Intesa Sanpaolo BP: from bank to asset manager

As reported by Reuters  Intesa SanPaolo set an ambitious goal to almost halve its stock of bad loans and boost net income. The new business plan that will be released on Tuesday targets 6 billion euros ($7.4 billion) in profits in 2021 on rising interest and fee income. This is consistent with the recent  history of the bank that has led a shift among Italian banks towards fee-earning businesses and last year considered a bid for insurer Assicurazioni Generali.

Intesa, which reported a 3.8 billion euro net profit for 2017 net of an extraordinary state contribution, said it would halve its gross impaired debts to 6 percent of total loans in 2021 compared with 11.9 percent at the end of last year.

Yielding to regulatory pressure to cut soured debts faster, Intesa in January started discussing the sale of a portfolio together with a stake in its debt collection unit to Sweden’s Intrum Justitia.

The bank confirmed it would move its debt recovery and real estate businesses into a new company and consider a partnership.

Until now the bank had bet on recovering bad debts internally, shunning sales that burn through capital as they are carried out at a loss.

The bank said it would take advantage of the introduction of the new IFRS9 accounting rule to book 4.1 billion euros in writedowns before taxes, mostly of loans, in the first quarter of 2018.

Also Rachel Sanderson at Financial Times commented on this topic

The long-awaited strategy reboot aims to rebuild investor confidence after a turbulent period for Italy’s banking industry in which Intesa has remained profitable but has seen momentum slow.

Shares in Intesa, one of Italy’s most healthiest banks, rose 1.8 per cent despite volatility on global markets, as Carlo Messina, the chief executive, revealed the new business plan.

In recent quarters, net income has been boosted by taxpayer funds Intesa received as part of a deal to take control of the good assets of two failed Venetian banks and help shore up confidence in the fragile banking system last summer.

On Tuesday, Intesa said it would cut its net non-performing loans to €12.1bn from €22.5bn by 2021, with its cost of risk falling to 41 basis points from 81bp in 2017. Net income ratio would rise 12 per cent to €6bn over the period of the plan from €3.8bn in 2017, and its payout ratio would fall from 85 per cent for 2018 to 70 per cent for 2021.

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Progress on the Action Plan to tackle non-performing loans

In January 2018 the European Commission presented its first progress report on the Action Plan to tackle non-performing loans (NPLs) in Europe, which Finance Ministers agreed on in July 2017.

The progress report,  highlights recent developments of NPLs both in the EU as a whole and within individual EU countries. It shows that the positive trend of falling NPL ratios and growing coverage ratios has solidified and continued into the second half of 2017. The report also provides an update on the Commission’s ongoing work to deliver on the elements of the action plan for which it has direct responsibility.

Link to the communication

Quick Pick from the doc:

Following the financial crisis, the regulatory framework for banks has changed
substantially. The European Union has taken the lead in implementing reforms agreed globally at the level of the G20 and in the Basel Committee with the objective of reinforcing financial stability, reducing risk in the banking sector, and avoiding that taxpayers have to contribute financially to the costs of failing banks.

(…)

High stocks of Non-Performing Loans (NPLs), in certain banks and Member States, are being reduced. The average ratio of NPLs has decreased by one third since 2014 and is on a steady downward trend.

High stocks of NPLs can weigh on a bank’s short- and longer-term performance through two main channels.

  • First, NPLs require higher levels of provisioning. Loan provisions reduce bank profitability and reduce the bank’s regulatory capital.
  • Second, NPLs tie up significant amounts of a bank’s resources, both human and financial. This reduces the bank’s capacity to lend, including to small and medium-sized enterprises which rely on bank lending to a much
    greater extent than larger companies, thereby affecting economic growth and job creation.

(..)

The Commission has devoted significant attention to addressing the issue of NPLs since the outset of the financial crisis in 2008/9. For banks, whose viability was threatened by high NPL ratios, the Commission has assisted Member States in setting up ad-hoc and systemwide measures with the objective of reducing NPL stocks (sometimes as part of a financial assistance programme) through solutions compatible with State aid rules such as specific impaired assets measures for banks, winding down vehicles and/or market compatible structures, which entailed a substantial reduction of the stock of Non-Performing Loans present in the banking sector.

(…)

For its part, the Commission is committed to delivering on those elements of the NPL
Action Plan for which it has direct responsibility. The Commission announced, in its
Communication on Completing the Banking Union in October 2017, a comprehensive package for tackling high NPL ratios by spring 2018.

