63Bn in 9 months – is servicing market ready for the workload?

According the Credit Village NPL Observatory (here the press release) by the end or 2017 3rd quarter 137 transfers agreement of NPL portfolios were signed in Italy for a face value of 63Bn.

osservatorio

The main question arising from this exceptional boost in sales is if existing servicing capability available on the market i enough to manage the workload. A partial attempt to answer this question will be discussed in the 11th CV day on 22nd November (here the program)

While most of news sources are focused on upcoming and announced deals, the  Credit Village NPL Observatory tries to understand what part of the told pipeline is actually closed and to spot also smaller transactions that are usually are not reported in newspaper.

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Excusatio non petita

As widely reported by Italian blog Phastidio.net the recent addendum to ECB’ Guidelines on NPL management has triggered several negative reactions from Italian editors and politicians.  The main concern seem to be that new severe regulation may increase significantly the expected provisions and therefore hurt Italian banks and depress their market capitalization. Hence the need to defend local champions against the bad German bureaucrat.

There is a Latin motto to describe this

Excusatio non petita, accusatio manifesta

it means that defensing oneself before anyone have started accusing is equivalent to admit to be guiltily.

So if central bank is simply recommending fair accounting of NPLs those who claim excessive austerity are implying not only that current internal guidelines are inadequate but also that the cost of revising them is hardly bearable, and by contrasting the request of additional transparency they are saying that this issue is not a relevant priority.

My view is in order to take the opportunity to campaign against austerity and European entities little attention has been paid to the detail of the specific document  and to the global framework proposed by ECB.

Let’s try to understand it better.

What exactly is asking ECB in this addedum?

First of all let’s point out that guidelines are not a binding rules: it is a reasonable suggestion on the behavior expected under a prudential approach to NPL provisions. Secondly let’s remember that the last addendum is a draft, open to comments until December 2017.

Then what is ECB asking? That within a reasonable term a non performing exposure should be fully provisioned. The idea is at that point the credit should either be recovered to the possible extent either classified as zero recovery exposure. Please note that, deviations may be considered as clearly expressed in the picture below:

Cattura

Therefore there is no mechanistic approach as Italian editors seem to believe: if relevant evidence of future collections are available the backstop may not be applied.

Since the basic concept is not too complex the seems quite reasonable according common sense, how about the time frame proposed? The term to trigger the backstop is differentiated between secured and unsecured claim:

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Are these deadline appropriates? Let’s give a look to the following graph:

profilo-temporale-recupero-crediti

it is taken from a bank of Italy research paper ans shows that 7 years seem to be an appropriate term for secured loans: by that time foreclosures and restructuring agreements in Italy have collected almost everything and only bankruptcies  need more time. Nevertheless enough evidence should have been collected in order to point out  if further recoveries are to be expected or not.

What about 2 years for unsecured loans? It is slightly more complicated because you may have 3 cases:

  1. legal workout process in which enough evidence should be available to decide whether the credit should be fully provisioned or not
  2. positive out of court workout in which 2 years are enough because either the borrower has paid either he is still paying
  3. negative out of court workout where in 2 years you may not be in the position to decide if something will be collected in future or not

what can be conclude? That the suggestions works pretty well with the only issue of unsecured loans with negative out of court workout process. Let’s take a look to a table coming from another Bankit research paper 

tassi-di-recupero

Unsecured loans recovered on average 36% in Italy between 2006 and 2015 and recovery rates are going down as also reported in the following graph

tassi-di-recupero-2

We are therefore saying that the most severe issue is 100% provisions on a portion of unsecured loans that, since no legal workout are pending or in progress and out of court recovery process was negative, have low probability to collect anything in future.

Bottom line is that ECB is asking to manage NPLs properly and within a reasonable term (in line with data available for Italy) to book 100% provisions if no relevant evidence are available of further collections (this analysis has been published in Italian on Phastidio.net blog).

Accusatio manifesta

As I tried to explain, ECB is only trying to propose commonsense elements in NPL management in order to achieve higher transparency and fair representation of Non Performing Exposure values on balance sheets.

Those who deem this as austerity or bureaucracy excess  or mechanistic approach have either misunderstood the content of the document (and the nature of guidelines that are not binding neither unconditional automatic rules) either accused Italian banks of beeing unprepared to apply fair accounting rules. In this last option they believe that transparency is low priority issue and “not hurting banks” is so important that keeping NPL on book at unrealistic values may be accepted.

PS this blog is just a place where I propose my comments and views and cannot compete with large newspapers and Pundits columns so if you like it just share  my posts.

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Why the Prudential provisioning backstop won’t hurt (too much) Italian Banks

ECB published on 4th October an addendum to the Guidelines on NPL Mangement published the last march. A public consultation will be open until 8th December.

The main point of this update is the suggestion of Prudential provisioning backstop for
non-performing exposures.

Table on Backstop

This basically means that, within a certain amount of time, Non performing exposures will have to be fully provisioned. The time frame is different between secured and unsecured loans.

Cattura

Should Italian banks worry about this?

Current best practice already sets provisioning of unsecured loan at 80-90% at the Unlikely To Pay and 90-100% at Non Performing Loan classification date while coverage of secured loans is normally driven by Collateral Assets’ expected liquidation value.

After 2 years for unsecured loans and 7 years for secured ones

  1. either the collection process should be finished
  2. or at least it should be quite clear if further collections have to be expected or not

In the first case it is correct to write off any residual claim if there are any. In the second case banks should be able to provide enough argument to justify the deviation from the recommended 100% provisioning.

