The Times They Are A-Changin'
After nearly a decade of steady improvement, the declining trend in non-performing exposures (NPEs) on Italian banks' balance sheets came to a halt in
the first half of 2024, marking an inflection point for the industry. The increase is considered a natural adjustment following the sharp reductions of recent years. Total NPE stock increased slightly to €54.8bn, up from €52.6bn at the end of 2023. This rise was accompanied by annual inflows of €17.0bn, an uptick after several years of stabilization at historically low levels of €12-14bn.
The annual default rate for 1H 2024 rose to 1.14% from 0.88% in 2023, remaining below pre-2019-2020 levels (1.33% in 2018). Corporate defaults drove this increase, rising to 1.74% (from 1.35%), largely due to challenges in the manufacturing sector (default rate: 1.90% vs. 1.19% in 2023). Household defaults also grew modestly, reaching 0.69% from 0.63%.
Default rates in the Italian market are expected to rise modestly over the next 12 months, potentially reflecting broader trends observed across Europe. Between June 2023 and June 2024, NPE levels in Germany and France grew by 23% (from €34bn
to €41bn) and 5% (from €116bn to €121bn), respectively, among significant banks. In Germany, this increase was driven almost entirely by the Commercial Real Estate sector (accounting for 90% of the growth), while in France, the SME sector faced mounting difficulties. A general deterioration in credit quality is further evidenced by the rise in Stage 2 exposures, which grew from €212bn to €274bn in Germany and from €435bn to €466bn in France.
Amid these challenges, Italy continues to perform strongly. Notably, Stage 2 loans in Italy decreased by 17% in the first half of 2024, dropping from €211bn
to €177bn, and its share of total loans fell from 9.6%
to 8.2%.
The state guarantees provided to small and medium-sized enterprises during the Covid emergency, which had peaked at over €200 billion, have now more than halved (€91 billion as of May 2024) due to the repayment of installments. The average default rate for these loans is around 1.6 percent, in line with the trend observed for bank loans. This resilience highlights the effectiveness of proactive credit management strategies put in place by the Italian banking system.
In 2024, the Italian market for non-performing loans experienced a decline in both the number of transactions and the gross book value (GBV) traded. Annual transactions are expected to close below €11bn in 2024, reverting to pre-2017 levels. An increasing share of these transactions occurs in the secondary market (30% of total transactions) and a significant portion involves in-kind contribution funds (€1.6bn as of today).
Having addressed the immediate challenge of large-scale NPE deleveraging, Italian banks are now prioritizing proactive derisking or risk-sharing strategies. These include optimizing risk-weighted assets, and adopting originate-to-distribute models. This shift aligns with the ECB's efforts to simplify securitization processes, enabling banks to expedite regulatory approvals for significant risk transfer and free up capital for lending.
Moreover, an increasing number of players are collaborating with banks from the origination phase, strategically positioning themselves to capture new NPE inflows. The ability to scale operations across the entire credit management value chain, starting from the initial stages, will be essential for sustaining a competitive advantage.
While structural factors may continue to temper the growth of the primary NPE sales market, as seen over the past 24 months, the secondary market is rapidly gaining traction. Its significant untapped potential is poised for expansion, driven by the Secondary Market Directive (SMD) and the broader liberalization of the debt purchasing landscape. These shifts open new avenues for specialized players to innovate, diversify their portfolios, and strengthen their competitive positioning.
The debt purchasing and servicing markets are undergoing significant transformation. Several regulated players are shifting towards capital-light business models or diversifying into other sectors. At the same time, the emergence of “Specialized Debt Restructurers” promises to enhance secondary NPL markets by introducing stable buy-side participants.
In the Italian debt servicing sector, following recent consolidations, larger players are positioned to take the lead, facing the dual challenge of expanding their services across the credit lifecycle and achieving operational excellence through advanced technologies. With lower inflows, investors and servicers should prioritize either extracting value from managed assets or exploring opportunities in new asset classes.
In the first scenario, servicers must adopt strategies to enhance the value of underlying assets, whether through revitalizing businesses or redeveloping real estate properties. In the second, identifying and leveraging emerging asset classes can secure new inflows, diversify revenue streams, and strengthen portfolio resilience—key factors for maintaining competitiveness and maximizing returns. Notably, tax credits have emerged as a significant potential asset class, particularly following the reforms introduced by Legislative Decree 110/24. Among its provisions, the decree mandates the reassignment of uncollected tax credits to original creditor entities, which may delegate their servicing to private entities through public tender processes.
Regulatory pressures, including the implementation of the Secondary Market Directive, may reshape the long tail of debt servicers present in the market. Compliance requirements are increasingly stringent and particularly burdensome for smaller players. This situation could lead to a gradual alignment among various players, not necessarily through aggregations but via alliances and innovative coordination models that preserve the specific expertise and excellence of each player while mitigating regulatory burdens.
As the non-performing loans landscape evolves, industry players face a dual challenge: adapting to shifting market dynamics while seizing opportunities for growth. By embracing innovation, strengthening partnerships, and responding proactively to regulatory shifts, the sector can transform these challenges into sustainable value creation for clients and the broader economy.
Indeed, "The Times They Are A-Changin'," and those who can adapt to these changes will be best positioned to drive growth and innovation in the years ahead.
