Before COVID-19, the Italian NPE market was nearly mature, as deleverage activities had reduced sharply bad loans and, as a result, market participants were starting to focus on Unlikely to Pay (UtP) and on how to manage the tail of the huge non-performing stock cumulated during the past decade. NPEs on banking books reduced from €135bn to €99bn between Dec-19 and Dec-20 with an overall cumulated NPE stock in the market of over €350bn.
The COVID-19 crisis has reshuffled the cards and brought back to the table all participants that are now trying to understand how the market will evolve in the next few months and years. The complexity of this unprecedented economic downturn has resulted in a still largely uncertain situation.
Government measures are still largely “freezing” the portfolios, delaying and possibly reducing the flows to NPE. NPE ratios have reached minimum levels since 2008.
Latest data on moratoria and Stage 2 are starting to show first signs of attention. Stage 2 credits on Top Italian Banks' books increased by approx. €64bn between 2020 and 2019 reaching a weight on total loans of approx 14% and represent a significant portion of moratoria (over 30%) and loans subject to public guarantee (over 10%).
It is still very difficult to make reliable forecasts, but market consensus is that new NPE inflows will be in a range of €80 and 100bn in the next 24-30 months. Whatever the amount of new NPE inflows, will be a very significant mass of non-performing and performing loans will need to be adequately managed in the next years.
Regardless of new defaults, moratoria, Stage 2 and loans subject to public guarantee schemes will require a tailored approach in terms of credit management, opening the opportunity to find completely new solutions (e.g. internal/ external workout unit, industrialization).
The new NPEs will be driven mainly by loans to SMEs operating in the sectors most affected by the crisis. UtP will probably be the most relevant and complex asset class that needs to be addressed.
Calendar provisioning and new NPE profile (mainly made by UtP) will not allow banks to behave as during the previous crisis, cumulating and retaining NPEs on their books for years and disposing them through GACS at the end. Banks will need to act promptly to recover/ bring back new NPEs to performing.
The Italian National Recovery and Resilience Plan (PNRR) will shape the real economy recovery and will condition also winners and losers in NPE arena also impacting the probability of default of loans currently subject to Government measures.
The debt servicing market will also be affected: on one hand, the Italian industry will continue to focus on the management of an incomparable NPE stock of over €350bn; on the other one, debt servicers will face the challenge to manage the upcoming inflows, which will require a more tailored and sophisticated approach than in the past.
Pier Paolo Masenza
Financial Services Leader, PwC Italy
Tel: +39 06 570252472
Partner, PwC Italy
Tel: +39 02 66720351