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June 2020
Impact of Economic Stress on Retail Credit
Portfolios Across Europe
Europe Retail Credit Risk Webinar Series
Episode 1
Wednesday, 24 June
10:00 BST | 11:00 CEST
COVID-19:
360° View of the Dutch
Mortgage Loan Market
Impact of Economic
Stress on Retail Credit
Portfolios Across Europe
Episode 2
Tuesday, 30 June
14:00 BST | 15:00 CEST
Impact of Economic Stress on Retail Credit Portfolios Across Europe 3
Today’s Speakers
Brenda Solis Gonzalez
Risk Modeler
Pouyan Mashayekh, PhD
Senior Director
Juan Licari, PhD
Managing Director
Economics & Business Analytics
Impact of Economic Stress on Retail Credit Portfolios Across Europe 4
Retail loan-level econometric models for credit and impairment metrics
Portfolio Analyzer (PA) Suite of Models
Delinquency/Arrears (Flow rates or migration matrices)
Default Rates & PDs(Dynamic term-structures)
Prepayment Risk(Closed-good physical risk)
Exposure at Default (EADs)(Amortization curves or utilization
factors)
Expected Credit Losses (ECLs)
IFRS 9
Credit Impairments
M o r t g a g e s(With relevant sub-categories)
C r e d i t C a r d s(Bank cards & Retail cards)
P e r s o n a l L o a n s & L i n e s(Unsecured &r Secured)
Ve h i c l e / Au t o F i n a n c e(Loans & Leases)
O v e r d r a f t s(Across account types)
S t u d e n t L o a n s(Government & Private)
R e t a i l S M E s
(With relevant sub-categories)
Portfolio Loss Analytics(Dynamic multi-period Loss Distributions, VaRs, Tail-risk-contribution analysis,
Economic Capital, Risk Concentration)
Retai l Asset Classes
Impact of Economic Stress on Retail Credit Portfolios Across Europe 5
1. Modular Approach to Model Credit Risk for Retail Credit Portfolios
2. Case Studies for Mortgages, Consumer Loans, and Credit Cards
3. Auto Loans in Europe: Pan-European Perspective
4. Characterizing Non-Performing Loans
Agenda
1Modular Approach to Model
Credit Risk for Retail Credit
Portfolios
Impact of Economic Stress on Retail Credit Portfolios Across Europe 7
Shift of baseline scenarios
Unemployment Increases
0.0
5.0
10.0
15.0
20.0
25.0
Germany UnitedKingdom
France Greece Spain Italy Netherlands Portugal RussianFederation
Poland UnitedStates
Unemployment in 2019Q4 Max of 2020-22 Unemployment (Feb) Max of 2020-22 Unemployment (June)
CountryUnemployment
in 2019Q4
Max of 2020-22
Unemployment
(Feb)
Max of 2020-22
Unemployment
(June)
Value Date Value Date
Germany 5.00 5.36 2022Q4 6.36 2020Q4
United Kingdom 3.80 4.64 2022Q4 8.45 2021Q1
France 8.10 8.51 2020Q1 11.04 2020Q3
Greece 16.53 16.34 2020Q1 21.15 2020Q3
Spain 13.81 14.06 2020Q2 24.02 2020Q2
Italy 9.57 10.52 2022Q4 13.16 2020Q4
Netherlands 3.40 4.48 2021Q3 7.60 2021Q2
Portugal 6.62 6.29 2020Q1 9.86 2020Q3
Russian
Federation4.58 5.78 2021Q1 6.71 2020Q3
Poland 2.85 3.91 2022Q4 6.82 2021Q3
United States 3.53 4.37 2022Q2 14.04 2020Q2
Impact of Economic Stress on Retail Credit Portfolios Across Europe 8
Modular Structure for Consumer Loans AnalysisUsing Moody’s Portfolio Analyzer
FACTORS
Economic Data
Loan Level Data