The package will consist of the following measures:

  • A Blueprint for how national Asset Management Companies (AMCs) can be set up in compliance with existing EU banking and State aid rules (…)
  •  Measures to further develop secondary markets for Non-Performing Loans, especially with the aim of removing undue impediments to loan servicing by third parties and the transfer of loans
  • Measures to enhance the protection of secured creditors by allowing them more efficient methods of value recovery from secured loans through Accelerated Extrajudicial Collateral Enforcement (AECE). (…)
  • Introduce statutory prudential backstops to prevent the risk of under-provisioning of NPLs. Such backstops, on newly originated loans that later turn non-performing, would amount to minimum levels of provisions and deductions from own funds that banks would be required to make to cover incurred and expected losses.
  • A way forward to foster the transparency on NPLs in Europe by improving the data availability and comparability as regards NPLs, and potentially supporting the development by market participants of NPL information

Staff Working Document

The focus on Italy

According to ECB data, the NPL ratio decreased from 16.2% in June 2016 to 12.2% in June 2017. Private sector NPLs also declined from 20% in June 2016 to 15.9% in June 2017, still well above the average NPL ratio in the EU.
The end of June 2017 data reflect some important NPL sales and securitisations that have already had their effects on banks’ balance-sheets (in particular, the sale of EUR 17.7 billion of impaired assets by Unicredit was completed as at September 2017; the NPL securitisation transaction by Banca Monte dei Paschi di Siena – gross book value of EUR 26.1 billion –has not yet been completed).
In 2017, NPL securitisation has developed into an important NPL disposal strategy used by banks to clean up their balance sheets. In 2017, banks have increased their recourse to the Garanzia Cartolarizzazione Sofferenze (GACS), as several transactions were completed and launched. In this respect, the securitisation of the EUR 26.1 billion of gross NPLs by Monte dei Paschi di Siena constitutes the biggest NPL securitisation ever on the Italian market.
Overall, based on the track record so far, the GACS appears to have been more useful for large- and medium-sized banks than for smaller credit institutions, which have more difficulties in pooling a critical mass of impaired assets and in providing detailed loan portfolio data. To facilitate the securitisation of some categories of NPLs (in particular of unlikely-to-pay), increase the scope of manoeuvre of special purpose vehicles (SPVs) and encourage participation in foreclosure auctions, Italy introduced several amendments to Law 130/1999 on the securitisation of loans. The main novelties are: i) SPVs that acquire and securitise NPLs are allowed to grant new loans to certain categories of borrowers in case this facilitates the restructuring of the financial position of borrowers and the repayment of outstanding debt; ii) special purpose vehicles (SPVs) are allowed to buy assets placed as collateral for secured loans.; iii) the simplification of loan transfers from originating banks
to SPVs by exempting these transfers from the obligation to notify the borrowers.
The Italian Recovery Fund has become the main NPL investor in Italy. Through its
participation in four NPL securitisation transactions involving gross NPLs of roughly EUR 31 billion and an investment of EUR 2.5 billion, it has supported the disposal of NPLs by vulnerable banks.

The bulk of its investment (approximately EUR 1.5 billion) was in the securitisation of the NPL portfolio of Banca Monte dei Paschi di Siena, as it bought the mezzanine and junior tranches issued by the SPV. Overall, the Fund has participated in securitisation transactions with disposal prices between 19% and 32% of the gross book value, which reflect the different composition, data quality and impairment degree of securitised assets. The Fund has also contributed to the further development of the asset servicing market, as it entered in several agreements with CERVED on the servicing of securitised portfolios. Notwithstanding the progress so far, the number of servicing companies is still limited.
Banks have continued to upgrade their arrears management capacity, and some of them are still considering the internal NPL work-out as main priority, but have also made increased recourse to outright NPL sales. The secondary market for impaired assets has become more dynamic compared to previous years thanks to both domestic and foreign NPL buyers.
Outright sales are expected to further increase as banks are optimising their NPL
management and disposal strategies inter alia to comply with supervisory requirements.
However, credit institutions are wary about the impact a rapid disposal of NPLs may have on their capital buffers and pricing of impaired assets. The bid-ask spread for NPLs is still hovering around 15% to 20%, mainly due to sub-optimal data available for some portfolios as well as the still long recovery time of collateral.

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Why GACs like guarrantee is better than national AMCs

As reported by Reuters

European Union finance ministers on Tuesday called for speedier unloading of bad debt by EU banks and recommended more money be put aside by the banks to protect them from trouble. Vice-President Valdis Dombrovskis told a news conference after the finance ministers agreed a new plan to tackle the problem. (…)

Under the plan, the European Central Bank could force banks to increase their buffers against existing NPLs when it deems they are not sufficient. Banks could also be obliged to automatically set aside more capital for new loans when they expect the level of NPLs to grow beyond acceptable levels.

