Financial Services Ireland

The Italian NPEs Market: From Darkness to Daylight

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2018 was a record year for the Italian non-performing exposures (NPEs) transaction market, with announced portfolio disposals reaching almost €80b in terms of gross book value (GBV), an increase in excess of c.40% compared to 2017 figures.

After a slow start, the last months of 2018 were particularly active, mainly thanks to: i) the jumbo deal  carried out by Banco BPM on a €7.8b bad loans  portfolio together with its servicing platform; ii) multi- originator securitizations backed by mutual and cooperative local banks; iii) the disposal of unlikely-to- pay (UTP), leasing and other bad loans portfolios by  Monte dei Paschidi Siena (MPS) for an aggregate amount of €3.5b; iv) the disposal to Cerberus of an unsecured bad loans portfolio with a GBV of c.€2.2b belonging to Società Gestione Crediti Delta (Sgcd).

Over the last years, Italy made a considerable effort in  reducing its NPEs from the peak level of €341b reported in December 2015 to €209b as at September 2018 (c.-39%), but it still represents the Country with the highest amount of distressed loans in  Europe.

While lower bad loan inflows have played a relevant role in the Italian banks’ deleveraging path, portfolio disposals have been the real driver. In particular, the Garanziacartolarizzazionesofferenze (GACS) scheme  on senior notes introduced in early 2016 by the Italian  Legislator has sensibly contributed to the resurgence of the Italian securitisation market, with an aggregate  GBV in excess of €50b sold so far.

The clean-up of billions of NPEs from banks’ balance sheets has generated significant opportunities for the  servicing industry and the focus will now be moving on extracting value from managed portfolios. Also, the effort made by competent authorities in order to ensure adequate NPEs provisioning levels and  lower incidence ratios on banks’ loan books has progressed. On the one hand, the European Central Bank (ECB) and the European Banking Authority (EBA) published their guidelines to banks on the management of such exposures. On the other hand, the European Commission (EC), the Council of the EU  and the European Parliament recently reached a provisional agreement on the prudential backstop, a set of measures that will require banks to comply with  minimum loss coverage factors on new NPEs, a matter on which the ECB had also expressed its opinion earlier in 2018.

The proposed sterilisation of the effects deriving from massive NPEs disposals from the calculation of the loss given default (LGD) under the internal ratings-based (IRB) framework has also created an additional  incentive for banks to undertake ambitious deleveraging plans.

Having progressed this far, there are new challenges and opportunities for the Italian financial system, among others:

  • New asset classes, such as UTP loans and early stage NPEs, which would require a proactive management approach, specialized skills and deal structures;
  • Portfolio niches, such as leasing and small and medium enterprises (SMEs) backed portfolios;
  • Investments in innovation and IT platforms to enhance operational capabilities and implement more efficient recovery techniques, a crucial step to keep the servicing business profitable going forward;
  • Increasing secondary market activity, with investors starting to dispose part of recently acquired portfolios focusing on the asset classes they can better manage.

While most of the volumes seem at this point to have been dealt with, the pipeline is still significant with over  €20b deals already ongoing and several others to hit the market over the next few months.

In addition, focus will now be moving on new asset classes, portfolio niches and developing credit management capabilities.

How can EY help?

The Italian NPE market is a core market for us
Deleveraging is at the centre of several financial institutions’ agendas. Transactions emerging from  this process are often complex and require both breadth and depth of financial expertise to deliver value for vendors and purchasers.

EY teams can provide services to investors and financial institutions, including:

  • Portfolio analysis and segmentation
  • Data analytics
  • Business modeling and valuation
  • Process management
  • Tax, structuring and legal support
  • NPE & Corporate Restructuring expertise
    •Real estate services
  • Borrowers’ analysis
  • Industry expertise & industrial approach

Read the detailed report below, and don’t hesitate to reach out should you have any questions.


Alan O’Brien

Head of Strategy and Transactions
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