Will Italy be able to grasp the #NextGeneration opportunity?

The European Commission has put forward its proposal for a major recovery plan.

To ensure the recovery is sustainable, even, inclusive and fair for all Member States, the European Commission is proposing to create a new recovery instrument, Next Generation EU, embedded within a powerful, modern and revamped long-term EU budget. The Commission has also unveiled its adjusted Work Programme for 2020, which will prioritise the actions needed to propel Europe’s recovery and resilience.

Building on the considerable progress that has already been made in the European Parliament and the Council, the Commission now proposes to deploy a reinforced EU budget to help repair the immediate economic and social damage brought by the coronavirus pandemic, kickstart the recovery and prepare for a better future for the next generation.

The 2 most relevant and disruptive features of the plan are:

1- the amount of common debt issued that is some 10 times higher than historical precedents

2- the explicit admission of a trasnfer of resources from stronger (like Germany) countries to weaker ones (like Italy)

Italy is amid the countries worst hit by the current pandemic and amid those with the most relevant macroeconomic imbalances prior to the Covid19 crisis. According ANSA news agency Italy is expected to receive some 172.7 billion euros of the proposed 750 billion euro EU Recovery Fund for the coronavirus emergency. (

Some 81.087 billion will be granted as aid and 90.938 as loans, the sources said.
The EC’s proposed quota for Italy is the highest in the Fund, followed by Spain with 140.4 billion, split into 77.3 in aid and 63.1 in loans, the sources told ANSA.

According to Silvia Merler estimates the net benefit calculated for Italy may range between 32 and 38 Bn and would be equivalent to some 10 years of net contribution to EU Budget.

But while media seem to be focused on the quantity of available funds we should point out that what really matters is the quality their allocation. Italy has a negative track record in the ability to use funds granted by european institution and broadly in the efficacy of its government expenditure. This mean that to grasp the opportunity offered by Next Generation EU a substantial change in public policy will be needed.

Global Economy is facing a relevant challenge due to changed habits in working (more remote less commute), spending (more e-commerce), traveling both for business and leisure and finally living.

Some business will simply be not useful anymore while others will be much requested and this mean that so many people will need to change their job, learn new things and acquire new skills. A substantial transformation is coming and EU will provide a remarkable safety net for Italy and others “weaker” countries. But a substantial cooperation effort and a strong attitude to adapt will be needed to change the potential threat into a huge opportunity.

Italy is facing a unique opportunity to reverse the downturn derived by the crisis into an upward path to growth missing in Italy for several decades but the success of the initiative will mostly depend on the ability use properly grants and loans and to realize long-awaited structural reforms.

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Are you interested in Italian banks and NPL/UTP market? Ask for a briefing  (in person or via conference call) by sending me a private message. I am also available for consulting projects on Distressed Assets pricing and Portfolio Management.

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Updated pipeline on Italian NPE Market

Banca IFIS recently issued an update to its NPL Market Watch showing a pipeline of new transactions worth some € 32 billion showing a slight decrease of only 5Bn with respect to the last forecast published in January.

A significant contribution (worth 1 quarter of the total) is expected to come from secondary market.

After 2 years of reduction, the total stock of NPE, including both banks’ and other entities’ balance sheet, is expected to increase in 2020 reaching 351 Bn close to historical peak of 2017.

The report tries to identify main drivers on 2020 market and underlines the relevance of a potential slowdown in recovery activity as well as a decline in price offered and some potential incentives for sellers (e.g.Tax Incentives, Increased flows of NPL, need to maintain business plan for GACs)

According to Banca Ifis current scenario should provide interesting opportunities for existing incumbents, especially those with large operations in the country and could be less appealing for newcomers.

