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Global ABS Barcelona – Main news and insights from Cardo AI

What are the main insights and news from Global ABS 2022 in Barcelona?

In this article, we will make an overview of what happened at the Global ABS of June 2022, giving you our thoughts as CARDO AI about the main news and panel discussions we took part in. 

Over 4,000 market participants from banks, asset managers, servicers, and technology providers attended the three-day conference in Barcelona with several on and off-site events. From business meetings and panels to informal chats and networking events, we had the chance to discuss the main trends in the industry.

About Global ABS 2022

Global ABS 2022 is the biggest event in the world centered around the ABS and the securitization market. 

Securitizations are still at the top of the agenda for market participants and regulators thanks to the benefit they offer in facilitating institutional investors’ access to real assets and financial assets originated by banks and digital lenders and the opportunity for banks to de-risk their balance sheets and access cheap sources of funding.

What is happening in the overall structured finance market

The structured finance market remains solid and is attracting continuous interest from both issuers and investors. The EBA confirmed securitizations as being pivotal for a well-functioning financial system and the evolution of the market central to the agenda of the regulator.

Regarding portfolio performance in the current scenario – characterised by high inflation, rising interest rates, and the spectrum of a recession – all panelists confirmed that portfolios are solid for the moment and that no major increases in defaults have been noticed so far. 

One of the major concerns of lenders is related to inflation and how it will be absorbed by salary increases. The asset classes most at risk under this perspective are considered: (i) consumer unsecured loans, (ii) auto loans, (iii) loans to self-employed, and (iv) mortgages.

The one thing that the current high-inflation scenario is changing however is the risk appetite of cash-rich institutional players, such as pension funds, insurance companies etc., that, according to panelists, are starting to invest in digital lending products, looking for diversification and higher returns on investments. 

Limited growth in EU

The European market has so far lacked the ability to grow and is lagging behind compared to the United States: historically low-interest rates pushed banks to opt for alternative sources of funding reducing supply. On the demand side, difficulties to absorb fixed costs are keeping investors away.

Growth of the synthetic markets

Synthetic markets are growing as there is an increasing appetite from banks for on-balance sheet transactions (that can now be classified as STS) and insurers. The latter are growing their ability to assess credit risk and widening their focus from single names to portfolio exposures. Financial guarantees are the tool elected given their ability to ensure the right level of protection without exposure to mark to market volatility. 

The impact of Basel IV

Basel IV will impact banks with more stringent requirements, paving the way for new SRT deals. 

The role of regulation

After the initial negative attitude to what was considered just regulatory burdens, the market is getting used to STS securitizations and ESMA reporting, notwithstanding the level of regulation imposed on the sector seems to be “unfair” if compared to similar products such as covered bonds

Italian NPLs

  • The market will continue to be driven by GACS, with upcoming updates 
  • Existing GACS showing a mixed performance with c. 50% ahead of business plan and 50% below, although collections timing are improving after the clogs created during the pandemic is relaxing
  • The traditional methodology of assessing transactions based on comparison with a business plan is becoming inadequate as it is strictly connected to the underlying assumptions and methodology used by Servicers, which become more conservative after the pandemic. Profitability is emerging as an alternative KPI to properly measure transactions’ performance.
  • The secondary market is growing and is expected to be pivotal for many participants in order to manage the liquidity needs

The role of data in the securitization market

  • The increased level of data and information and the standard for data reporting imposed by the regulator has been widely considered a very positive initiative bringing more transparency to the market. This has helped all participants to improve due diligence, thanks to better comparability across different transactions and better credit assessments.
  • On the other hand, many are still struggling in complying with new standards. These standards are in fact considered too detailed (especially when it comes to vintage assets) and the format required is too complex to to be used by investors, resulting in the need for additional custom reporting. 
  • ESMA is currently working on new reporting standards. The new templates are expected to solve most of the issues mentioned above and meet the needs of the market players. There is also the possibility that the templates will be used for more than just regulatory compliance.
  • This includes focusing on data quality rather than quantity: ESMA aims to avoid the need to report to multiple counter-parties and to have one single source of truth. Furthermore, instead of providing multiple views of the same data, the focus should be on loan-by-loan data information leaving to the final user the option to aggregate based on specific needs.

