The Italian Npl Market. Ready to Face the Crisis

The Italian NPL Market

Ready to Face the Crisis

pwc.com/it June 2020 Ready to Face the Crisis not in the next few months, in which the shield of payment holidays and public support through the In the last 5 years, the NPE market was release of state guarantees will largely “freeze” the gradually heading towards a medium-term portfolios, delaying and possibly reducing the flows steady state. Deleverage activities reduced to NPE. Nevertheless, moratoria will end, and the sharply bad loans and, as a result, market combined effect of the decrease in revenue and participants were starting to focus on Unlikely to worsening of financial position of many companies Pay (UTP) and on how to manage the tail of the will lead to a severe scrutiny of the capability to huge non-performing stock cumulated during pay creditors which will turn into an unavoidable the past decade. reclassification to default of a significant number of counterparties. Market consensus is that NPE Italian banks, in response to market and new inflows will be in a range between 60 and 100 regulatory pressure, have halved the total stock billion in the next 18 months with a direct impact of NPL (€135bn in 2019 vs €341bn in 2015) on current UTP and NPL stock. and, at the same time, they have set up their NPL platform and organizational controls that Also because, and this is the third certainty, will allow to manage non-performing loans notwithstanding a general relief of supervisory and more quickly and efficiently and thus to face regulatory pressures on banks in this “emergency” the incoming economic crisis in a more resilient situation, the focus on a rigorous valuation of the way. credit quality of banking portfolios will be high and increasing in the next few months. Banks will The COVID-19 crisis, needless to say, has be forced to assess the likeliness to pay of their surprised everybody, reshuffling the cards and clients, and with objective or subjective indicators bringing back to the table all participants that of financial difficulties emerging, many exposures are now trying to understand how the market will need to be reclassified. The clear confirmation will evolve in the next few months and years. of this expectation can be found in the increasing provisions that some large banking groups have Today, still in the aftermath of the healthcare already posted in their balance sheets to account emergency, we have some (few) certainties. for future losses.

Paradoxically, the first certainty is a degree of… All in all, these few certainties bring with them uncertainty. Despite several economic forecasts some clear market consequences. which have been released by public institutions or private research centers (one of the latest of Unlikely to Pay (€61bn as of 2019) will probably be which, by the European Commission, points at the most relevant and complex asset class that will a 9,5% decrease in GDP in 2020) the situation is need to be addressed. Banks will have to come up still largely unpredictable both for its complexity with some reliable drivers in order to identify those and incomparability with previous economic clients to support and those which will not be able downturns and for the unpredictable evolution to be restored. Banks and servicers, because the of the health emergency. number, granularity and sectorial composition of UTP will probably be different than in the past, will need The second certainty is that the economic to deploy new servicing capabilities and strategies. downturn will lead to an increase in NPL in the Investors, with an appetite for new finance which short to medium term. When, how much and will be increasing, will be able to find potential new how will this increase materialize? Probably opportunities when economic recovery will show up.

2 | PwC Contents

Macroeconomic Scenario 4 The debt purchaser and debt servicing market Recent market activity and outlook 8 will also be affected, turning the industry from a focus on the stock, which considering the Italian Real Estate Market 14 primary and secondary market will amount to Regulatory and Legal Framework Updates 20 about 350bn by the year end, to a new focus on how to manage the upcoming flows. Luckily, Italian NPL Market 26 one of the legacies of the last crisis is the Focus on GACS 34 presence, now, of a sustainable NPL industry that will be able, more rapidly and effectively Italian Banks Overview 38 than in the past, to manage increasing volumes, Focus on Italian UtP market 44 supporting the economy and, when possible, helping to bring back to viability some of Focus on Italian Non Performing Leasing market 50 the companies that will experience financial The Servicing Market 54 difficulties. Appendix 66 The crisis will have other clear market implications. On the price of collaterals, with Real Estate prices potentially decreasing, at least for a temporary period, and with geographical and sectorial evolutions which will have to be carefully assessed by investors. On NPLs recoveries, which have slowed down due to the stop of Courts activities in these months, and that will lead to a review of the underline business plans of the serviced portfolios. Innovative structures such as restructuring funds will emerge, given the expected increase in the market space.

Finally, the “NPE issue” will be deeply influenced by the effectiveness of public support and economic recovery schemes, by the timing and intensity of the removal of the current regulatory relief measures and by the implementation of “systemic” solutions. Such solutions could be especially important for the UTP positions where a mobilization of the main economic stakeholder could be a game changer for the Italian economy. The solution must be rapid, at market conditions and need to leverage on local economies and stakeholder.

All in all we believe that the financial services sector has now proven to be more resilient and Ready to Face the Crisis.

3 The Italian NPL market

Macroeconomic Scenario

Key Message The outbreak of COVID-19 represents a major shock for the Italian economy with an extensive impact on national gross domestic product, which the European Commission predicts will drop by 9.5% this year. Despite the policy response at both European and Italian level, the crisis is likely to revamp the trend of NPEs new inw a ien e analysts’ consensus, is expected to fall eween an billion euros in the next 18 months.

4 | PwC Macroeconomic Scenario

Chart 1: EU main economic drivers The outbreak of COVID-19 is shaping the entire world and constitutes 9.0 an unprecedented challenge 8.1 7.9 7.26.7 with important socio-economic 6.1 consequences. 3.6 3.4 2.7 3.43.23.1 2.1 1.5 1.6 1.81.4 1.3 In March-April, most market activities 0.6 in Italy and Europe were on stand-by -0.6 because of the lockdown and social -0.7 -1.0 distancing measures, causing a strong -3.6 crisis in the real economy both in terms of supply and demand. Despite -7.4 phase 2 having started, both Italian and -8.3 European contexts are uncertain, but Real GDP (%) nation () nemployment rate Current Account udget alance ( total labour force) (% GDP) (% GDP) the situation is constantly evolving from both a medical and macroeconomic 2017 2018 2019 2020F 2021F perspective. Source: PwC analysis on European Commission institutional paper “European Economic Forecast – Spring 2020”. Unemployment rate calculated as a % of total labour force, current account balance and budget balance as a % of Regarding the political framework, GDP. Displayed data and forecasts for the EU refer to the EU27 some measures to safeguard the economy have been implemented and others are expected in the next months both in Italy and Europe. Overall Chart 2: Italian main economic drivers iniﬁcan lic rerce are irece to strengthen the healthcare sector and 11.2 civil protection and to support affected 10.6 11.8 workers and economic sectors. 10.0 10.7 6.5 The Italian Government promoted 3.43.3 2.5 2.53.0 measures to safeguard the economy 1.7 1.31.2 0.80.3 0.6 0.7 mainly based on standstill and public -0.3 -1.6 guarantees to support the credit sector -2.2 and measures to support SMEs which -2.4 -5.6 play a key role in the national economy. The aim is to make credit access easier -9.5 -11.1 through the relief of public guarantees. Real GDP (%) nation () nemployment rate Current Account udget alance ( total labour force) (% GDP) (% GDP)

