In the last three years the NPL market have been subject to disruptive evolutions. Banks have undergone a deep review of their operating models and a strong deleverage process. Total NPL on banks’ balance sheets decreased from €341bn to €180bn in gross terms. This resolution process has proceeded at an accelerated pace during 2018, with an €80bn decrease with respect to year-end 2017.
Notwithstanding this improvement in asset quality, NPL still represent a relevant issue for banks account, with €88 net billions of problematic credits still standing in the balance sheets as at December 2018.
The higher share of this risk is represented by Unlikely to Pay exposures which, considering net book value, have largely overcome bad loans (€51bn versus €34bn). And UtPs are not easy to be tackled: they are difficult to be correctly classified (going versus gone concern), recovered (strong sectorial competences are needed) and managed (the debtor is still an active client of the Bank and in most of the cases a plurality of banks have a share of wallet in the exposure).
Markets, regulators and supervisors are not indifferent to this hidden threat and pressure to further improve asset quality is still high if not increasing in time. Market capitalizations of financial institutions are negatively correlated with asset quality, pointing at concerns of investors over banks being focused on NPL management rather than on evolving and improving their core business models. And a wave of new regulations has come to light.
Aware of the systemic failures that the crisis highlighted, European institutions have undergone a wide review of the regulatory framework.
After issuing the guidelines on NPL, describing a set of best practice that banks are expected to follow, the ECB has approved an addendum to these guidelines requiring a minimum coverage for NPL that banks will retain on their balance sheet. This coverage, that can be fulfilled by accounting provisions or capital allocation, is expected to reach the entire value of the exposure within seven or two years after the classification to non performing, depending on the collateralization.
A similar regulation was approved by the European Commission, under a Pillar I perspective, binding for all banks though with slightly different schedules. These measures, broadly known as “Calendar provisioning” approach, are clearly disruptive for the traditional banks and for credit purchasers.
And it’s not the end of the story…
Pier Paolo Masenza
Financial Services Leader, PwC Italy
Tel: +39 06 570252472
Partner, PwC Italy
Tel: +39 02 66720351
CO-Head of NPL, PwC Italy
Tel: +39 02 7785222