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The Italian NPE market

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

Wind of Change

2022 was supposed to be the year of post-COVID normalization and acceleration of economic growth. Following Russia’s invasion of Ukraine and the effects of stark increase in inflation felt around the world, the prospects for a robust global recovery from the COVID pandemic seem increasingly fleeting. 

Banks face additional challenges: the effects of the extraordinary governmental aid and support provided to soften the blow have still not been felt. While pressure from regulators persists. 

These are uncertain times.

2021 EU banks’ results were heading towards pre-COVID levels, as risks from the pandemic seemed under control. 

This stability, however, was only apparent. Besides the €78bn of non-performing exposures present on Italian banking books as of March 2022 (of which €44bn past due and UtP), other areas of concern include:

  • the rising share of loans classified as Stage 2: loans that show a significant increase in credit risk and require at least a close monitoring (€ 222bn at the end of 2021, 13% of total loan book)

  • €250+ bn of state-guaranteed loans granted between 2020 and 2021. Most of these loans will terminate their grace period next financial quarter.

  • a significant stock of €300bn NPEs still under management, sold by the banks in recent years in their deleverage process, and now owned by investors.

Market consensus expects an increase in NPE flows up to €70-90bn over the next 24-36 months. However, this estimate is still speculative since we could expect new government measures to be implemented to aid the worsening macroeconomic conditions.

 

Banks are now more prepared to face this new phase thanks to the sizeable de-risking processes achieved in recent years: including more adequate capitalization and improved NPE management strategies. Moreover, some banks have already announced their commitment to additional NPE disposals. 

The Italian market has approximately €300bn of UtP and Stage 2 credits. These asset classes, mainly composed of  SMEs, belong to the sectors most affected by the crisis. Considering that these UtP/ Stage 2 loans still have a direct impact on the current economy, they require specialized management by banks. 

Banks will need to pay more attention to a prompt management of past due and will need to develop new skills in the area of "industrial" management for the struggling companies, as well as adopt "more sophisticated" solutions to solve these crises.  

Professional debt servicers will have to prepare for the next "Beyond NPE" phase through revenue diversification and skills enrichment. At the same time, investors will need to have the capacity to issue new finance to borrowers.

Two more significant developments will characterize the NPE market in the coming years. First, debt investors/ servicers will have to extract value from existing AuM (€300bn just shifted out of banking books), focusing on recovery maximization, productivity increase, and cost control, while transitioning towards a more tech-intensive model. Additionally, the secondary market will continue to increase.

The debt purchasing & servicing sector will play a key role in supporting the real economy. Thousands of companies are facing, or are approaching, financial difficulties; and the NPE industry will have the crucial task of accelerating their recovery and returning them to performing status.

We strongly believe that a holistic solution, an "alliance" of sorts, among all key actors (banks, debt servicers, investors and local stakeholders), is crucial in order to effectively champion the recovery of the real economy. The market needs a systemic solution aimed at rationalizing, making business restructuring faster and more efficient.

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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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