npl evolution in italy - cerved company · npl evolution in italy last update – june 2016 cerved...
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![Page 1: NPL evolution in Italy - Cerved Company · NPL evolution in Italy Last update – June 2016 Cerved Credit Management . Agenda 2 NPLs in Italy The impact of Law 132/2015 GACS and the](https://reader033.vdocuments.us/reader033/viewer/2022050600/5fa7d5403416a2739c594d71/html5/thumbnails/1.jpg)
NPL evolution in Italy
Last update – June 2016
Cerved Credit Management
![Page 2: NPL evolution in Italy - Cerved Company · NPL evolution in Italy Last update – June 2016 Cerved Credit Management . Agenda 2 NPLs in Italy The impact of Law 132/2015 GACS and the](https://reader033.vdocuments.us/reader033/viewer/2022050600/5fa7d5403416a2739c594d71/html5/thumbnails/2.jpg)
Agenda
2
NPLs in Italy
The impact of Law 132/2015
GACS and the Atlante Fund
Decree 59/2016 and next steps
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Impaired loans in Italy amount to 341 € bn
3
Source: Cerved on Bank of Italy data
87
133
157
237
195
282
327 341
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More than 80% of bad debts originated from loans to corporates
4
81%
Corporates
19%
Households
(Mortgages &
Consumer Loans)
Source: Cerved on Bank of Italy data
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The increase in new bad debts has not been offset by an adequate outflow
5
Source: Cerved on Bank of Italy data
Note: * Adjusted for Total cash exposure to borrowers signalled to the Central Credit Register as per Bank of Italy
*
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The action plan of the Italian government to reduce NPLs
6
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS
Atlante
Fund
Decree
59/2016
Measures to shorten bankruptcies, to facilitate voluntary agreements, to speed up the foreclosure process and to introduce tax deducibility on loan losses and impairments
Guarantees to facilitate the removal of bad debts from the books of commercial banks
Private initiative backed by the Italian government
Atlante aims to ensure success of banks re-capitalizazion and to buy bad debts
Further measures to speed up recovery rates
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NPLs transactions on the rise in 2015
7
3.7 5.0
8.3
19
• Disposals more than doubled in
2015 compared to 2014
• Unicredit was the most active
banking group in the disposal of
portfolios (€ 4.7bn), followed by
MPS (€ 3bn)
• Strong appetite from both new
players on the market and
incumbents
5.0
Source: Cerved on PwC data
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Agenda
8
NPLs in Italy
The impact of Law 132/2015
GACS and the Atlante Fund
Decree 59/2016 and next steps
![Page 9: NPL evolution in Italy - Cerved Company · NPL evolution in Italy Last update – June 2016 Cerved Credit Management . Agenda 2 NPLs in Italy The impact of Law 132/2015 GACS and the](https://reader033.vdocuments.us/reader033/viewer/2022050600/5fa7d5403416a2739c594d71/html5/thumbnails/9.jpg)
Law 132/2015
9
Measures to shorten bankruptcies
Measures to facilitate successful voluntary arrangements with creditors and thereby reduce the number of bankruptcies
Measures to facilitate debt restructuring agreements and forbearance
Measures to speed up the foreclosure process on both movable and non-movable assets
Stricter limits on seizures of salaries and pensions
Tax deductibility of loan losses and impairments
The Italian Parliament passed a new law on 6th August (no. 132/2015) containing
urgent measures to modify insolvency proceedings and other judicial procedures:
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
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Simulation of Law 132/2015’s impact on NPLs stock
10
The evolution of bad debts stock has been estimated considering:
• New bad debt inflows
• Estimated with Cerved’s forecasting model which is based on
a macroeconomic scenario that assumes moderate recovery
until 2020 as per IMF
• Bad debt extinguished outflows
• Estimates based on duration of insolvency proceedings and
foreclosures procedures
• Duration of such procedures has been modified considering
the expectation of operators and experts on the impact of Law
132/2015
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
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The generation of new bad debts is forecast to decrease to 28€ bn in 2020
11
• Based on a wide range of statistical models, Cerved can
forecast new bad debts ratio under different macroeconomic
scenarios
• Based on the IMF macroeconomic scenario, the new bad
debt ratio is forecast to decelerate until 2020, but still much
higher than the pre-crisis level
Source: Cerved
2015 2016 2017 2018 2019 2020
GDP 0.8% 1.2% 1.5% 1.5% 1.5% 1.4%
Unempl. rate 12.2% 11.8% 11.4% 11.0% 10.6% 10.4%
Inflation 0.1% 0.8% 1.4% 1.5% 1.6% 1.7%
Interest rate 3.9% 3.7% 3.7% 3.7% 3.7% 3.7%
Macroeconomic scenario
Source: Cerved on Istat and IMF (October 2015)
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
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Based on Cerved data collected from the Italian Business Register and evidence of Cerved Credit
Management on problematic loans under management
The average duration of bad debts has been estimated as a weighted average of lengths and volumes of
insolvencies in each segment
Insolvency Proceedings
Duration of insolvency procedures and administrative time to resolve bad debts
12
1
7.8
0.5
Lag between doubtful
account and start of
insolvency proceedings
Average duration of
bankruptcies
Lag between closing of
bankruptcy and removal
of doubtful account
2.9
2.1
1
Lead time required to
repossess property
and begin acution
Average duration
of auction
Lag between end of
auction and cash-in
2
4.2
Court procedure
Time for debt
collection
Foreclosure on real estate Seizure of 20% of salary
Average duration of bad debts: 7.3 years
Average years
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
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The impact of law 132/2015 on bankruptcies and auctions length
13
In November Cerved and ABI (Italian Banking