My take on this topic impact of #Covid-19 on italian NPE i slightly different:

1- as others have pointed out offered prices are going to decrease due to expected longer recovery timing and higher risk premia this may delay, or even nullify the closing of lage disposal transactions – the postponement of MPS sale to AMCO reduced from inital 14bn to some 10 bn € can be an example of this effect

2-the real size of Covid-19 impact on on the economy as well as extraordinary measures deployed by government are not yet clear and it would be premature try to asses the consequence for the market – some potentially disruptive measures (for credit management industry) like suspension of paycheck seizure and foreclosures are still under discussion

3-banks are definitely going to face a substantial increase in NPE exposures due to the economic slowdown, but the given the extraordinary measures introduced by the government to support economy and the “Coronavirus response: Banking Package” introduced by European Commission to to facilitate bank lending it is possible the classifcation of loans to non perfoming status will be delayed to year end or even 2021 reducing the immediate pressure on primary market

4-secondary market may potentially offer interesting opportunities since servicer of large portfolios may be willing to partially compensate the reduction of collections this year, but the reduction in offered prices may be a relevant obstacle especially for secured loans

Finally, it is quite early to assess the impact of Covid-19 on NPE market, we can reasonably assume that it will be significant in terms of additional volumes and that a reduction in recovery speed will be experienced.

The extraordinary measures introduced to mitigate the negative consequences on economy will probably delay formal default classification meaning that we will probably see the real number of new bankruptcies and loan delinquency only in the final part of the year or even in 2021.

Are you interested in Italian banks and NPL/UTP market? Ask for a briefing  (in person or via conference call) by sending me a private message. I am also available for consulting projects on Distressed Assets pricing and Portfolio Management.

Link to my updated business profile

If you like my updates you can buy me a coffee clicking on the button with the small mug below and subscribe my newsletter 

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You can also support my Patreon Account (from 2€ per month)

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How bad will be 2020 for Italian Banks?

The Covid19 Shock has hit Italian banks after a 4 years struggle to reduce NPLs’ stock and increase capital buffer. Since the peak of 2015 gross NPE stock has more than halved and NPE ratio reached the lowest level in 10 year at 7.7%. Despite this remarkable achievement, one of the most significant amongst European countries, Italy has still one of the biggest NPE ratio (8% in the second quarter 2019 vs 3% of EU average and 5% target required by ECB).

At the end of 2019 new flows of NPLs coming from Performing status were about to get back to pre crisis levels while the those coming from UTP were higher mostly due to the contribution of construction industry. The Pandemic has dramatically changed the perspective and the estimation of a further reduction in NPE stock on banks balance sheets (NPE ratio expected to reach 6.5% according Banca IFIS Market watch of January) need to be definitely revised.

In the first quarter of 2020 Unicredit has declared a 900m increase in provisions to face potential credit loss while Intesa Sanpaolo has limited this amount to 300m but has also let the market know there is a total buffer of 1.5bn to face potential consequences of the Covid19 crisis.

https://www.bancaifis.it/en/news-en/npl-market-watch-january-2020/

Other listed banks have also increased provisions: MPS for 193m, Banco BPM for 70m and BPER Banca for 50m. With the Italian Economy expected to shrink of some 9% according IMF and Cerved Ratings estimating some 10% to 20% of Italian SME not able to survive the crisis 2020 will pose a relevant challenge to local banking system.

Some relief measures have been introduced both at national and European Banks and additional state intervention may come later this year.

European Commision has introduced a Banking Package to facilitate bank lending- Supporting households and businesses aimed at encouraging banks to make full use of the flexibility embedded in the EU’s prudential and accounting framework.

The areas of flexibility in the EU’s regulatory framework include:

  1. The rules on how banks assess the risk that a borrower will not repay a loan in a sudden economic crisis , such as the Coronavirus pandemic, and the effect that has on the amount of money the bank needs to set aside for any possible losses;
  2. The prudential rules on the classification of non-performing loans in the context where relief measures such as guarantee schemes and moratoria have been provided either by Member States or by banks;
  3. The accounting treatment of delays in the repayment of loans. The Interpretative Communication clarifies that the application of relief measures alone which banks or States grant households and businesses to bridge short-term liquidity needs, such as delays in the repayment of loans, should not automatically lead to a harsher accounting treatment of the respective loans.
NPLCALL con Giovanni Bossi e la moderazione di Morya Longo

Italian government is also trying to introduce incentives and stimulus packages to help households and SMEs to face the emergency. So far it looks like that while support to individuals and families is somehow proceeding corporates are struggling to access to new loans secured by state guarantee that was supposed to be on a fast track process without relevant checks.