2017 2018 2019 2020F 2021F

Source: PwC analysis on European Commission institutional paper “European Economic Forecast – Spring 2020”. Unemployment rate calculated as a % of total labour force, current account balance and budget balance as a % of GDP

5 The Italian NPL market

Chart 3: Total investments volume trend (% change) In Europe, the current exceptional situation has led supranational and nainal ariie a a eile 15% 13.0% approach. In particular, the strong 10% downturn of European economies 5.7% 3.7% 9.7% allowed the use of the general 5% 3.1% 1.4% ecae clae f e r area ﬁcal 3.2% 2.9% 0% framewr Ti ffer e eiili necessary to the national budgets to -5% support the economy and to respond in -13.2% -10% a coordinated manner to the impact of the pandemic. -15% -14.2%

-20% The most important measure adopted 2017 2018 2019 2020F 2021F so far is related to the monetary Italy EU policy. On 18 March 2020 the ECB Source: PwC analysis on European Commission institutional paper “European Economic Forecast – Spring 2020”. launched the pandemic emergency Displayed data and forecasts for the EU refer to the EU27 purchase program (PEPP). The PEPP is a non-standard monetary policy measure to counter the serious risks Table 1: Government gross debt ratio per country to the monetary policy transmission mechanism. It will have an overall envelope of €750bn and will include all "Government 2017 2018 2019 2020F 2021F Trend the asset categories eligible under the gross debt ratio 2019 - 2021F (% GDP)" existing asset purchase program (APP). EU 83.3 81.3 79.4 95.1 92.0 Other important measures, which Italy 134.1 134.8 134.8 158.9 remain under debate, are the Spain 95.5 113.7 strengthening of European Investment France 98.3 98.1 98.1 111.9 Bank (EIB) activities, the access to Germany 59.8 71.8 the European Stability Mechanism UK 85.7 85.4 102.1 101.5 (ESM) funds in a revised key, the SURE instrument to protect workers and jobs Source: PwC analysis on European Commission institutional paper “European Economic Forecast – Spring 2020”. and the constitution of a Recovery Displayed data and forecasts for the EU refer to the EU27 n ﬁnance innaie ﬁnancial instruments to support the recovery of the continent.

6 | PwC Macroeconomic Scenario

Chart 4: Trend of FTSE All Share Banks index and BTP-Bund spread The European Commission forecasts a strong downturn of European economies and an increase in 14,000 400 bps unemployement. EU real GDP 13,000 350 bps experienced a moderate growth of 12,000 1.5% in 2019, but is now expected to 11,000 contract in 2020 by a record -7.4% 300 bps an rw in Te 10,000 250 bps unemployment level is expected to rise 9,000 frm in in 8,000 before declining to 7.9% in 2021. 200 bps 7,000 150 bps The shock caused by the spread of the 6,000 virus is symmetric, the pandemic has 5,000 hit all Member States. However, it is 100 bps certain that each country’s recovery will Jul-18 Jul-19 Apr-18 Apr-19 Apr-20 Jan-18 Oct-18 Jan-19 Oct-19 Jan-20 Jun-18 Jun-19 Mar-18 Mar-19 Mar-20 Feb-18 Feb-19 Feb-20 Aug-18 Sep-18 Nov-18 Dec-18 Aug-19 Sep-19 Nov-19 Dec-19 Dec-17 May-18 May-19 depend also on the structure of their FTSE Italia All Share Banks Spread BTP-BUND economies and on their capacity to respond with appropriate policies. Source: PwC analysis on data provider information

The Italian economy is forecasted to cnrac an rw in 2021 resulting in an aggregate l f in w ear l e unemployment level is forecasted to rise reaching 11.8% in 2020 before declining to 10.7% in 2021.

Public debts are expected to blow up in the coming months due to the increase in public expenses to contain the consequences of the pandemic. Italian eﬁci i eece e arn of the GDP and therefore public debt is expected to reach a peak between f e in

Rating agency downgraded Italy’s credit rating to one notch and the Btp- Bund spread reached the highest levels in the last three years. Nonetheless, the situation now seems to be under control thanks to the decision of the ECB to take additional measures to mitigate the impact of rating downgrades to ensure the smooth transmissions of its monetary policy in all jurisdictions of the euro area.

7 The Italian NPL market

Recent market activity and outlook

Key Message The outbreak of COVID-19 and the consequent lockdown could potentially impact deleveraging strategies for 2020-2022 where uncertainty about potential investors’ appetite, pricing expectations and recovery strategies should be compensated by government stimulus that would preserve the level of NPEs transactions for 2020 maintaining them in a range between € 30-35 bn, in line with what has been recorded last year.