Default/Prepayment
LGD
EAD
Risks simulations, cash-flow
calculations
Scenario projections for risk metrics such
as ECL, Loss Distribution, Credit
VaR
Account-level, forward-looking,
scenario-conditional cash-flows
MODELS OUTPUT
Staging, Impairment
Calculations & Forecasts
2Case Studies for
Mortgages, Consumer
Loans, and Credit Cards
Impact of Economic Stress on Retail Credit Portfolios Across Europe 10
UK MortgagesImpact on the forecast of key risk metrics
2
7
12
17
22
27
2020M4 2021M4 2022M4 2023M4 2024M4
Baseline (Feb) Upside (Feb) Downside (Feb)
Baseline (May) Upside (May) Downside (May)
0.05
0.15
0.25
0.35
0.45
0.55
0.65
0.75
0.85
0.95
2020M4 2021M4 2022M4 2023M4 2024M4
Baseline (Feb) Upside (Feb) Downside (Feb)
Baseline (May) Upside (May) Downside (May)
A n n u a l i z e d C o n d i t i o n a l P D , % A n n u a l i z e d L G D , %
Impact of Economic Stress on Retail Credit Portfolios Across Europe 11
UK MortgagesImpact on expected losses
0.015 0.0170.024
0.018
0.030
0.053
0.179
0.081
Upside Baseline Downside Prob. Weighted
Feb May
0.001 0.003 0.000.003 0.02 0.0230.02
0.100.12
0.010.04 0.05
0.03
0.11
0.160.16
0.48
0.76
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Owner Occupied (OCC) Buy To Let (BTL) Secondary Home (SEC)
Upside (Feb) Baseline (Feb) Downside (Feb)Upside (May) Baseline (May) Downside (May)
E x p e c t e d l o s s e s b y O c c u p a n c y, % E x p e c t e d l o s s e s b y S t a g e s , %
Impact of Economic Stress on Retail Credit Portfolios Across Europe 12
UK Mortgages: Cross-country ComparisonIFRS 9 staging and expected losses
0.018
0.02
0.081
0.04
UK Dutch
Feb May
D i s t r i b u t i o n o f E x p o s u r e a c r o s s S t a g e s p e r S c e n a r i o s , %
E x p e c t e d C r e d i t L o s s e s o v e r E x p o s u r e s , %
99.06 99.00
0.789 0.853
0.150 0.150
Feb May
U K D u t c h
98.30
85.02
1.26
14.54
0.43 0.43
Feb May
Impact of Economic Stress on Retail Credit Portfolios Across Europe 13
UK Mortgages: Impact on One AccountChanging DPD status & scenario vintages, all else unchanged
E x p e c t e d L o s s e s , %
1.457
19.098
1.729
23.051
Current 60DPD
Feb May
L i f e t i m e P D , %
0.142
12.442
0.205
14.644
Current 60DPD
Feb May
1 2 m o n t h P D , %
0.006
0.754
0.008
0.910
Current 60DPD
Feb May
Impact of Economic Stress on Retail Credit Portfolios Across Europe 14
UK MortgagesSimulations –Distribution of Expected Losses
0
500
1,000
1,500
2,000
2,500
3,000
0.000 0.003 0.005 0.008 0.015 0.030 0.045 0.060 0.075 0.094 0.119
Feb May
February May
Loss Summary Baseline Feb 2020 Loss Summary Baseline May 2020
Expected Loss 0.002 Expected Loss 0.022
Loss Summary S3 Feb 2020 Loss Summary S3 May 2020
Expected Loss 0.004 Expected Loss 0.055
Loss Summary S4 Feb 2020 Loss Summary S4 May 2020
Expected Loss 0.006 Expected Loss 0.076
Aggregate Statistics Feb 2020 – BL Aggregate Statistics May 2020 – BL
Simulations 10,000 Simulations 10,000
Mean 0.0019 Mean 0.0222
SD 0.0016 SD 0.0118
IQR 0.0016 IQR 0.0141
Skewness 2.3716 Skewness 1.489
Kurtosis 8.7207 Kurtosis 3.6922
