The Italian NPE market

This publication provides on a regular basis an update (in English) on the Non Performing Loans (NPL) market in Italy.

Chasing Tomorrow

After reaching its peak in 2015, the non-performing exposure (NPE) stock on banking books has consistently decreased, reaching €56 billion as of June 2023. This may suggest that NPEs are no longer a significant problem. The inflow of new NPEs has dropped to the lowest levels in the last three years, defying common expectations, thanks to a series of extraordinary government interventions.

At the same time, deleveraging was accomplished through the creation of a substantial primary market for NPE sales, using the GACS state guarantee which expired in 2022.

The Italian banking system now appears stronger, with solid capitalization (CET1 ratio fully phased equal to 15.8%, up by 5 percentage points from 2015), efficient derisking processes (gross NPE ratio down to 2.4% in 1H 2023 vs. 16.8% in 2015), and good levels of profitability (approximately 14% in 1H 2023, at record levels).

However, the outlook for the euro area has somewhat deteriorated, as low growth and higher interest rates are expected to persist. Geopolitical challenges remain, and expectations for economic growth have recently been revised downward (1.0% Real GDP growth expected in 2024 for the Euro Area, halved from end-2022 expectations).

Yet, another perspective on Non-Performing Exposures (NPEs) can be taken into account: i) there are over €300 billion of total NPEs in the market, including those sold to investors, as a significant portion of the loans transferred by banks in the deleveraging process is still outstanding and requires management, and ii) there are over €200 billion of Stage 2 loans that require close monitoring.

In addition, from 2020 to June 2023, over €340 billion in loans with state guarantees (MCC and SACE) have been disbursed, generating a loan stock of approximately €230 billion as of June 2023. As the repayment of principal has commenced, there has been a slight increase in the corresponding loan default rate, consistently remaining higher than the default rate for companies that did not utilize government-guaranteed loans (2.1% compared to 1.1% in June 2023). However, installment payments, on average, constitute a small percentage of companies’ turnover (around 5% annually), and the guaranteed loans have a low residual maturity (3.5 years on average), signalling that the risk is under control. Nevertheless, these credits certainly require particular attention.

In this context, over the years, a highly evolved industry has developed for the management of bad loans. However, the industry is still in the startup phase for unlikely-to-pay management, and therefore, it is expected to undergo a substantial transformation to meet the new needs of banks, introducing new services and embracing a novel approach to capitalize on emerging business opportunities.

The market's needs and priorities have undergone a profound change: from a gone-concern to a going-concern focus. 

As a result, the industry needs to transform itself. Finding a solution for non/sub-performing loans means supporting the real economy, and it requires a joint effort from the system (banks, servicers, and investors). Additionally, the government could play its part by promoting solutions that create a virtuous cycle for the entire economy.

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Pier Paolo Masenza

Pier Paolo Masenza

Partner | Financial Services Leader, PwC Italy

Fedele Pascuzzi

Fedele Pascuzzi

Partner, PwC Italy

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