As reported by Credit Village News several banks are asking companies and client firms as a pre-condition for the approval of the loan application to use the new liquidity to cover past exposures. This mean that the net amount available for corporates in not the full 25k euro potentially available for each applicant but this amount minus outstanding debts . While this protects the lenders it reduces efficacy of the measure.

It is in not easy to figure out how Pandemic will affect italian banks: while most of actions are currently aimed at setting aside funds to face the perspective of several UTPs turning into NPLs the real unknown variable is the amount of new NPE (especially Past Due and UTP) coming from performing status.

So far we can say that banks look better positioned to face negative consequences of Covid19 with respect of the rest of Italian economy because they can rely on

  1. positive results gained in 4 years spent reducing Non Performing Exposures and increasing capital buffers
  2. extraordinary flexibility in accounting principles that helping borrowers are going to protect lenders from booking immediate credit losses and or increasing to much provisions
  3. benefit from broad macroeconomic measure aimed at mitigating negative impact for the whole economy

Are you interested in Italian banks and NPL/UTP market? Ask for a briefing  (in person or via conference call) by sending me a private message. I am also available for consulting projects on Distressed Assets pricing and Portfolio Management.

Link to my updated business profile

If you like my updates you can buy me a coffee clicking on the button with the small mug below and subscribe my newsletter 

Buy Me a Coffee at ko-fi.com

You can also support my Patreon Account (from 2€ per month)

To get further updates Join the Linkedin Group – Entering Italian NPL Market 

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GLG – Gerson Lehrman Group – Council Member

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Parole Povere

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Is a Bad Bank the right solution for Euro zone?

The main problem with dealing with a Bad Bank is the proper assessment of distressed assets’ current value and how this is affected by estimation of expected cash flows. If the actual value is lower than trasfer price to the Asset Management Compay the gap need to be filled somehow. Futhermore it need to be considered that quality and Efficacy of management do matters and significanty affect the timing and amount finally collected.

As reported by Financial Times European Central Bank officials have held high-level talks with counterparts in Brussels about creating a eurozone bad bank to remove billions of euros in toxic debts from lenders’ balance sheets.

So far Senior EU officials have pushed back on the idea, arguing there are better ways to tackle toxic loans, but declined to give further details. The most relevant opposition to the idea stands within the European Commission, where officials are reluctant to waive EU rules requiring state aid for banks to be provided only after a resolution process imposes losses on their shareholders and bondholders.

However, people following the discussions inside the commission did not rule out their resuming at a later stage of the pandemic.

Charts showing how ratio of non-performing loans has decreased in Eurozone countries in recent years - the ECB is keen to accelerate the fight against toxic debt

In order to get a full picture of the situation the Financial Times recalls that in March, the commission adopted a temporary relaxation of state-aid rules and has since waved through billions of euros in emergency government relief measures. Brussels is also finalising plans alongside member states to allow countries to inject equity directly into struggling businesses, though in return they will be restricted from paying dividends or bonuses while in receipt of state aid.

I had made some skeptical comments on 2017 Bad Bank’s proposal made by Mr Enria when he was head of European Banking Authority: my main doubts we on how to calculate the transfer price of NPLS and who would be supposed to fill the gap between book values and market prices.

Recent news regarding Unicredit ready to sale some 3-3.5Bn of NPLs in order to stay on track with complete disposal of non core assets by 2021 can be considered an evidence to support the idea that a Bad Bank Solution may not be the best way to tackle NPL problem in Euro Area.

The main assumption with ECB proposal seem to be that regardless the timing, collections related to Bad Loans are going to be at least equal to current Net Book Value. If this is the case there is no need to fill a gap and the Bad Bank can be considered like a parking lot where NPL are stockpiled waiting for cash to come.