95th/50th Pct 3.7547 95th/50th Pct 2.2905
D i s t r i b u t i o n o f E L s A c r o s s S c e n a r i o V i n t a g e s , B a s e l i n e
Impact of Economic Stress on Retail Credit Portfolios Across Europe 15
0.3
0.35
0.4
0.45
0.5
0.55
2020M5 2020M11 2021M5 2021M11 2022M5
Baseline (Feb) Upside (Feb) Downside (Feb)
Baseline (May) Upside (May) Downside (May)
UK Credit CardsImpact on PD
0.4390.453
0.474
0.5070.523
0.549
Upside Baseline Downside Upside Baseline Downside
A n n u a l i z e d u n c o n d i t i o n a l P D , % 1 2 - m o n t h P D , %
Feb May
Impact of Economic Stress on Retail Credit Portfolios Across Europe 16
94.4593.97
5.55.97
0.05 0.05
Prob. Weighted Prob. Weighted
Stage 1 Stage 2 Stage 3
M a yF e b
Impact on stages and ECL
UK Credit Cards
0.72
0.74
0.77
0.74
0.78
0.80
0.84
0.80
Upside Baseline Downside Prob. Weighted
Feb May
D i s t r i b u t i o n o f E x p o s u r e a c r o s s S t a g e s , % E x p e c t e d C r e d i t L o s s e s o v e r E x p o s u r e s , %
0.169.72
97.08
0.179.87
97.22
Stage 1 Stage 2 Stage 3
Impact of Economic Stress on Retail Credit Portfolios Across Europe 17
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
May 2020 Nov 2020 May 2021 Nov 2021 May 2022
Baseline (Feb) Upside (Feb) Downside (Feb)
Baseline (May) Upside (May) Downside (May)
German Personal LoansImpact on PD
0.799 0.805 0.811
0.8900.955
1.020
Upside Baseline Downside Upside Baseline Downside
A n n u a l i z e d u n c o n d i t i o n a l P D , % 1 2 - m o n t h s P D , % ,
Feb May
Impact of Economic Stress on Retail Credit Portfolios Across Europe 18
63.1554.43
36.6545.37
0.20 0.20
Prob. Weighted Prob. Weighted
Stage 1 Stage 2 Stage 3
M a yF e b
Impact on stages and ECL
German Personal Loans
1.341.44
1.611.46
1.5481.717
1.9211.727
Upside Baseline Downside Prob. Weighted
Feb May
D i s t r i b u t i o n o f E x p o s u r e a c r o s s S t a g e s , % E x p e c t e d C r e d i t L o s s e s o v e r E x p o s u r e s , %
0.47 2.76
77.86
0.51 3.20
96.74
Stage 1 Stage 2 Stage 3
3 Auto Loans in Europe:
Pan-European Perspective
Impact of Economic Stress on Retail Credit Portfolios Across Europe 20
Explanatory Variables of PP, PD & LGD models
LTV
New/Used
Car age at origination
Loan age
Employment status
Borrower income
Income verification
Unemployment rate
Home price changes
LTV
New/Used
Car age at origination
Borrower income
PD & Prepayment Loss Given Default
Impact of Economic Stress on Retail Credit Portfolios Across Europe 21
Spain: PD ForecastFor a representative portfolio
A n n u a l i z e d C o n d i t i o n a l P D , % 1 2 - m o n t h P D , %
F e b M a y
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.04
2020M07 2021M08 2022M09 2023M10 2024M11
Baseline (Feb) Downside (Feb) Severe downside (Feb)
Baseline (May) Downside (May) Severe downside (May)
0.11
0.16
0.17 0.16
0.20
0.22
0
0.05
0.1
0.15
0.2
0.25
Baseline Downside Severedownside
Baseline Downside Severedownside
Impact of Economic Stress on Retail Credit Portfolios Across Europe 22
February May
Loss Summary Baseline Feb 2020 Loss Summary Baseline May 2020