Association) carried out a survey on the perceived
impact on the time required to extinguish bad debts
and on the recovery rates). Cerved and ABI estimated:
-28% length of bankruptcies
-20% length of the real estate auctions
In the Notes on financial stability and supervision1,
Bank of Italy estimated the impact of the law 132/2015
as follows:
-50% length of bankruptcy in a favorable scenario
(-18% to -33% in a less favorable one)
-25% length of the real estate auctions
7.3 4.7 yrs 7.3 6 yrs Weighted average time
to extinguish bad debts
in 2020
Weighted average time
to extinguish bad debts
in 20202
(1) M. Marcucci, A. Pischedda, V Profeta, The changes of the Italian insolvency and foreclosure regulation adopted in 2015, Notes on financial stability and supervision n. 2
(2) Cerved calculations based on the reduction of lengths estimated by the Bank of Italy
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
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Bank of Italy favorable
scenario
175 €bn
-
50
100
150
200
250
20
04
20
05
20
06
20
07
20
08
20
09
20
10
2011
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Bad debts reduced by 20-40€ bn versus the baseline scenario thanks to Law 132/2015
Forecast
197 €bn
Bad debt stock € bn
Source: Cerved on Istat and IMF
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
216 €bn Baseline scenario
Banks and investors
expectations (ABI-Cerved)
14
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Early evidence of Law 132/2015: increase in number of procedures completed by courts
15
Law 132/2015
6,383 bankruptcies
completed
-4.7% YoY
7,234 bankruptcies
completed
+13.3% YoY
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
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Duration of bankruptcies was declining already before the introduction of L. 132/2015
16
Average duration of bankruptcies
procedures in 2015 was 7 years and 5
months, lower than the approx. 8 years in
2014.
Law 132/2015
-7.8% -7.9% Shortening in duration of bankruptcies started before
the introduction of Law 132/2015: the average length
contracted by 7.8% between January and August
2015 (pre-reform) and by 7.9% between September
and March 2016 (post-reform), compared to the
previous year.
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
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0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Heterogeneity in the duration of bankruptcies
• Information relative to the duration of
bankruptcies indicates a wide variability
in 2015:
• a fourth of the bankruptcies closed
were represented by procedures
lasting less than 2 years;
• half of the bankruptcies closed
were represented by procedures
lasting less than 4 years;
• three-fourths of bankruptcies lasted
less than 10.4 years.
• There is a ‘long tail’ of c. 25% of
procedures with a duration of more than
11 years, of which some of these with a
duration of more than 20 years
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
17
Average: 7.4 years
75%
25%
50%
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Agenda
18
NPLs in Italy
The impact of Law 132/2015
GACS and the Atlante Fund
Decree 59/2016 and next steps
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21.0
23.0
26.2
1 2 3 4 5 6 7 8 9 10
10%
15%
15% e impatto atteso sui RR 10% e impatto atteso sui RR
Average duration of bad debts
19
Net present value for an investor Based on different scenarios
Low prices offered by investors have slowed down the NPL market
17.8
ABI-Cerved
scenario
(6 yrs)
Baseline
scenario
(7.3 yrs)
Bankitalia
scenario
(4.5 yrs)
28.9
• The shorter the time needed to
extinguish bad debts, the higher
the price expected by a NPL
investor
• The higher the discount rate, the
lower the price: cash to be
obtained in the future is worth less
in the present when interest rates
are higher
• If a positive impact on recovery
rate is also considered, valuations
of investors go up further
Source: Cerved
15% Target IRR and positive impact on Recovery Rate
10% Target IRR and positive impact on Recovery Rate
15% Target IRR
10% Target IRR
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Banks have reduced the book values of their bad debts, but still far from investors’ prices
20
Source: Cerved on Bank of Italy data
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21
Discount rates
Banks can obtain
funding at
substantially
lower interest
rates than
investors,
especially thanks
to refinancing
programmes put
in place by the
ECB
Expected
collection
Costs
Information
asymmetries
between buyers
and sellers
regarding the
timing of future
collection
Investors face
charges to set up
an acquisition
vehicle, as well as
contract costs
and servicing
costs
Times
Information
asymmetries
between buyers
and sellers
regarding the
amount of future
collection
Reasons behind bank-investors price gap
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Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
Since January 2016 a state guarantee scheme (GACS) is available
22
Garanzie sulle cartolarizzazione delle sofferenze (GACS) are available for senior tranches
of securitized bad debts:
Bank securitizes NPLs in a special purpose
vehicle
SPV
The SPV buys NPLs and issues two
categories of bonds:
• Senior (higher priority compared to other
bonds in the event of liquidation)
• Junior (lower priority)
SPV
bond senior
junior
Two conditions must be met: (i) Investment
grade rating on the senior tranche of securitized
NPLs, and (ii) Independent Servicer
BBB
State guarantees are available on the
senior tranche, if rated as investment
grade
investors
BBB
1
2
3
4
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Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
The impact of GACS on prices
23
price
% tranche senior
Hypothesis:
- Average length: 7.3 years
- Cost of Junior Tranche: 15%
- Cost of Senior Tranche: 3%
102
103
105
108
112
100
105
110
115
120
0% 20% 30% 40% 50% 60%
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GACS strengthened by the Atlante Fund
24
Hypothetical incremental path on NPLs’ transfer price (Source: Quaestio)
Source: Quaestio capital management.
