NPL Investing & Collection Summit

#savethedate April 13, Milan, Palazzo Mezzanotte,Italian Stock Exchange Building, Parterre Hall – NPL Investing & Collection Summit 

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  • SESSION 1 UTP: The new path for originators,investors & servicers
  • SESSION 2 M&A: are servicers sold out and is
    carve out the best alternative?
  • SESSION 3 Exploring new borders of collection

Link to the program

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GLG – Gerson Lehrman Group – Council Member

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DBRS positive outlook on ECB guidelines

DBRS has recently published a commentary titled “DBRS: New Coverage Rules for NPLs Positive , but Uncertainty Remains.”

According to the Rating Agency, in essence:

  • the new rules from the ECB and EC for minimum loss coverage are positive and the impact across banks is expected to be manageable;
  • both authorities are targeting the same goal, but applying two different sets of rules and this may create some regulation uncertainty;
  • while the EC Proposal will be the minimum standard for Banks, the ECB has the means to go further on a case by-case basis for affected Banks.

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While I can somehow agree on the potential confusion between the 2 sets of rules, I would stress that ECB Guidelines are more focused moral suasion and aimed to promote best practices in risk understanding and management rather than prescribing mandatory accounting standards.

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Why ECB guidelines on NPL are so much about moral suasion

Some commentators are worried about the impact that recently published Addendum to ECB guidelines on NPL management could have on banks provisions and lending capacity. The idea is that stricter requirements could push banks to increase provisions on NPEs and, especially for unsecured loans, reduce the convenience of lending.

My take on this is that direct effect will be quite limited while the most relevant perspective should be Moral Suasion.

First and Foremost, guidelines are not binding rules like those included in European Commission NPL Package (statutory prudential backstops)

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therefore no bank will be forced to increase provisions on NPL due to some mechanic application of an updated accounting principle.

Secondly, as I explained in this post the timeline proposed to increase provisions is consistent even with Italian sluggish Judicial system so what is ECB asking is supposed to be already in place in the most advanced banks and should not require an exceptional effort for other players.

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Finally, the way asset quality review works is applying a detailed analysis of  single relevant roles assessing the updated an most realistic liquidation values of existing guarantees.  If an updated and realistic forecast of expected recoveries on the single loan justifies a level of provision lower than the one set by guidelines than this will be accepted by ECB.

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So what is all this fuss about?

ECB is suggesting that banks should have a proactive approach to credit management and that the improvement in workout efficacy and efficiency should allow to update provisions in order to make them more consistent with what will be actually collected.

It is not about increasing provisions for sake of austerity or excessive caution, but much more about running properly credit management process and updating accounting values in order to maintain a fair representation of financial situation.

Within 2 years the workout process for an unsecured loan should have been either completed either brought to a stage in which is pretty clear the extent of claim residual claim that can still be collected. If this is true than ECB guidelines are even redundant (as they could actually be they could actually be after the new European Commission package).

If this is not true then the problem is not only the lack of efficiency but  mostly the unfair representation of financial situation: balance sheet include claims that will never be collected and when the level of trust from market operators fells below a critical threshold we will experience real troubles and  the recent experience of Monte dei Paschi di Siena and Venete Banks stand as hard lesson on this.

My conclusionas are that

  • ECB Guidelines will not have a dramatic impact because they are based on best practices already existing and not really difficult to match
  • they will have a cost due to investments in workout operations and/or outsourcing fees as well as limited increase in prudential capital buffers
  • they will bring substantial gains due to increased transparency of balance sheets and via augmented trust by market operators, reduced cost of funding as well as increased equity evaluation

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Commission measures to address the risks related to NPLs

The Commission is delivering on the Council’s Action Plan to address the high stock of NPLs and prevent their possible future accumulation. The measures proposed by the Commission aim to put the EU banking sector on an even sounder footing for future generations and are an essential step towards the completion of the Banking Union.

 

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Here the link to the press release

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My take is that the most relevant part of the package is the amendment to  Capital Requirements Regulation (CRR) (here the proposal) that provides a common minimum coverage levels for newly originated loans that become non-performing, because it provides a clear guideline on what is expected to be a prudential behavior for banks.

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Other measures like enabling accelerated out-of-court enforcement of loans secured by collateral and harmonizing requirements and creating a single market for credit servicing and the transfer of bank loans to third parties across the EU are in my very own opinion kind of “political sweetener” set to sell to the wide public the tightening to rules on capital.

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In addition I am definitely against the idea of national AMCs that i believe are of no use for the assumed purpose. I am going to write in more detail on this topic in next days, meanwhile pls find below a synthetic table on the contents of the package

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Here the factsheet of the proposal

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Positive outlook for NPL according DBRS

According DBRS rating agency Banking restructuring continues amid tougher regulatory expectations forasset quality:

  • Italian banks are stepping up their efforts to reduce NPLs on the back of tougher expectations from European regulators
  • The gross NPL ratio is expected to improve to a level close or below 10% by 2019-2020, according to banks’ recent plans
  • Core profitability remains modest and will require further improvement in asset quality and efficiency

More detail can be found in acommentary titled “Italian Banks Make Progress on Restructuring in 2017 and Raise Targets for NPL Reduction”

Read here the press release

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Can Fintech disrupt real estate market?

Will real estate agents, property and facility managers share the dramatic fate of dinosaurs?

This kind of comparison may look a little bit extreme, but the idea should be taken in serious consideration as recently pointed out by the Forbes Real Estate Council.

While brick and mortar banks and traditional  payment agents are trying to keep the pace of Fintech innovative startups and to figure out how to cope with the moves of Tech Giants towards financial services, a new wave of Proptech players is coming to disrupt what was so far considered a traditional sector.

Crowdfunding platforms may let individuals to access large real estate development projects, allowing small investments that could limit risk through divesification.

Virtual real estate broker like purplebricks  or settled  may help private individuals to sale or rent properties charging flat fees rather than usual market rates with savings that may reach 5,000 pounds per deal.

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Techword has raked 12 most disruptive proptech companies that may change the shape o real estate markets in upcoming months.

To sum up the most relevant drivers of disruption are expected to be

  1. Easier link to capital markets for both equity and lending resuorcers
  2. Reduced frictions and Information Asymmetry between demand end offer of property
  3. Advanced Technology solutions to handle contracts, payments, and communication between all individuals and corporate involved in the market

It is not possible to foresee precisely what upcoming real estate market will look like and if current incumbents are going to transform or disappear, what we could take for granted and  is valid for all the Fintech revolution space is the famous principle (wrongly attributed to Charles Darwin):

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change

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Arrow expands its presence Italy

As Reported by Financial Times and Italian Magazine Credit Village Arrow Global is going to expand its presence in Italy acquiring 2 local firms.

The target are Parr Credit and Europa Investimenti

The first one is special servicer with large operations and a relevant position in Italian phone collection and customer care outsourcing.

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The second is a special situations boutique with a focus on large bankruptcies and liquidation processes.

Europa Inv

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