8 | PwC Recent market activity and outlook

Te ﬁeear eri a Regarding announced and ongoing transactions: registered NPE transactions in terms of GBV for around €230bn, while the NPE • UniCredit, in line with its latest industrial plan, will be one of the top stock as of YE-2019 (GBV €135bn) has players in the NPE market in 2020 with approx. €8.5bn of ongoing fallen more than half since the peak of transactions, of which approx. €3bn of bad loans (Projects Lisbona, the 2015 (GBV €341bn). Tokyo, New York and Loira), €3bn of UtP (Project Dawn and Project Sandokan 2, with the latest in its closing phase) and €2.5bn of NPL Te ﬁr mn f ae leasing. registered a contraction on NPE transactions compared to the same • Cariparma is carrying out a “platform” deal, like the one period of the previous years: Q1-2020 of Intesa Sanpaolo (Project M), concerning most of its NPE stock has registered approx. €1.3bn of closed (approx. €3bn) throughout the disposal of part of the portfolio and transactions in terms of GBV vs approx. the award of a servicing contract on the residual part of it, as well €3.9bn in Q1-2019. a n fre inw

Despite the diffusion of the COVID-19, • Also Banco BPM is analysing the opportunity to set up a “platform” that for sure has affected and will affect deal for a UtP portfolio of approx. €2bn. the deleveraging strategies carried out by almost all Italian banks, the NPE • On the GACS side, BPER and Banca Popolare di Sondrio will likely market is still alive. ask for the public guarantee for the NPL securitisations they are currently working on. Overall, 2020 will be featured by approx. €25bn of NPE transactions in terms of • Last but not least, the secondary market is in great ferment featuring GBV without taking into account the approx. €0.4bn of closed transactions in terms of GBV and approx. potential jumbo deal of approx. €9bn €2.3bn of announced transactions. Moreover, we have to take related to the deleveraging strategy of into consideration the role of secondary market as an alternative MPS, which is still under negotiation recovery strategy to accelerate the collections needed to repay between the Italian Government and the Senior notes outstanding principal (often secured by GACS). EU Commission.

Chart 5: NPL transactions trend in the Italian market (€bn)

84.1 2.0 2.6 67.7 2.2 10.5

37.3 34.4 6.0

18.3 20.7 4.6 8.0 1.4 30.9 4.0 18.3 14.7 55.0 79.4 31.2 4.0 8.0 0.1 3.4 2013 2014 2015 2016 2017 2018 2019 2020

Bad Loans UtP Mixed Ongoing

Source: PwC estimates on public information and market rumours

9 The Italian NPL market

What is to be expected from the Italian NPE Concerning future NPE transactions, we think that market over the next coming years? the uncertain investors’ appetite, pricing trends and recovery strategies, will stabilize for a couple of years. earin new inw a a rel f e ill In 2021 we foresee transaction volumes in line with nin rea f e CO i i er ifﬁcl 2020, ranging between €20bn and €25bn, without to make reliable forecasts. Compared to the 2008 considering potential “jumbo deals”, such as Monte lal ﬁnancial crii e alian crei em dei Paschi. Then, starting from 2022, we expect is now more solid and resilient as a whole, even almost a double in transaction volumes, ranging though it is still challenged by a level of non- between €35bn - €40bn. performing loans above the EU average.

In that case the banking NPE peak was reached in 2015, 7 years later the outbreak of the crisis. Now we can eec a rer ime fr e new inw wave, maybe between 2 and 4 years.

As showed in the graph, main Italian banks registered extra provision funds in the quarterly data as of 31st March 2020.

Chart 6: Top 10 Italian banks - Additional buffers built up for future COVID-19 impacts (€ mln)

1,500

902

193

70 50 50 51.7

UCG ISP* Banco BPM MPS UBI BPER Credem

Source: PwC estimates on public information. *€0.3bn provisions booked in Q1 and ~€1.2bn potential additional pre-tax provisioning from the Nexi capital gain

10 | PwC Recent market activity and outlook

Table 2: Main closed transactions as of May 2020

Date Seller Volume NPE category Macro asset Buyer Primary / Secondary (€m) class market Transactions closed in 2020 2020 Q2 Deutsche Bank 270 Bad Loans Unsecured MBCredit Solutions Primary 2020 Q2 Credito Valtellinese 250 Bad Loans n.a. Confidential Primary 2020 Q2 J-Invest 1,701 Bad Loans Unsecured NPL Securitisation Italy Secondary SPV srl 2020 Q1 Credito Valtellinese 177 Bad Loans Secured AMCO Primary 2020 Q1 Credito Valtellinese 357 Bad Loans Unsecured Hoist Finance Primary 2020 Q1 illimity 182 Bad Loans Unsecured Sorec Srl, Phinance Partners Secondary Spa e CGM Italia SGR Spa 2020 Q1 UniCredit 115 Bad Loans Secured illimity Primary 2020 Q1 Unknown 170 Bad Loans Secured illimity Secondary Other transactions 316 with deal value < €100m Total (2020) 3,538

Transactions closed in 2019 1/2 2019 Q4 BNL 148 Bad Loans Secured Fortress Primary 2019 Q4 BNL 162 Bad Loans Unsecured Kruk Italia Primary 2019 Q4 Intrum 440 Bad Loans n.a. illimity Bank Secondary 2019 Q4 Intrum 192 Bad Loans n.a. Banca IFIS Secondary 2019 Q4 ICCREA 231 Bad Loans Mainly Unsecured Banca IFIS Primary 2019 Q4 Banca Monte dei 200 UtP Mainly Secured Confidential Primary Paschi di Siena 2019 Q4 Various popular and 827 Bad Loans Mainly Secured POP NPLs 2019 srl Primary cooperative banks 2019 Q4 Banca Monte dei 1,600 Bad Loans Unsecured illimity Primary Paschi di Siena 2019 Q4 Banca Carige 177 Bad Loans Secured AMCO Primary 2019 Q4 Banca Carige 1,380 UtP Mixed Secured/ AMCO Primary Unsecured 2019 Q4 Banca Carige 920 Bad Loans Mixed Secured/ AMCO Primary Unsecured 2019 Q4 ICCREA 1,300 Bad Loans Mixed Secured/ Confidential Primary Unsecured 2019 Q4 UBI Banca 858 Bad Loans Mainly Secured Iseo SPV Primary 2019 Q4 UniCredit Leasing 154 Bad Loans Unsecured Guber, Barclays Bank, Primary Banca IFIS 2019 Q4 BNL 400 Bad Loans Unsecured Banca IFIS, Guber, Primary Barclays Bank 2019 Q4 Gruppo Cassa 345 Bad Loans Mixed Secured/ Arrow Global Primary Centrale Unsecured 2019 Q4 UniCredit 1,039 Bad Loans Unsecured Confidential Primary 2019 Q4 Banca del Fucino 100 Bad Loans Unsecured J-Invest Primary 2019 Q4 UniCredit 6,100 Bad Loans Mainly Secured Prisma SPV Primary 2019 Q4 Hoist Finance 5,000 Bad Loans Unsecured CarVal Investors (95% notes Secondary mezzanine and junior) 2019 Q3 UniCredit 375 Bad Loans Mainly Unsecured n.a. Primary 2019 Q3 UniCredit 664 Bad Loans Secured illimity Primary 2019 Q3 UniCredit 1,100 Bad Loans Unsecured SPF Investment Primary Management LP