Improving  the Secondary market

Ministers also stated that secondary markets for NPLs are currently underdeveloped and provide little incentive for banks to unload their bad credit and therefore proposed measures to improve secondary markets for NPLs.

The famous euro sign landmark is seen through the lights of a passing tram outside the former headquarters of the European Central Bank in Frankfurt, Germany

The famous euro sign landmark is seen through the lights of a passing tram outside the former headquarters of the European Central Bank (ECB) in Frankfurt, Germany, January 19, 2016. REUTERS/Kai Pfaffenbach

Ministers hope this could address what they consider a “price problem” since NPL are currently sold at small percentages of their nominal values they hope that a better-functioning market would push up the prices of NPLs.

An earlier plan to set up an EU “bad bank” that could have absorbed big chunks of bad debt at higher prices was dropped, in part because EU states with healthier banks, like Germany, are not keen to use taxpayers’ money to help lenders in the mostly southern European countries where the bad loan problem is worst.

But ministers agreed on Tuesday a more prudent blueprint to set up national “asset management companies” (AMCs) that could help develop the market for bad loans. EU officials said the price of bad loans depends on national conditions and recovery time and can vary widely among countries. The commission will set by the end of the year “asset valuation rules” for AMCs.

AMCs could also be turned into national bad banks that acquire bad loans at prices much closer to their nominal value. But this would constitute state aid and would entail strict conditions, the restructuring of the banks that offloaded the bad loans and losses for banks’ shareholders and junior bondholders, EU officials said.

Ministers also pushed for changes to national insolvency regimes that would speed up the recovery of bad loans from debtors.

(news reported by Francesco Guarascio @fraguarascio in Brussels; additional reporting by Francesco Canepa in Frankfurt)

The question of Local AMCs

As I explained previously I don’t believe national AMCs or local Bad Bank may be a useful tool to improve NPL secondary market because any time I hear about paying price ‘above market level’ there are 2 simple questions coming to my head:

  1. how is market price calculated?
  2. who will fill the GAP?

Using a state guarantee, only in those cases where pure market deals would have unbearable costs is a far more effective strategy: most recent bad banks experience in Italy are not exactly a success with REV Gestione Crediti parking its assets for 2 years, being able to dispose only a small portion of them and then transferring the management to Cerved and doBank in recent days and SGA taking some 20 years to collect former Banco di Napoli’s Bad loans.

Recent Italian experience of GACs Securitizations proves that relevant amount of NPLs can be offloaded from balance sheet at affordable cost without a direct state aid and within a market  framework, so what’s the point of involving state owned entities with the significant risk of mispricing assets? Without the commitment of a private buyer  willing to get back its investment and possibly making some profits, what will prevent poor management of assets and lack of control in recovery cost? And finally who is going to pay for these inefficiencies?
MVHO is that taxpayer’s money is going to fill the GAP and without any market driver this gap could be wider than expected, and this is the reason why (if something has to be done in market that proved to be able to work quite well)  I prefer state guarantees like GACs that are issued at market prices and within securitization schemes with private buyers for mezzanine and junior tranches.

 

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Entering Italian NPL Market (Linkedin Group)

Is still Italy the hottest market for NPL investors?  What volumes can be expected for this year? Will the M&A process involving special servicer go on?

Cattura

How will Italian banks face ECB guidelines’ challenges? GACs and Securitization schemes will affect market price levels?

Table on Backstop

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Italian banks look healthier and will continue to heal in 2018 (S&P Ratings)

ROME, Jan. 17 (Xinhua) — Italian banks are looking healthier now than they have for the past few years and will continue to heal in 2018, Standard & Poor’s Global Ratings said in a report on Tuesday evening.

The ratings agency said improved private-sector creditworthiness, coupled with banks’ efforts to repair their balance sheets, have paved the way for “a return to some moderate profitability” in the current year.

Lenders strengthened their capital, bolstered loan-loss reserves, reduced their stocks of nonperforming loans (NPLs), and cut costs, according to S&P analysts.

On the downside, S&P estimated that at year-end 2017, banks still held toxic loans worth 275 billion euros on their books.

This was down from 349 billion euros’ worth of gross NPLs held by Italy’s banks at the end of 2016, according to the finance ministry’s 2017 Economic and Financial Document (DEF).

According to the European Systemic Risk Board (ESRB), keeping NPLs on the books too long, even if the banks cover them with provisions, is bad for the real economy in the long run.