Considering that the new guidelines will be applicable only to newly classified at Non Performing Exposures and that the 100% provisioning is strongly suggested, but not mandatory significant consequences can hardly be expected for Italian Banks.

Additional comments in the folllowing post

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Italian NPL Market Update 2017-10

Quaestio Capital SGR, on behalf of the Atlante II Fund, has signed a binding agreement
to purchase approximately Euro 2.7 billion of non-performing loans from Cassa di Risparmio di Cesena, Cassa di Risparmio di Rimini and Cassa di Risparmio di San Miniato. According Citywire website Algebris Investmests will buy further 290m from the same banks.

The securitization of the non-performing loans allows the sale of the three banks to Crédit Agricole Cariparma SpA possible, as happened when the three good banks were sold to UBI and Cariferrara to BPER (full press release).

banca_carige_logo

Carige is said to have shortlisted 4 bidders for a portfolio worth 1.4Bn that should be sold in boundle with the credit management platform named Gerica. The 4 are said to be Davidson Kempner with Prelios, Bayview Capital with Crif, Lindorff-Intrum Justitia and  Credito Fondiario.

Credit Village has published the 2017 edition of its NPL Onservatory: transactions have increased in 2017 (114 from January to August, compared to 62 in the same period in 2016) and GBV is €31.2 billion. But, only €21.2 billion has actually “changed hands”. (here the press release).

Banca IFIS has concluded its first senior financing transaction in the NPL sector. Moreover, the bank has acquired 3 non-performing/performing portfolios, totaling a nominal value of over 1,7 billion Euro. (full press release).

  • The senior financing operation is a loan to finance the acquisition, through a securitization company, of a NPL secured portfolio (mortgages loans) originated by an Italian banking group by affiliates of Cerberus Capital Management, L.P., a leader in global alternative investing.
  • The first 2 NPL profolios were purchased from an international fund dealing in distressed loans through a securitisation company, for an overall nominal value of 1,5 billion Euro The third portfolio purchased by Banca IFIS has a nominal value of 192 million Euro, corresponding to 1.300 positions. It is made up of 71% secured retail loans and 29% unsecured loans and was sold to Banca IFIS by a leading European bank.

logoB2 Kapital SRL, the Italian subsidiary of B2Holding ASA, has signed agreements for acquisition of non-performing loan portfolios from Credit Agricole and Banco Desio Group with combined face value of EUR 175M. The transactions include both secured and unsecured positions.

Best Capital Italy srl, italian branch of Best SA has acquired 170m NPLs  as secondary trad from Palamon Capital.

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New Credit Village NPL Report

The New Report issued by Credit Village  provides some interesting insights on NPL market:

cover-Osservatorio-intro-agosto-2017-2017

  • The actual size of closed deal is significant lower that the amount initially announced (and report by press)
  • The number of transactions is growing while the size is split between few Jumbo deals (MPS, Unicredit etc) and several smaller ones
  • The asset mix is changing with reduction of consumer and increase of SME and secured
  • Secondary market in the first half of 2017 appears to have shrunk with respect to last year

Preview of the report

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Italian government studying new rules to help banks reduce NPLs

Italian government (as reported by Sole24Ore)  is considering including in the next budget law measures

  1. to widen the scope of bad loan securitisations allowing the possibility of “mixed structured” including both impaired and performing loans and  including tax concessions for special purpose vehicles as well as to
  2. allow banks to issue bonds that would rank between highly protected senior and junior debt in the event of a default.

The technicians, in short, work on a series of instruments to accompany the “long road ahead” that must be covered by a financial system  according to the words of the Minister of Economy Pier Carlo Padoan (as reported by LaRepubblica) during a recent Luiss conference on the revitalization of the banking system:

«a un punto di svolta, ma bisogna continuare su questa strada. Il cammino resta lungo».

“at a turning point, but we must continue along this path. The road remains long “.

9adca154deea1c807d113f4ce32c4f65-kahi-u1101192537759jwc-1024x57640lastampa-it

Ignazio Angeloni, a member of the Supervisory Board of the European Central Bank has a similar opinion:

«La strada che le banche europee e italiane in particolare stanno percorrendo è quella giusta. Le banche italiane  hanno fatto un percorso notevole, c’è stato un miglioramento netto, ma non bisogna sedersi sugli allori».

“The path that European and Italian banks in particular are taking is the right one. The Italian banks -have made a remarkable path, there has been a net improvement, but you don’t have to reduce the pace. “

In addition, Mr Angeloni has pointed out that small and medium banks will be the next focus especially in countries like Italy, Germany and Austria.

These entities are not directly monitored by ECB ( actually national Central Banks act on behalf of ECB) and may face relevant conflicts of interest and irregularities, since depositors, creditors and investors can be the same people.

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Global Distressed Investments Forum

#Savethedate September 26th, 2017   – London, Marriott Grosvenor Square –

Global Distressed Investments Forum

Topics covered:

  • NPL Transactions – developments, players and deals
  • Private Equity, Special situations, distressed M&A
  • Effective debt purchasing strategies & collections models
  • Pan-European Special Opportunities
  • CRE & secured portfolios
  • Upcoming opportunities in emerging markets; Asia-Pacific & LATAM
  • Corporate/SME NPLs
  • Institutional fixes at an EU Level and ECB guidance for NPLs
  • Market Focuses on Italy, Romania, Greece, Spain and many more..

 

Cattura

GDI 2017 takes place in the newly reconstructed London Marriott Grosvenor Sq. in the Mayfair area, with up 800m2 dedicated to the event.

Preferential accommodation rates available for participants of the GDI 2017 Forum.

Event Website 

Register to the Event

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