Expected Loss 0.8545 Expected Loss 1.2842
Loss Summary S3 Feb 2020 Loss Summary S3 May 2020
Expected Loss 1.2376 Expected Loss 1.6385
Loss Summary S4 Feb 2020 Loss Summary S4 May 2020
Expected Loss 1.4576 Expected Loss 1.8186
Aggregate Statistics Feb 2020 – BL Aggregate Statistics May 2020 – BL
Number of Simulations 100,000 Number of Simulations 100,000
Mean (Portfolio EL) 0.8966% Mean (Portfolio EL) 1.2786%
Standard Deviation 0.2019 Standard Deviation 0.1875
Interquartile Range 0.2183 Interquartile Range 0.2108
Skewness 2.2294 Skewness 1.7532
Kurtosis 12.8530 Kurtosis 9.3869
95th / 50th Percentile 1.4642 95th / 50th Percentile 1.2835
Value-at-Risk Value-at-Risk
99.5 1.77 99.5 2.03
99.0 1.59 99.0 1.89
95.0 1.26 95.0 1.61
90.0 1.14 90.0 1.51
Spain: Simulations – Distribution of Expected LossesExpected Loss - VaR Approach
D i s t r i b u t i o n o f E L s A c r o s s S c e n a r i o V i n t a g e s , B a s e l i n e
0
0.02
0.04
0.06
0.08
0.1
0.12
0.0
5
0.2
0.3
5
0.5
0.6
5
0.8
0.9
5
1.1
1.2
5
1.4
1.5
5
1.7
1.8
5 2
2.1
5
2.3
2.4
5
2.6
2.7
5
2.9
3.0
5
3.2
3.3
5
3.5
3.6
5
3.8
3.9
5
4.1
4.2
5
4.4
Fre
qu
en
cy
EL [%]
Feb 2020 - BL May 2020 - BL
Impact of Economic Stress on Retail Credit Portfolios Across Europe 23
Portugal: PD ForecastFor a representative portfolio
A n n u a l i z e d C o n d i t i o n a l P D , % 1 2 - m o n t h P D , %
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
2020m07 2021m06 2022m05 2023m04 2024m03 2025m02
Baseline (Feb) Downside (Feb) Severe downside (Feb)
Baseline (May) Downside (May) Severe downside (May)
0.25
0.32
0.35
0.32
0.40
0.43
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
Baseline Downside SevereDownside
Baseline Downside Severedownside
F e b M a y
Impact of Economic Stress on Retail Credit Portfolios Across Europe 24
Feb May
Loss Summary Baseline Feb 2020 Loss Summary Baseline May 2020
Expected Loss 1.6050 Expected Loss 2.3670
Loss Summary S3 Feb 2020 Loss Summary S3 May 2020
Expected Loss 2.2687 Expected Loss 3.2398
Loss Summary S4 Feb 2020 Loss Summary S4 May 2020
Expected Loss 2.6486 Expected Loss 3.7340
Aggregate Statistics Feb 2020 – BL Aggregate Statistics May 2020 – BL
Number of Simulations100,000
Number of Simulations100,000
Mean (Portfolio EL) 1.6269% Mean (Portfolio EL) 2.3703%
Standard Deviation 0.2087 Standard Deviation 0.2707
Interquartile Range0.2737
Interquartile Range0.3538
Skewness 0.4496 Skewness 0.5357
Kurtosis 0.5071 Kurtosis 0.6505
95th / 50th Percentile1.2342
95th / 50th Percentile1.2127
Value-at-Risk Value-at-Risk
99.5 2.27 99.5 3.23
99.0 2.19 99.0 3.12
95.0 2.00 95.0 2.85
90.0 1.91 90.0 2.73
Portugal: Simulations – Distribution of Expected LossesExpected Loss - VaR Approach
D i s t r i b u t i o n o f E L s A c r o s s S c e n a r i o V i n t a g e s , B a s e l i n e
0
0.02
0.04
0.06
0.08
0.1
0.12
0.0
5
0.2
0.3
5
0.5
0.6
5
0.8
0.9
5
1.1
1.2
5
1.4
1.5
5
1.7
1.8
5 2
2.1
5
2.3
2.4
5
2.6
2.7
5
2.9
3.0
5
3.2
3.3
5
3.5
3.6
5
3.8
3.9
5
4.1
4.2
5
4.4
Fre
qu
en
cy
EL [%]
Feb 2020 - BL May 2020 - BL
4 Characterizing
