Italy remains one of the largest non-performing exposure (NPE) markets in Europe. Italian banks gradually reduced a stock which reached a peak in 2015 at €341 bn of NPEs down to €99 bn at Dec-20. The deleverage process mainly focused on bad loans led to Unlikely-to-Pay exceeding bad loans since December 2020.
Before COVID-19 the situation of NPEs appeared substantially under control. However, the pandemic has completely changed the scenario. The complexity of this unprecedented economic downturn has resulted in a still largely uncertain situation. The only certainty is that the market will be affected by a new wave of NPEs, still shifted back in time due to the relief measures adopted by the government.
In this scenario the main Italian banks have not been impacted by COVID-19 to date: they all continued the reduction of NPE ratios with a cost of risk also in the last quarters still below 2019 levels. However, banks are still vulnerable, in particular those with higher exposures towards enterprises belonging to the sectors most affected by the crisis.
Improving macroeconomic conditions might limit NPE formation. However, some first signs of possible credit deterioration are beginning to be observed. Credits classified Stage 2 on Italian banking books reached €219 bn at Jun-21 (+23% YoY), representing 14.3% of total credits.
All of this is happening in a context in which in terms of credit quality the Italian banking system still has a "higher" risk profile than other European countries. Looking at the Italian significant banks in June 2021, the share of Stage 2 loans out of total performing loans was around 4 percentage points higher than the average for the euro-area significant banks.
Given the context, it is still very difficult to make reliable forecasts, but market consensus is that NPE new inflows will be in a range between €70 and 90 bn in the next 24-36 months, net of any further extraordinary measure. However, in their latest business plans main banks remain optimistic about the resilience of the quality of their credit portfolios.
Regardless of how many new NPE flows will be, there is a clear need for industrial transformation in the management of NPEs. Despite the deleverage carried out by the banks in recent years, it remains an important stock to manage which is worth about € 400 bn, today more than 130,000 companies are classified as UtP and the new flows will mainly be “live” loans (UtP), small / medium-sized enterprises belonging to the sectors most affected by the crisis. These NPEs will require ad-hoc management by the banks which will not be able to behave as during the previous crisis, accumulating non-performing loans on the books for years and disposing them with solutions such as GACS.
An alliance between all the players (government, banks, investors, local stakeholders) is needed to support the recovery of the real economy.
Pier Paolo Masenza
Financial Services Leader, PwC Italy
Partner, PwC Italy