projected NPL ratios for selected countries based on macro scenarios from the IMF (2020)

We use a panel regression for the transformed NPL ratio with real GDP growth and the unemployment rate as explanatory variables. We note the uncertainties around econometric models calibrated on historical data when predicting the economic fallout from an unprecedented pandemic. Overall, the model predicts at least a doubling of NPL in many countries. We predict a tripling of NPL in the US starting from the historically low levels of 2019. In Europe, the predicted increase will fully reverse the successful reduction of NPL since the last crisis after 2014. The doubling of NPL in France could mean that France will overtake Italy as the country with the largest stock of NPL in Europe projected to reach EUR 350bn over the next two years. Portugal and Ireland will not reach the high NPL ratios of the last crisis. The projected rise in the NPL ratio in Italy, Spain and Greece is of particular concern given their elevated stock when entering the corona crisis.

You can access the full technical paper by clicking here:

NPL Markets - Forecasting NPL Ratios after COVID

This paper was recently updated on May 6th 2020

Interactive NPL Ratio Forecasting

This is an interactive table which allows you to stress test NPL ratios across a broad range of countries using the IMF data. You can change the unemployment rate and RGDP growth forecast for 2020 and 2021. The exact methodology can be found in the technical paper Forecasting NPL Ratios after COVID.