Based on the following assumptions. Securitisation: % tranche senior=65%; yield on senior notes = 5%;IRR required on the junior tranche=15%. GACS effect: cost of senior notes = Italy risk
+ guarantee fee; Atlante effect: sale of a junior tranche of an ABS GACS to the Atlante Fund (IRR=6%); Analysis of incremental sensitivity: reduction of costs associated with servicing from
8% to 7%; reduction of the time to recovery from 7 to 5 years; increase in recovery rate from 35% to 40%.
Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
20.7%
28.3%
33.8%
2.6% 1%
4% 0.3% 1%
4.2%
Straight sale ABS No GACS ABS GACS ABS GACS Atlante
Final price Servicing costs reduction
Reduction in time to
recovery
Recovery rate increase
Final price + Sensitivity
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Aug
2015
Jan
2016
Apr
2016
May
2016
L.132 bankruptcy
reform law
GACS Atlante
Fund
Decree
59/2016
The impact of GACS and Atlante on NPLs
25
-
50
100
150
200
250
20
04
20
05
20
06
20
07
20
08
20
09
20
10
2011
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Forecasts
175 €bn Shorter lengths of
procedures
216 €bn Baseline scenario
(7.3 years)
Shorter length of
procedures
+ potential
effectiveness of GACS
scheme and Atlante
Fund
107 €bn
Bad debt stock € bn
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Agenda
26
NPLs in Italy
The impact of Law 132/2015
GACS and the Atlante Fund
Decree 59/2016 and next steps
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L.132
bankruptcy
reform law
GACS
Atlante
Fund
Decree
59/2016
May 2016
Apr 2016 2016
Jan 2015 Aug
Decree 59/2016
27
PLEDGE OF INSTRUMENTAL ASSETS IN
ADDITION TO REAL ESTATE COLLATERAL
AUTOMATIC REPOSSESSION OF THE REAL
ESTATE ASSETS IN FAVOUR OF THE BANK
COMPULSORY EXPROPRIATION
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Other actions to reduce NPLs in Italy
28
The gov’t action plan is based on a systematic approach: it introduces
new measures on bankuptcies and other judicial procedures, fiscal
incentives, stimulates NPL market by a new guarantee scheme and
by supporting the launch of a new Fund
The correct implementation of new measures is crucial to ensure
success of the action plan
In particular, it is urgent to make NPLs more transparent, in order to
reduce information asymmetry between banks and investors
More actions to strengthen the action plan exist, e.g.:
• More simple GACS price scheme
• Allow access to database (Agenzia Entrate, Centrale Rischi
Bankitalia, etc) to players who can help investors to price NPLs
• High heterogeneity by courts: incentives towards best
practices could help very much
Systematic
approach
Implementation is
important
More transparent
NPLs
More actions
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Average bankruptcy lengths varies from 3 to 16 years across the country
29
2.2X
5.1X
Source: Cerved
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In case of convergence, bankruptcy lengths below three years by 2020
30
Within the 10% of the
faster provinces,
bankruptcies close
in less than 5.5 years 7.8
5.5
2.75
2015 2016 2017 2018 2019 2020
totale
10% più veloci
Convergence hypothesis
Source: Cerved
Note: * Other provinces, excluding the 10% faster provinces
Other
provinces
10% faster
provinces
*
Years
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High variability in the duration of real estate auctions
31
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Torino Padova Trapani Bari Roma Brescia Milano
Length of real estate auctions Average years, closed procedures in 2015
Length of most
efficient court is
25% below the
average
Source: T6, Tavolo sulle esecuzioni immobiliari
Note: statistics are referred only to real estate auctions started after 2009, therefore lengths could be underestimated
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With GACS, Atlante and convergence toward more efficient courts, bad debts stock at pre-crysis level in 2020
32
216 €bn
0
50
100
150
200
250
20
06
2007
20
08
20
09
20
10
2011
20
12
20
13
20
14
2015
20
16
20
17
20
18
20
19
20
20
175 €bn
155 €bn
Optimistic scenario of
Bank of Italy
Optimistic scenario of Bank
of Italy + Convergence
toward more efficient courts
87€ bn Optimistic scenario of Bank
of Italy + Convergence
toward more efficient courts
+ GACS and Atlante fund
Source: Cerved elaboration on T6 data
Bad debts stock € bn
Baseline scenario
(7.3 years)
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