Unfortunately most of times this is not the case: debt collection process and forclosures need to be initiated and monitored, claims need to be submitted to bankrupcty receivers and so on. Also relevant decision need to be taken along the trade off between immediate discounted payoff vs future legal proceeds or multiple year payment plan.

It is still not clear how ECB proposal on Bad Bank would determine trasfer price of existing NPL portfolios and how the future credit collection activity will be run.

Based on current publicly available info the decision to reject the idea for the moment seem to be reasonable considering that most urgent priority should be try to avoid new corporate and household default rathern than subsidize banks relieving their balance sheets.

Link to my updated business profile

Are you interested in Italian banks and NPL/UTP market? Ask for a briefing  (in person or via conference call) by sending me a private message. I am also available for consulting projects on Distressed Assets pricing and Portfolio Management.

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GLG – Gerson Lehrman Group – Council Member

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NPL Call Main Takeways

On friday 3rd of April I had a very interesting and insightful conversation with with Giovanni Bossi following the questions raised by Morya Longo. We talked on a video conference call open to some 250 professionals that contributed to an intense Q&A section at the end.

Below the full video of the event

Main takeaways of the conversation include:

1-a significant increase in volume of insolvencies expected as a consequence of economy lockdown

2-a relevant challenge for banks divided between the request of regulators of not reducing lending and the need of not wasting the achievements of 4 years of intense activity aimed at reducing bad loans and increase captial buffers

3-a quite likely reduction in prices offered for NPL portfolios due to longer recovery timing and increased country risk premium

4-a substantial pressure on credit management industry that will face reduced turnover and profit margins as well as increased workload

5-a difficult puzzle with UTP exposure that will show increased default probability as well as higher need of financial support and advisory in order to face the crisis

Fourther comments will come in future posts

Here you can download the slides

Are you interested in Italian banks and NPL/UTP market? Ask for a briefing  (in person or via conference call) by sending me a private message. I am also availablefor consulting projects on Distressed Assets pricing and Portfolio Management.

Link to my updated business profile

Buy Me a Coffee at ko-fi.com

Support my Patreon Account (from 2€ per month)

@massimofamularo

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Parole Povere

Do you like these updates? subscribe my newsletter 

To get further updates Join the Linkedin Group – Entering Italian NPL Market  and follow #Liberi Di Scegliere via @blastingnews

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GLG – Gerson Lehrman Group – Council Member

La Finanza in Soldoni

Parole Povere

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#Savethedate NPL Call 3 aprile

A 360° conversation on Covid-19 impact on current status and reasonable perspectives of Credit Management Industry, NPL Market and broad banking industry with Giovanni Bossi and myself. Morya Longo is going to moderate the event.

#SavetheDate April 3rd 12 pm Italian time.

Immagine

Join the call with this link

You can also join the call using +39 02 8732 3415 e digita il PIN: 875 304 081# additional dial in number at this link

Do you like these updates? subscribe my newsletter 

Are you interested in Italian banks and NPL/UTP market? Ask for a briefing  (in person or via conference call) by sending me a private message. I am also available for consulting projects on Distressed Assets pricing and Portfolio Management.

Link to my updated business profile

To get further updates Join the Linkedin Group – Entering Italian NPL Market  and follow #Liberi Di Scegliere via @blastingnews

Contents of this blog are free but time do have an opportunity cost. If like the contents and do want to reward the time deployed to produce them you can make a small donation via Paypal (if you prefere a bank wire send me a message via linkedin o Twitter)

@massimofamularo

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GLG – Gerson Lehrman Group – Council Member

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Hard times for Italian Banks

In the mid-1990s Bill Gates declared

“banking is necessary, banks are not”

Today disruption process promoted by fintech companies can be seen as the coup de grace to weakened traditional banks that over the years have struggled to compete with non-banking financial intermediaries specialized in specific products , such as companies that grant personal loans and/or issue credit cards.

Most recently European banks have been unable to repay their cost of capital, hit by tougher rules after the global financial crisis and the European Central Bank’s ultra-loose monetary policy which makes lending unprofitable.