ESG insights for the securitization market

  • ESG seemed to be at the centre of every panel, with most discussions revolving around what is the right level of ESG factors adoption for different asset classes, data availability, regulation, and standardization needs.
  • The need to provide incentives to invest in sustainable assets should find a balance between the impact on the risks perceived (which is not lowered by sustainability per se) and the support for lower economics in order to grant the development of the market
  • The EIF and EBA seem to agree on the direction of ESG securitisation strategy. Independently from the type of approach considered to be ideally superior (sustainable collateral or use of proceeds), market players are favouring the most pragmatic tactics: having a low number of readily available sustainable assets while supporting their creation in the near future. This would most probably incentivise the green transition investments, later enabling securitisation to follow a green collateral approach.
  • ESG reporting and required templates were discussed as a necessary development for the market to have clear guidelines to drive the originators and debtors on providing this information. Such information will have to be provided in granular and robust forms so that the risk of greenwashing can be minimized. As we speak, there were 30+ different standards that market participants mentioned.
  • The focus on ESG has raised new interesting ideas around new markets, such as the solar market, carbon credit intermediation, and green transformation finance.
  • From an investor’s point of view, ESG is a crucial element to be considered not only to evaluate an investment but also to be monitored across the life of all transactions, with the final goal of providing an additional element to drive the investment strategy.
  • From a lender’s point of view, incorporating ESG is very tricky. This challenge becomes even more significant when it comes to consumer lending. For example, in relation to the environmental factors, there is a clear trade-off: it is very difficult to have strict control on how borrowed money is spent without slowing the process and reducing the efficiency – this would mean going back to a more traditional process. What can be done, instead, is to analyze the carbon emission of the equivalent footprint of the portfolios, linking it to the behavior of borrowers (analyzing demographics). Furthermore, when it comes to social factors, the significant trade-off lies between the positive impact generated by lending to people with a poor credit history or low income and the embedded credit risk. 
  • ESG is here to stay, and regulation will soon intervene. The call for lenders is to start to voluntarily report ESG data as soon as possible, to be prepared and get a competitive advantage when regulation kicks in. 

Technology’s impact on the market

  • The European market has an estimated funding gap of $1 – 1.5tn. As banks are not able to finance it all, this represents a huge opportunity for fintech
  • Fintechs are still considered “subprime lenders” by some market participants given their limited track record (especially during downturns) and their focus on unbanked lenders
  • Technology plays a big role in making this non-bank lender and relatively new asset classes more appealing: better sets of data, accounting integrated software and interactive dashboards with real-time updates on portfolio performance are ways for lenders to gain the trust needed from investors, becoming more institutional, providing better insights than their more traditional comparables with the final result of putting lenders in a better shape to access capital markets.
  • Blockchain can be a game-changer for the industry, helping both the issuance and the management of transactions, although some limits are still seen in matching on-chain securities with off-chain assets

Global ABS 2022 Barcelona: Wrap-up

All panels and discussions came to the same insights: the market needs high-quality standardized data, and in particular, the need for ESG-related data is becoming more and more relevant. In addition, the market actors that do have the data are struggling to manage it efficiently and take advantage of all the information at their disposal, simply because they are lacking the right technology and tools. 

We have perceived a lack of action in terms of investing in technology that can enable data leveraging. The approach taken by market players is in general rather passive: they expect that some external entity (i.e. the regulator) will set the standards and rules. However, as they don’t get actively involved in the process, what is implemented often does not fulfill real needs.  The situation in Europe looks very different from the US, where financial institutions and investors took the lead and reset the market rules after the GFC hammered the sector and again set its own standards for sustainable transactions without the need for a supranational entity. 

Market actors cannot afford information asymmetry anymore. Considering the regulatory actions in the past few years, data will eventually become a commodity, and only the players that are well equipped to properly manage it and extract valuable insights will gain a competitive advantage in the market.

At Cardo AI, we strongly believe that European financial institutions and investors should change the pace and take a proactive approach in setting data requirements, creating partnerships amongst them and with tech companies in order to enforce and activate this standard. To find more about our technology, check out our dedicated web page.