11 The Italian NPL market

Date Seller Volume NPE category Macro asset Buyer Primary / Secondary (€m) class market Transactions closed in 2019 2/2 2019 Q3 UBI Banca 740 Bad Loans Mixed Secured/ Credito Fondiario Primary Unsecured 2019 Q3 Banca Monte dei 455 UtP Secured Cerberus Primary Paschi di Siena 2019 Q3 Banca Monte dei 450 UtP Mainly Unsecured illimity Primary Paschi di Siena 2019 Q3 Banca Monte dei 240 Bad Loans Mixed Secured/ illimity Primary Paschi di Siena Unsecured 2019 Q3 UniCredit 240 Bad Loans Unsecured illimity Primary 2019 Q3 Hoist Finance 225 Bad Loans Unsecured CarVal Investors (95% Secondary notes, excl. Junior) 2019 Q3 UniCredit 210 Bad Loans Unsecured Guber & Barclays Primary 2019 Q3 Banca Monte dei 202 UtP Mainly Secured Unknown Primary Paschi di Siena 2019 Q3 Banco Desio & an 180 Bad Loans Unsecured The SPV notes will Mixed Primary / Italian NPL investor be underwrited by Secondary institutional investors 2019 Q3 UBI Banca 157 Bad Loans Unsecured Confidential Primary 2019 Q3 Banca del Fucino 150 Bad Loans Secured Fucino RMBS srl SPV Primary 2019 Q3 CR Asti 149 Bad Loans Mixed Secured/ Unknown Primary Unsecured 2019 Q3 Banca Monte dei 137 Bad Loans Mixed Secured/ Unknown Primary Paschi di Siena Unsecured 2019 Q3 Chebanca! 137 Bad Loans Secured D.E. Shaw Primary 2019 Q3 Banca Monte dei 130 UtP Secured BofA Merrill Lynch Primary Paschi di Siena 2019 Q3 Intesa Sanpaolo 3,000 UtP Mixed Secured/ DK / Prelios Primary Unsecured 2019 Q2 Banco BPM 650 Bad Loans Secured illimity Primary 2019 Q2 Confidential 450 Bad Loans Unsecured Banca IFIS Primary 2019 Q2 Confidential 351 Bad Loans Mainly Unsecured Guber Secondary 2019 Q2 Findomestic Banca 250 Bad Loans Consumer Banca IFIS Primary 2019 Q1 Banca Monte dei 350 Bad Loans Secured Guber Primary Paschi di Siena 2019 Q1 Cassa di Risparmio n.a. Bad Loans Secured Fire Primary di Savigliano 2019 Q1 Banca del Fucino 103 UtP n.a. UnipolReC Primary 2019 Q1 Banca del Fucino 211 Bad Loans n.a. Barclays, Varde, Guber Primary 2019 Q1 BPER Banca 1,300 Bad Loans Mainly Unsecured WRM Primary 2019 Q1 CCRES (CCB Group) 734 Bad Loans Secured Guber and Barclays Primary 2019 Q1 Intesa Sanpaolo 187 Bad Loans Secured Juno 2 Srl Primary 2019 Q1 Banca Valsabbina 150 Bad Loans Mixed Secured/ Guber and Barclays Primary Unsecured 2019 Q1 BNL 968 Bad Loans Mainly Secured Juno 2 Srl Primary Other transactions with deal 1,034 value < €100m Total (2019) 37,251

Source: PwC estimates on public information and market rumours of primary and secondary market. Data refer to transaction from January 2019 to May 2020. Some transactions involved groups of different investors; the volumes of these transactions have been allocated to each player, when possible. Otherwise, they have been assigned to the main investor. In case of securitization transactions, the total volume has been allocated to the main buyer, without taking into account eventual notes subscribed by the banks themselves and/or third parties (e.g. senior)

12 | PwC Recent market activity and outlook

Table 3: Main ongoing NPE transactions as of May 2020

Seller Volume (€m) NPE category Macro asset class Primary / Secondary market Belvedere SPV 192 Bad Loans Unsecured Secondary UniCredit 2,000 UtP Mixed Secured/Unsecured Primary Banca Carige 310 UtP Shipping Primary Intesa Sanpaolo 325 Bad Loans Unsecured Primary Intesa Sanpaolo 325 UtP Unsecured Primary UniCredit 1,000 Bad Loans Unsecured Primary UniCredit 1,000 Bad Loans Unsecured Primary UniCredit 700 Bad Loans Secured Primary UniCredit 2,500 Bad Loans Leasing Primary Alba Leasing 400 Bad Loans Leasing Primary Cariparma 3,000 Bad Loans Mixed secured / unsecured Primary Gruppo Cassa Centrale Banca 700 Bad Loans Mixed secured / unsecured Primary Banca Popolare di Bari 2,200 Bad Loans & UtP Mixed secured / unsecured Primary Banca Popolare di Sondrio 1,000 Bad Loans Mixed secured / unsecured Primary Bper 1,000 Bad Loans Mixed secured / unsecured Primary UniCredit 250 Bad Loans Unsecured Primary UniCredit 1,000 UtP Mixed secured / unsecured Primary Banco BPM 2,000 UtP Mixed secured / unsecured Primary Confidential 2,000 Bad Loans Mixed secured / unsecured Secondary Banca Monte dei Paschi di Siena 9,000 Bad Loans & UtP Mixed secured / unsecured Primary Total 30,902

Source: PwC estimates on public information and market rumours

13 The Italian NPL market

Italian Real Estate Market

Key Message 2019 has represented a record year in terms of completed transactions, both residential and commercial properties, with the latter being driven fﬁce el an logistics. n e ﬁr alf f investors largely adopted a "wait-and-see" approach as a result of the pandemic. This, together with uncertainty about the duration of the emergency and the intensity of future restrictive measures, seems to indicate a subdued investment market for the rest of the year. Notwithstanding this, over a longer time horizon, we continue to see institutional investors' interest in the industry, and the NPE market will be a valuable source of new product supply for the market. 14 | PwC Italian Real Estate Market