Non-performing Loans
Impact of Economic Stress on Retail Credit Portfolios Across Europe 26
Household NPL exposure 2018, € Billion
NPLs By Country
Source: Moody’s Analytics, ECB
56.1
1
48.6
2
41.1
2
34.6
7
34.5
6
16.2
7
14.7
0
9.0
1
5.7
8
5.2
0
4.8
6
4.8
0
4.6
1
4.2
2
4.0
9
2.9
2
1.9
3
0.5
0
0.2
6
0.2
5
0.1
7
0.1
5
0.1
5
0.1
5
0.1
1
0.0
5
0.0
3
0
10
20
30
40
50
60
70
€, B
illio
n
Impact of Economic Stress on Retail Credit Portfolios Across Europe 27
Models for Predicting NPL Cash Flow
N P L
N e v e r c u r e d
L i q u i d a t i o n
C u r e d
R e d e f a u l t
1 C u r e m o d e l 2 E xp e c t ed t i m e t o
l i q u i d a t i on i n c a s e
c u r e n e ve r h a p p ens
3 L o s s g i ve n d e f au l t i n
c a s e o f l i q u i da t i o n
4 R e d e f au l t m o d e l f o r
c u r e d l o a n s
M o d e l s N e e d e d
Case 1 Auto Loans in Europe
Impact of Economic Stress on Retail Credit Portfolios Across Europe 29
Cured = at least 3 months of being in current after 90DPD
Probability of Getting Cured Thru Time
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2014M01 2014M07 2015M01 2015M07 2016M01 2016M07 2017M01 2017M07 2018M01 2018M07
Pro
babili
ty o
f gett
ing c
ure
d
Default date
Impact of Economic Stress on Retail Credit Portfolios Across Europe 30
Redefault Rate is Relatively High for Cured Loans
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Re
De
fau
lt r
ate
Number of months from cure date
Impact of Economic Stress on Retail Credit Portfolios Across Europe 31
LGD in Case of Not Getting CuredOn average it takes 6 months to liquidation after default
0
10
20
30
40
50
60
70
80
0 50 100 150 200 250
LG
D
Original LTV
0
5,000
10,000
15,000
20,000
25,000
30,000
0
500
1,000
1,500
2,000
2,500
1 5 9
13
17
21
25
29
33
37
41
45
49
53
57
61
65
69
73
77
81
85
89
93
97
Num
ber
of
loans w
ith L
GD
>0 a
nd L
GD
<100
Num
ber
of
loans w
ith L
GD
>0 a
nd L
GD
<100
LGD
Cure Model
for Mortgages in ItalyCase 2
Impact of Economic Stress on Retail Credit Portfolios Across Europe 33
Explanatory Variables of the Cure Model
CLTV (-)
Time since default (-)
Loan Characteristics
GDP annual growth at origination (-)
Unemployment annual growth
at origination (+)
Spread of interest rate
at origination (-)
Macroeconomic Factors
Seasonality
NUTS 1 regions flags
Fixed Effects
Owner occupied flag (-)
Mortgage purpose:
construction flag (-)
Additional
Impact of Economic Stress on Retail Credit Portfolios Across Europe 34
In-sample Fit of the Cure Model
T i m e s i n c e D e f a u l tC LT V
Impact of Economic Stress on Retail Credit Portfolios Across Europe 35
Q&A
Email us at help@economy.com or
Muhammad.Jafree@moodys.com
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Impact of Economic Stress on Retail Credit Portfolios Across Europe 37
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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and
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(as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
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