The Italian NPL Market

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

 

What’s next…?!

The Italian market for Non Performing Exposures (“NPE”) over the year 2017 and the first months of 2018 met expectations in terms of vitality and fervor. With regard to Bad Loans, volumes lie at €165 billion (GBV) and €64 billion (NBV) as at December 2017. Their massive reduction, occurred from December 2016 to December 2017 (less 18% in terms of GBV and less 26% in terms of NBV), has been driven mainly by a few mega deals of loans derecognition (€17.7 billion disposed by Unicredit through Project Fino, €16.8 billion disposed by Banca Popolare di Vicenza and Veneto Banca through their bailout). Eventually the NPL disposals in 2017 reached a volume of €64 billion.

The reduction trend even continued over the first quarter of 2018 featuring further mega deals such as the disposal of €24 billion of Bad loans sold by MPS through securitisation and the disposal of €10.8 billion of Bad Loans sold by Intesa Sanpaolo in the context of the sale of their NPL platform to Intrum. 

Alongside the circa €37 billion of transactions already closed in 2018 from 1st January, we foresee a pipeline for further NPE transactions to be announced in the year equal to circa €28 billion, including several securitisation operations under GACS (supported by the Italian Government guarantee on the senior notes) and the disposals of some Unlikey to Pay (“UtP”) portfolios. These announced transactions will even fuel the NPL secondary market. UtP exposures reached €94 billion of GBV as at December 2017 (vs. €117 billion one year before) definitively surpassing the level of Bad Loans in terms of NBV (€66 billion vs €64 billion respectively). Italian banks are still pondering over how to best structure the management of their UtP (internally by their specialised departments or externally by specialised servicers), and effectively implement disposal plans of their UtP exposures (sales of UtP, net of the disposals associated to several bailouts, were limited in terms of numbers of transactions and in EUR volumes in 2017).

The first months of 2018 also witnessed a significant increase in the NPE provisions within the Italian banks led by the application of IFRS9 for the first time. The adoption of the international accounting principle led the average NPE provision of the top ten Italian banks as at March 2018 to 59% from 54% as at December 2017 (in particular Bad Loans’ provision achieved 66% from 61% and the Unlikely to Pay’s provision reached 38% from 35%). 

Over the last eighteen months, the real trendsetter of the NPL market was the consolidation path of the servicing arena through the acquisition of several workout platforms by big players. 

The transactions included either the captive units of some Italian banks (e.g. the platform of MPS, Carige and Intesa Sanpaolo acquired respectively by Cerved/Quaestio, Credito Fondiario and Intrum) and some independent players (e.g. CAF, Phoenix Asset Management, Parr Credit, FBS acquired respectively by Intrum, Anacap/Pimco, Arrow and Banca IFIS). We believe that new players could enter the market in 2018 for further platform disposals, mainly driven by the future opportunities of the servicing market such as i) the forecasted rise in the volumes of Bad Loans outsourced by the Italian banks to external servicers, ii) the management of the Unlikely to Pay exposures which actually represent the next frontier of NPE servicing. 

In the context of consolidation, a leading role could be held by the “challenger banks”. These players, leveraging their banking license, their in-house workout management expertise and restructuring capabilities, could offer a wide range of services in the market either in the consolidated field on Bad Loans’ collection and in pioneering the field of Unlikely to Pay loans’ management. We believe that the challenger banks could represent the evolution of the traditional banking business model. Through i) new lending to UtP, sub-performing and subprime borrowers, ii) specialty finance and iii) expertise in restructuring measures, the challenger banks could massively affect the dynamics of these portions of NPE portfolios that at least up until now did not result in significant positive outcome within the Italian banking system.

The maneuvers we see in the market even reflect the requests of the Regulators addressed to the Italian banks. These recommendations aim, on the one hand, at redefining their NPE strategies to reduce the NPE ratios and on the other hand, at reshaping their operating model to progress towards a further industrialization of the overall loans management. Regulatory pressure on the Italian banks aimed at reducing their NPE ratio is focusing even on UtP that always more frequently are under investigation in the course of the audit of the Regulators. ECB guidelines, whose application will be extended in Italy to the Less Significant banks, the calendar provisioning (within the ECB Addendum) and the aforementioned first time adoption of IFRS9, will continue to drive the strategic decisions of the Italian banks in the near future. 

Despite the political turmoil currently perceived by the market, in light of all the movements occurred over the last year, we believe that the Italian NPE market is still rich with interesting opportunities and new potential and innovative initiatives. 

Thus we wonder what’s next…?! 

 

June 2018

 

 

Contact us

Pier Paolo Masenza
Financial Services Leader, PwC Italy
Tel: +39 06 570252472
Email

Vito Ruscigno
Associate Partner, PwC Italy
Tel: +39 02 7785213
Email

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