Table 4: Italian NTN1 comparison by sector

Asset type Q1 2019 Q2 2019 Q3 2019 Q4 2019 H2 2018 H2 2019 Y 2018 Y 2019 Delta (%) Delta (%) H2 19-18 Y 19-18 Residential 138,525 137,099 297,834 305,397 578,804 2.5% 4.3% Ofﬁce 2,201 2,225 5,199 9,987 10,478 8.5% 4.9% Retail 7,175 8,137 9,301 15,113 Industrial 2,529 2,995 3,919 12,118 12,123 0.0% Total 150,430 173,387 148,827 184,934 324,707 2.8% 4.3% Appurtenances 97,491 112,848 95,490 211,417 218,052 428,390 3.1% 5.4% Other 13,491 14,218 18,943 31,902 59,987 3.9% 4.7% Grand Total 302,395 258,535 584,974 1,148,781 3.0% 4.7%

Source: PwC analysis on Italian IRS data. 1. NTN is the number of standardized real estate units sold, taking into account the share of the property transferred; renance incle rerie c a aemen arae r arin ace Te ecr Oer incle ial clinic arrac elene ecane an ﬁre ain

Table 5: Residential NTN by geographic area Volume of real estate transactions in 2019 Area Region H2 2018 H2 2019 Y 2018 Y 2019 Delta (%) H2 Delta (%) Y 19-18 19-18 In 2019, the Italian real estate North Provinces 99,209 104,271 3.5% 5.1% market continued its positive No Provinces 110,890 115,417 213,585 225,125 4.1% 5.4% trend with an increase of 4.7% in Total 312,794 3.9% 5.3% total transactions, driven mainly Center Provinces 28,470 28,099 55,570 (1.3%) 2.1% by sales of residential properties. No Provinces 33,231 33,282 0.2% 4.1% Total 119,209 122,994 (0.5%) 3.2% Te m iniﬁcan rw South Provinces 43,705 3.4% 2.3% compared to the previous year, No Provinces 53,441 54,443 103,915 1.9% 3.4% was recorded in the retail asset Total 74,517 151,151 2.3% 3.1% cla wi a increae Italy Provinces 100,115 197,505 204,724 2.1% 3.7% See Table [4]. No Provinces 203,142 381,139 398,817 2.8% Total 305,397 4.3% 2019 residential sales have Source: PwC analysis on Italian IRS data increased across all Italian regions compared to 2018. The North Table 6: Non residential NTN by geographic area showed the highest growth, with a 5.3% increase, followed by the NTN H2 2019 Q3 2019 Q4 2019 H2 2018 H2 2019 Y 2018 Y 2019 Delta (%) Delta (%) O H2 19-18 Y 19-18 Center and South with 3.2% and North 1,310 3,199 5.2% 4.9% 3.1% growth, respectively. See Center 470 714 994 1,184 1,948 2,089 19.1% 7.2% Table [5]. South 445 1,091 2,012 8.4% During 2019, the number of non- 5,199 9,987 10,478 8.5% 4.9% residential asset transactions increased by 4.8% compared to NTN H2 2019 Q3 2019 Q4 2019 H2 2018 H2 2019 Y 2018 Y 2019 Delta (%) Delta (%) Retail NTN H2 19-18 Y 19-18 2018, mainly driven by the retail North 3.271 7.258 7.924 15.414 9.2% 8.1% ae cla Te fﬁce emen Center 1.597 2.040 3.408 9.1% registered a notable increase of 4.9% compared to 2018, while the South 1.955 4.447 industrial sector remains mostly 15.113 unchanged. See Table [6]. NTN H2 2019 Q3 2019 Q4 2019 H2 2018 H2 2019 Y 2018 Y 2019 Delta (%) Delta (%) Industrial NTN H2 19-18 Y 19-18 Appurtenances (which include North 1.723 4.504 4.371 8.277 8.079 (3.0%) (2.4%) garages, basements and parking Center 519 1.051 1.131 1.935 2.001 3.4% spaces) and other sectors continue to perform well. South 438 1.097 1.907 2.042 9.0% 7.1% See Table [4]. 12.118 12.123 0.04% Source: PwC analysis on Italian IRS data

15 The Italian NPL market

Investments in the non-residential real estate market

In 2019, the Italian commercial real volume of €3.8bn. Retail investments estate market recorded an investment reached more than €1.9bn, down 13% volume of €12.3 bn, increasing by 40% compared to 2018, with investments in compared to 2018. high streets prevailing.

The individual sector with the largest Milan and Rome still represent key are f inemen i e fﬁce markets for investments, accounting asset class with €4.8bn, representing for about 37% and 15%, respectively, about 40% of total transaction of total 2019 investment volumes. The volumes, followed by the hotel sector main source for real estate investments with €3.3bn which was the asset in Italy is still represented by foreign class with the highest increase. This capital, accounting for 75% of the year was the best year ever for the total, which is higher compared to the alian fﬁce ecr eeciall fr previous year. Milan which recorded an investment

Chart 7: Investments in non-residential real estate – Investor type

12,287 11,100 17%

27% 26% 9,100 8,857 8,100

5,130 5,211 60% 65% 4,130 4,383 70% 70% 73% 75% 78%

1,744

73% 83% 74% 30% 22% 27% 40% 30% 35% 25%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Italian investors Foreign investors Total investment (€m)

Source: PwC analysis on BNP Paribas Real Estate data

Chart 8: Investments in non-residential real estate – Asset class

Y-2018 Y-2019 9% 6%

15% Ofﬁce 27% 41% 39% Retail €8.8 bn €12.3 bn Industrial

12% Tourist Other 11% 25% 16%

Source: PwC analysis on BNP Paribas Real Estate data

16 | PwC Italian Real Estate Market

Chart 9: Italian Real Estate Execution In 2019, 205,000 judicial real estate executions were recorded in Italy for a total volume of €28.4bn, with the North 46% residential asset class accounting Center 24% for 70%. Residential judicial sales South 18% are n incle in e Islands 12% residential transactions (NTN) registered in 2019 by the Italian IRS.