“The presence of an elevated NPL stock is a symptom of broader solvency problems in the real economy. All these factors adversely affect potential economic growth,” the ESRB wrote in a July 2017 paper titled “Resolving NPLs in Europe”.

Italy is slowly pulling out of two economic recessions that were sparked by the global financial crisis of 2008 and by the sovereign debt crisis of 2010.

According to the Bank of Italy, national GDP contracted 7 percent and industrial production plunged 25 percent in 2007-2012.

The prolonged downturn caused households and businesses to default on their loans, and deteriorated credit jumped from 4.5 percent at the end of 2007 to 12.3 percent by mid-2015, according to the Italian central bank.

Read the full text on Xinua

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Italian NPL Update 2018-01

Spaxs is the new Special Purpose Acquisition Company lauched by Corrado Passera, former Intesa Sanpaolo and Poste Italiane’s ceo and former Minister of the economic development, and Andrea Clamer, former head of Npl Area at Banca Ifis. It is expected to raise 400-500m aimed at investing in a non performing loans managing platform and/or a small bank in order to enter the Italian Npl market and and financing Italian SMEs (see also Bebeez,it article)

schermata-2018-01-14-alle-17-53-29

Intesa Sanpaolo is considering to sale a 10Bn NPL portfolio together with its credit management platform now part of the non core unit Capital Light Bank.  Sweden’s Intrum Justitia, as reported by Blomberg should be already working on the potential acquisition that may be auctioned later on this year.

Banca Akros closed the Project Multiseller NPL 2017, a mostly secured NPL deal originated by 5 banks, namely Banca Centropadana Credito Cooperativo, Banca di Piacenza, Banca Valsabbina, Sanfelice 1893 Banca Popolare e Banca Mediocredito del Friuli Venezia Giulia. This deal is part of a wider Multiseller NPL program aimed to help banks to dispose their NPL and UTPs.

Polish listed servicer Best SA acquired 128m NPL portfolio from 15 cooperative banks. The deal included mostly retail and SMEs exposures.  Iccrea Banca has arranged the deal for the sellers while Zenith Service as worked as advisor and master servicer for the buyer.

Znak_uzupelniajacy

Axactor Italy (formerly CS Union) acquired 2 mixed consumer and SME (including some secured exposure) an 1 Leasing  NPL portfolios for a total GBV o 80m.

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Are EBA NPL templates too hard for Italian banks?

The effort of  European Banking Authority  in order to to promote a secondary market for NPL is remarkable and the recently published standard data templates are definitely a good step in the right direction.

While I did not support the idea of local Asset Management Companies to address the same problem (as previously proposed by EBA),  reducing information asymmetry is an obvious way to reduce Bid Ask gap because:

  • the more the available data set is complete and updated,
  • the lower is the risk premium required in the discount rate,
  • the higher is the potential price paid

Grafico EBA

In order to provide a market perspective two key-point deserve some attention

  1. in order to finalize a bid buyers also need
    • info enrichment like updates on employment status of borrowers
    • field checks like recent photos of the collateral assets and updated appraisal on maintenance status
    • most recent legal doc like bankruptcy receiver reports, official auction results etc
  2. collecting and checking the info has non negligible cost that for smaller entities may imply substantial restructuring of internal business processes as well as accounting and IT systems

Trying to figure out how EBA templates can be used in the Italian NPL market we should consider that

  • a very limited number of banks (the biggest and the most advanced) is ready to produce the templates without disrupting internal processes
  • all the other would be forced to hire external advisers to collect and check the data in order to fill the templates
  • since the originators with more problems in collecting data are often those with lower quality portfolio it is questionable if the additional cost of the preliminary due diligence to fill the templates would be compensated or not by the extra price gained providing clearer and more complete data set

In conclusion, supporting the development of a secondary market is a fundamental step on the way to improve soundness in banking sector and finally reduce NPL ratios and gross stocks; in order to realize this goal, setting and a standard framework for data set to be provided by sellers is for sure  and helpful tool to reduce information asymmetry.

Furthermore, the attempt to propose a best practice in structure and detail level of data provided by sellers offers a good chance to start a discussion on internal processes to manage data in order to be able to fill the templates and on the credit management process itself since some data can be available (es updates on legal status) only if a proper activity have been performed.

Finally, the above mentioned additional requirements necessary to investors in order to calculate their bid price should also be considered while considering (see chart below) that an appropriate portfolio segmentation in order to match buyers preferences is also a very relevant issue to close the bid ask gap.

Grafico EBA

 

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