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.

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.

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About Massimo Famularo

Investment Manager and Blogger Focus on Distressed Assets and Non Performing Loans Interested in Politics, Economics,
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