The highest concentration of real estate executions is recorded in e r wi f e al followed by the Center with 24%, the South with 18%, and then the Islands with 12%. The region with the highest number of real estate executions is Lombardy with circa Source: PwC analysis 18.7% of the total. on Astasy data

Chart 10: Closed Secured Portfolio by Area Closed Secured Portfolio

From analyzing the closed secured North 51.8% portfolio managed by servicers, Center 19.5% it can be seen that the greatest South and concentration is located in Northern Islands 28.7% Italy (51.8%) followed by the South and Islands (28.7%) and then the Center (19.5%). See Chart [10].

In addition, analyzing the data by city size shows that 39% of the assets are located in small towns with less than 25,000 residents, 14% are in large cities with more than 1M residents, and only 5% are in cities with a population between 250,000- 500,000. See Chart [11].

Chart 11: Closed Secured Portfolio by City Size (residents)

5% 7% <25k 11% > 1M 39% 25-50 100-250 12% 50-100 500- 1M 250-500 12% 14%

Source: PwC analysis based on data provided by Servicers as of 31/12/2019; data has been directly provided by Sericer an a n een eriﬁe wC Sericer raniainal inrial an erain rcre ar greatly. Comparing the information presented above requires a correct analysis and understanding of the competitive landscape and servicer business model.

17 The Italian NPL market

The graphs below show the portfolios Considering the recovery rate by closed by the Servicers considering the eac ae cla fﬁce w e recovery strategies and the recovery highest performance (73%) followed by rate by asset class. For all recovery residential (58%). The asset class with strategies, the main asset class is the lowest recovery rate is development residential. The asset class in closed at 39%. portfolios with the lowest share over the total volume is development.

Chart 12: Closed portfolio by asset class (GBV)

Extrajudicial Judicial Loan-Sale 1% 4% 1% 3% 2% 8% 5% 5% 5% Residential 8% 8% Retail 8% 6% Industrial 11% 53% Others 15% Land 6% 15% 61% 66% Ofﬁce

9% Development

Chart 13: Recovery rate by asset class on closed portfolio

17%

27% 26% 73%

58% 53% 54% 50% 46% 39%

Development Others Land Industrial Retail Residential ffice

Srce wC anali ae n aa rie Sericer a f aa a een irecl rie Sericer an a n een eriﬁe wC Sericer raniainal industrial and operating structures vary greatly. Comparing the information presented above requires a correct analysis and understanding of the competitive landscape and servicer business model. The analysis in chart 13 is based on data from 9 players and returned with arithmetic averages.

18 | PwC Italian Real Estate Market

COVID-19 – Market Commentary For residential, market conditions are expected to deteriorate in the short term and could be worse than As for most countries, COVID a iniﬁcanl what was experienced during the 2012 crisis; residential affected the Italian real estate market and the most transactions could possibly decrease by 20-25% affected asset classes so far are retail and hospitality compared to last year. due to the government lock-down. Over a longer time horizon, cyclical conditions will depend For retail, there has been a strong demand for on the impact of the pandemic on household income. renegotiating lease contracts and/or temporarily en ren an i i ifﬁcl reic mare The impact on the real estate market caused by developments, while for hotels the situation is more COVID-19 is still unclear and will depend on the duration, complex since there was an immediate and strong the intensity of future restrictive measures and the tools contraction in occupancy and demand in the short-term that will be made available in the coming months. is expected to be supported by mostly local tourism.

19 The Italian NPL market

Regulatory and Legal Framework Updates

Key Message From a regulatory perspective the Competent Authorities are adopting, where ile a eile approach, by easing the monitoring of the NPE targets and by postponing some of its key deadlines and supervisory activities. In addition, in order to minimize the impact on the asset quality of the banks and facilitate bank lending, a number of measures and actions have been taken both at local and at European level (e.g. extension of preferential treatment to public guarantees, EBA guidelines on moratoria, introduction f aree ic ﬁ arrangements etc.).

20 | PwC Regulatory and Legal Framework Updates

Regulatory response to COVID-19

The Competent Authorities are risks should be guaranteed on the ain were ile a eile application of such discretions. approach, taking into consideration the “exceptional” circumstances and Regulatory interventions can be leveraging on the various discretions grouped into the following three foreseen by the regulation. However, categories: a careful monitoring of the various

Easing of regulatory pressure Review of the regulatory agenda Monitoring of emergency evolution

• The ECB has stated its intention • EBA recommends CAs to plan • Banks have been asked to review w eiili in mnirin e supervisory activities, including on- their business continuity plan in achievement of NPL targets. ie inecin in a eile wa order to asses the impacts of • Banks are allowed to temporarily and to postpone those considered COVID-19 and to identify actions operate below the limits foreseen non-essential. to undertake as to minimize any by Pillar 2 Guidance (P2G), Capital • ECB has decided to postpone by six adverse effects. Conservation Buffer (CCB) and mn e erificain f cmliance • Moreover, banks are called to liquidity Coverage Ratio. with qualitative SREP measures and monitor on a continuous basis their • Extension to publicly guaranteed any TRIM investigations. ri rfile loans the preferential treatment • Bank of Italy on a similar note has foreseen in the Guidance for NPLs postponed part of its regulatory aranee r inre Official deadlines expected in 1H20 (e.g. Export Credit Agencies. ICAAP, ILAAP).

The role of EBA

Since the 12th march 2020, EBA ha 12th march 2020 25th march 2020 31st march 2020 2nd april 2020 22nd april 2020 published recommendations and Actions to mitigate Prudential Recommendations Guidelines on Prudential Guidelines aimed at mitigation the the impact of Framework and on dividends and legislative and non framework on impacts of the COVID-19 pandemic COVID-19 in the other interventions reporting guidelines legislative moratoria market risk and banking sector other measures on the banking sector.

