The global outlook has deteriorated throughout 2022 amid high inflation, aggressive monetary tightening, and uncertainties from both the war in Ukraine and the lingering pandemic.
The stock of non-performing exposures on Italian banks' books has reached its lowest values in the last 15 years with €68bn in June 2022. Warning signs emerged in 2022: an increase in default rates was observed in the first semester: for corporates +15% compared to December 2021 while still decreasing for families.
The rise in cost base (raw materials, energy, funding) is likely to negatively impact companies’ 2022 financial statements leading to worse results than in 2021. In addition, all loans with public guarantee granted under the 2020-2021 temporary framework (over €250bn) will end the pre-amortisation period.
We expect the Government to maintain supporting measures. However, this intervention may be limited given the 145% debt/GDP ratio reached after pandemic.
In line with market consensus, we estimate around €60bn of new defaulted loans in the next 24-36 months (around 2x, +€30bn compared to the actual volumes of the previous two years). Loans with public guarantee are expected to represent a relevant portion of total defaults.
The Italian banking system appears more solid than during the 2013-2014 crisis.
Banks hold solid capital levels (CET1 ratio +3 p.p. between 2014 and 2021) that could help them manage a downturn.
NPE coverage ratio increased significantly (+ 7 p.p. between 2015 and 2021) showing ability to absorb future losses.
Above €300bn of primary market NPE transactions in period 2015-2022 of which €110bn assisted by GACS allowed to reach minimum levels in terms of stock of non-performing loans on banking books.
A real debt servicing "industry" has been created with €300+bn under management and 15,000 resources employed.
The amount of loans in Stage 2 has soared, reaching over €250bn in June 2022, equal to 14% of total loans (vs. €141bn at the end of 2019, equal to 9% of total loans). This is not only an Italian phenomenon: the amount of stage 2 credits in Europe reached around €1.4tn in June 2022, representing around 10% of total credits.
UtPs are still on bank balance sheets (€36.5bn), the loans backed by state guarantees disbursed in the last 2 years over €250bn and the expected new NPE flows (up to €60bn) bring the total amount of credits “under the spotlight” to over €500bn. These loans should be the real focus of all players involved in the NPE space in the next years, the so called "live" credits that must be managed proactively with the aim of bringing them "back to performing".
To date, there is no proven model for the large-scale management of sub-performing/UtP loans. Changing the perspective of the credit management to the "going-concern", business models will have to be (further) rethought. The use of data, the automation of the decision-making process and the use of new technologies such as Artificial Intelligence and Machine Learning will be crucial.
Players will need to develop new competencies (e.g. capacity to attract new finance, proactive management of public guarantees, RE asset valorisation).
The "going concern" nature of these credits poses a major problem and will have a potential impact on the real economy. Only an alliance among all the actors involved will be able to guarantee the right support. Banks and servicers need to develop a structured approach encouraging the relaunch of struggling companies. The Government will have to ensure the launch of recapitalisation and revitalisation initiatives for the country, capable of involving investors who bring "patient" capital to provide new finance.
The "going concern" nature of these credits in the coming years poses a major problem of potential impact on the real economy. Only an alliance among all the actors involved will be able to guarantee the right support for the real economy.