Bankers in the euro zone say they need to bulk up to compete with U.S. rivals but diverging regulation across different countries hamper cross-border mergers.  A softer stance toward tie-ups could be one the response coming from regulatory authorities as the sector struggles to make money against backdrop of low rates.


Intesa Sanpaolo and Unicredit the 2 largest italian banks (the second one is the only Global Systemically Important Institution) have chosen two very different approach to face this situation.

Unicredit has planned to continue the consolidation process started with the Transform 2019 with the new Team 2023 business plan based on:

  • Growth of the franchise by reinforcing leadership as the “go-to” bank for European SMEs, leveraging growth engines in CEE and CIB, and expanding the client base of individuals through improved distribution and service models, while enhancing customer experience
  • Further strengthen monitoring and management of credit and financial risk, and targeted actions on compliance and operational risk with Non Core rundown by end 2021 confirmed, with Non Core NPEs below €9bn by end 2019 and below €5bn by end 2020
  • Proactive capital allocation, gradual alignment of domestic sovereign bond portfolios and evolution of Group structure, including working on a project to create a subholding, incorporated in Italy and not listed, for international operations

Intesa Sanpaolo recently launched a Voluntary Public Exchange Offer for all UBI Banca Ordinary Shares aimed at building a a European Leader to Enhance Value Creation through a Stronger Italian Footprint

Apart from the abstract speeches about amazing synergies and similar company cultures, the plan is based on 3 pillars :

  • Exploit the difference between “strong” Intesa stock value (price/tangible asset ratio close to 1) and UBI Weak one (price/tangible asset ratio below 50%) offering 1.7 newly issued shares for every UBI share
  • Sell in cash about 400 / 500 branches of the aggregated entity to BPER and some insurance activities to the UnipolSai Group
  • Use the negative Goodwill to cover integration costs and increase loan loss provisions to accelerate de-risking.

Although Intesa Sanpaolo may be strengthened by the acquisition of UBI, critical issues arising from the structural decline in profitability and the progressive reduction in workers’ need in traditional banking remain on the horizon and will necessarily have to be addressed in near future.

In addition to general issues faced by global and European banks Italian ones need to deal with:

  • hypertrophy of the workforce derived from the historical role of social safety net that banks played in Italy not to mention political party interference
  • technological gap and structural inefficiency resulting from a status as a semi-public entities and from prolonged protection from international competition granted by a vigilance that has favoured stability over efficiency
  • credit quality worse than the European average despite significant efforts in recent years to reduce the stock of non-performing loans
  • little or no economic growth and stagnant productivity of the home country system and poorly meritocratic corporate culture that privileges loyalty over merit

The future of Italian Banks will see fewer administrative employees, whose duties will be limited to the supervision and monitoring of activities carried out by IT procedures. fewer front office operators and more consultants and customer relationship managers that will deal with clients through through different communication channels such as email, telephone, videoconferencing in addition to the traditional physical presence. In this scenario it is quite plausible an increase in the relative number of independent and flexible workers (free lance, contractors, agents), compared to full-time employees.

Provided that it is easy to support a over the phone, but while is much more complicated to make a remote surgery (but also haircut) , this underlying trend will probably affect some sectors (education, publishing, communication, financial services, consulting) more than others (medicine, personal care, construction, logistics). We can face the wave by trying to ride it and prepare in time to face the changes that we cannot affect, or we can ignore it and pay the consequences in the future.

Do you like these updates? subscribe my newsletter 

Are you interested in Italian banks and NPL/UTP market? Ask for a briefing  (in person or via conference call) by sending me a private message. I am also available for consulting projects on Distressed Assets pricing and Portfolio Management.

Link to my updated business profile

To get further updates Join the Linkedin Group – Entering Italian NPL Market  and follow #Liberi Di Scegliere via @blastingnews

Contents of this blog are free but time do have an opportunity cost. If like the contents and do want to reward the time deployed to produce them you can make a small donation via Paypal (if you prefere a bank wire send me a message via linkedin o Twitter)

@massimofamularo

Linkedin

GLG – Gerson Lehrman Group – Council Member

Parole Povere

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