• EBA postpones its Stress Test exercise to 2021 to allow banks to give priority to operational continuity and has asked the cmeen ariie leerae were ile n e imlici eiili eriin frm e reference relain • rie recmmenain n renial aec rearin e claiﬁcain f nn erfrmin lan e ieniﬁcain of forborne exposures and the application of the accounting principle IFRS9 within the COVID-19 context; various activities requiring input from the banks (public consultations, funding plan submission and QIS dec-19) are postponed. • EBA recommends banks regarding: dividends distribution, the acquisition of own shares and the payment of bonus; proposes to postpone the deadlines regarding supervisory reporting (barring exceptions) and the Pillar 3 Publication; consumer protection and on the functioning of payment systems. QIS on June 2020 data are cancelled. • EBA publishes Guidelines, following its statement of 25th March clarifying some key aspects in relation to the use of legislative and non legislative moratoria, that aim to provide further clarity on the treatments of moratoria applied before 30 June 2020 as to contain the COVID-19 pandemic. • EBA provides recommendations on some aspects of the prudential framework in response to the COVID-19 pandemic: market risk, SREP, recovery plan, digital operational resilience and application to the securitisations of the moratoria Guidelines.

21 The Italian NPL market

EBA Guidelines on moratoria (Illustrative non exhaustive)

Scope of application ntonout • The guidelines aim to provide further clarity on the • When the application of a general payment treatments of moratoria applied before 30 June 2020 mrarim mee e reiremen ecifie with the scope to contain the COVID-19 pandemic. in the guidelines, institutions should count the • The selection criteria for application of moratoria days past due based on the revised schedule of should not include the creditworthiness of the payments, resulting from the application of any debtor. Therefore, the application of moratoria moratorium. to debtors included in the watch list or to • i frer clarifie a if e cele f cnerarie alrea caracerie financial payment has been revised due to the application ifficlie l n e e cae of the moratorium, the assessment of unlikeliness • The moratorium changes only the schedule of to pay should be based on the revised schedule. payments and should not affect other conditions of • Institutions should prioritize the assessment of the loan and in particular the interest rate (unless obligors for whom the effects of the COVID-19 such change only serves for compensation to pandemic are most likely to transform into longer- avoid losses). erm financial ifficlie r inlenc • In case of application of moratoria to exposures Forbearance alrea claifie a efal e claificain • The application of a general payment remains as is. mrarim meein e reiremen ecifie in the guidelines) would not in itself lead to a Reporting and disclosure reclaificain ner e efiniin f frearance • In order to monitor the application of the measures • Given that the application of a general moratorium given, the Guidelines recommend that banks should is not a forbearance measure, it should also not collect and share the information on the moratoriums be considered distressed restructuring and the applied to the competent authorities which, in turn, cnierain f iminie financial liain i will provide them for disclosure to EBA. n alicale ar ar • EBA will identify the potential reporting and par. 3d CRR Reg. UE 575/2013). disclosure methods necessary to monitor the • However, where exposures have already been moratoriums in scope and will consequently subject to forbearance measures before the provide detailed requirements. alicain f c mraria i claificain should not be changed.

22 | PwC Regulatory and Legal Framework Updates

Measures taken in response to COVID-19 have a direct impact on the NPL market DTA The current emergency situation • An acceleration of disposal volumes can be expected in the view of will have an impact on the asset ier inw an f e enial caial enefi inrce e quality of the banks, on the NPL “Cura Italia” Decree. mare an n e ri rfile f • As per article 55 of “Cura Italia”, and under certain circumstances, the banks that should be closely disposals of non performing loans within 31st December 2020 can lead to monitored. The granting of moratoria a portion of DTAs being converted into tax credits. and the guarantees given will impact IFRS 9 staging (changes in stage Public Guarantees allocation and increase in provisions), • The extension of the MCC guarantees through the government decree claificain a carefl aemen f “Liquidità” makes possible the restructuring of new distressed exposures, Unlikeliness to Pay) and risk weighting. cerin ere claifie a r T fllwin st January 2020 and to counterparties that have adopted the instruments as per the The measures adopted both at a local bankruptcy law after 31st December 2019. and European level aim to support the • Loans covered by publicly guaranteed loans will receive the preferential mare an rerain new inw treatment foreseen in the Guidance for NPLs guaranteed or insured by of non performing loans as possible, Official r Crei encie a rel an will face a minimm ainin financial iniin cerae eecain fr e fir een ear f e inae cn and clients.

The European Commission adopts Targeted amendments (Illustrative non exhaustive) Banking Package in response to COVID-19 1. IFRS 9 Transitional arrangements • Possibility for banks that hadn’t adopted the transitional arrangements On 28 April 2020 the European to opt-in. Commission adopted a banking • Extension of the transitional period. package aimed at facilitating bank • ificain n e amen calclain a ae accn f e lending to support the economy and impacts of the emergency situation. help mitigate the economic impact of the COVID-19 pandemic. The 2. NPL Framework acae cni in aree ic fi • With regards the rules on the minimum loss coverage for non amendments to banking rules, in order to performing exposures, temporarily extension of the treatment that is currently maximize the ability of banks to lend and applicable to NPEs guaranteed or insured by export credit agencies to NPEs absorb losses related to the COVID-19 covered by state guarantees under the COVID-19 emergency situation. pandemic, and in an interpretative cmmnicain wic cnfirm an 3. Leverage ratio encourages the recent statements • Postponement to 1 January 2023 of the date of application of the buffer n in eiili wiin accnin on the leverage ratio for G-SII banks. an renial rle e cnfirm e • ificain f e calclain f e leerae cefficien in cae f eiili wen i cme lic an proven emergencies with regards exposures towards central banks. private moratoria on loan repayments). 4. Anticipation of some CRR II measures The European Commission will launch • Possibility to do not deduct from CET1 software valued prudently a iale wiin e rean financial according to the EBA RTS. sector in order assess how best • Reduction of the ponderation factor for CQS/ CQP from 75% to 35% practices can be developed to further • ificain f e erimeer an calclain mel f e S support citizens and businesses. rin facr an inrcin f e nfrarcre rin facr

