High-volume transactions and trends in the Italian NPL market
The Italian market for Non Performing Exposures (“NPE”) as at September 2018 confirmed the expectations in terms of high volume transactions and trends.
The massive NPE disposals’ trend in 2017 (c. €74bn of sales) even continued over the first three quarters of 2018 featuring disposals equal to c. €60bn from January to September 2018. Announced and ongoing NPE transactions equal to c. €30bn could further fuel the market until the end of the year. These announced transactions will even fuel the NPL secondary market.
As at June 2018 Bad Loans volumes lie at €130bn (GBV) while UtP exposures reached €86bn (GBV) definitively surpassing the level of Bad Loans in terms of NBV (€53bn vs €42bn respectively). While Bad Loans deleverage plans are quite clearly stated, the 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.
Furthermore the UtP market features also structured transactions where specialised investors (distressed and turnaround) inject new equity or debt in distressed companies within a strategic exit plan. Specialised players are introducing new solutions for the banks to inject new finance in their borrowers and to reduce their NPE ratios.
Over the last eighteen months, the NPE market witnessed the consolidation of the servicing arena through the acquisition of several workout platforms by big players. New players could enter the market for further platform disposals, mainly driven by the future opportunities 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 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. ECB guidelines, whose application is extended in Italy to the Less Significant banks, the calendar provisioning (within the ECB Addendum) and the first time adoption of IFRS9, will continue to drive the strategic decisions of the Italian banks in the near future.
The Italian NPE market is therefore still rich with interesting opportunities and new potential and innovative initiatives.