23 The Italian NPL market

Impact of COVID-19 measures on bankruptcy and enforcement proceedings

Decree Law no. 18 of 17/03/2020 (the Ti fir amenmen i ifie mainl the health emergency if the defendant so-called Decreto Cura Italia) and by the fact that the alert obligations - a can demonstrate the existence of a Decree Law no. 23 of 08/04/2020 key element of the "new" insolvency causal link between the latter and (the so-called Decreto Liquidità) has management system - are designed insolvency, with consequences for the set temporary limits to the ordinary to operate in a stable economic ascertainment of the insolvency status performance of bankruptcy and environment, without being able to and the size of the amount of overdue enforcement proceedings, with a play an effective "selective" role under and unpaid debts. (limited) impact on the recovery of exceptional conditions. receivables. Anyway, it is still possible to enforce the Consequently, the rules of the so- debtor's assets individually. Starting with the earlier ones called Legge Fallimentare will still (bankruptcies and insolvency be applicable and, in the meantime, Moreover, in the knowledge that the proceedings), the amendments it is reasonable to expect further extraordinary emergency scenario have been done through an extrinsic amendments to the Codice della Crisi could jeopardize the feasibility of regulation, which is temporary, but d'Impresa e dell' Insolvenza as required arrangement with creditors and which seems to allow for subsequent under EU Directive 1023/2019. restructuring agreements which, regulatory interventions to reform otherwise, could have had favorable the bankruptcy discipline, due to With regards the lack of possibility - de results, it is introduced the chance to the economic consequences of the plano - of appeals for the declaration of postpone by six months - without any pandemic. anrc nil i fllw icial reiew e erm f flfillmen the Legislator's willingness to "protect", assumed in the negotiation procedures As far as this is concerned: on the one hand, entrepreneurs from (if they expire between 23/02/2020 • the postponement of the date of bankruptcy petitions - even if presented and 31/12/2021), as well as (art. 9, adoption of the Codice della Crisi on their own - with consequent paragraph 2) to modify the terms of d'Impresa e dell'Insolvenza to 1 dispersal of productive assets and, flfillmen a maimm f i mn September 2021 (Article 5) on the other hand, creditors as the In the latter case, after hearing the • e riiin nil liquidation of assets would take place opinion of the Commissario Giudiziale, of appeals for the declaration of in an unfavourable market scenario. the Court shall approve the new bankruptcy (Article 10) deadlines. • e nemen f flfilmen In this regard, it seems appropriate to deadlines and the possibility of point out that with regard to bankruptcy Likewise, in the event of an reformulating the proposal with eiin file rir e enr in arrangement with creditors with rights regard to arrangement with creditors force of the Decree, the Courts reere file ancillar cmen and debt restructuring agreements invested of appeals will reasonably at a later date, the automatic stay (Article 9 co 1 and 2). take into account the consequences of referre in aricle arara

24 | PwC Regulatory and Legal Framework Updates

i eene a n ifie Terefre wi ecific reference of the law (30/04/2020) of the real request. to real estate executions, the above estate enforcement proceedings if suspension (during the afore mentioned e rer i e fir me f e The above mentioned intervention says period) did not preclude the hearing foreclosed debtor (therefore no limit nothing with reference to the possibility for the authorization to sell pursuant to in respect to any other foreclosed f a mificain afer e aral ie ricle f e alian Ciil Ce e property or other assets). omologazione) which, therefore, must setting by the Delegato alle Vendite of be considered excluded. new sales experiments, the payment "First home" is that in which the to the creditor of the amount after the individual, who owns it, or his family Finally, with reference to the so-called auction sale of the properties pursuant members usually live in. "sovraindebitamento" proceedings to Article 585 of the Italian Civil Code, (i.e. the over indebtedness negotiated the transfer of the property and, Finally, it would seem appropriate to resolution proceedings), the Decree's therefore, the delay in the "satisfactory" proceed with a combined reading of the silence makes it conceivable that, phase of the procedures. provision last mentioned with Article if the execution of the agreement 41 bis of L 19/12/2019 no. 124 entitled becomes impossible for reasons not In addition, it seems reasonable to "Mortgage loans for the purchase of related to the debtor, the latter, with believe that the measures will not real eae inene a a fir me an the help of the entities appointed slow down the distribution of the subject to enforcement proceedings". for this purpose, may change the sums obtained from the sale of the proposed agreement. properties subject to execution; in this Actually, the above provision allows rear i eem inifican in e er w wn a fir me With reference to enforcement a al e fire cme rer ecre a fir mrae rceein ricle f eilaie frm reii n fficial and subject to real estate enforcement, Decree no. 23 of 8 April 2020 forecasts) the cash in court in the Italian to apply to the Bank or to the SPV should be considered, by which the Courthouse amounts to €11 billion and, (without prejudice to their discretion in suspension of procedural deadlines the distribution of these resources, granting the request) who have initiated provided for on 15 April 2020 by wl rin a inifican w f the enforcement procedure for the Legislative Decree no. 18/2020 was liquidity to the economic system. renegotiation of the loan or a new loan extended to 11 May 2020. to a third party bank (with payment of This is also due to the provisions the remaining debt), and subsequent The provision, however, was limited of Article 83, paragraph 3, letter A, subrogation in the existing mortgage to procedural deadlines and therefore of Legislative Decree no. 18/2020, guarantee. had no effect on the suspension of which does not consider as subject proceedings and the activities carried to suspension periods proceedings in This provision may be applied - until out therein. which the failure to deal with them could the date of 31/12/2021 - in relation cause serious damage to the parties, to properties pledged in the period given that the delayed distribution of eween an e m in a caw cnracin and provided that the debtor has repaid phase such as the current one could be at least 10% of the capital originally considered a suitable circumstance. finance an e al e e n exceed €250,000. re inifican weer i e provisions of Article 54 ter of the Law For an understanding of the operating that converted Legislative Decree procedures, the Interministerial Decree no. 18/2020, which provides the must be awaited which, at the time of suspension for a period of six months editing this report, has not yet been from the date of entry into force issued.

25 The Italian NPL market

Italian NPL Market

Key Message The Italian banking system, in response to market and regulatory pressure, has experienced a iniﬁcan eleerae in e la ﬁe ear where the total stock has fallen by more than half (€135bn in 2019 vs €341bn in 2015).

26 | PwC Italian NPL Market

Chart 14: Gross NPE trend Asset Quality

Chart 14 shows the trend in Italian NPE CAGR 2015 - 2019: -20.6% NPE stock. After peaking at €341bn 341 326 324 14 in 2015, the trend has been constantly 12 7 decreasing, reaching €135bn at 283 264 YE-2019. 237 18 5 NPE CAGR 2008-2015:194 +22.0% 21 127 117 180 13 157 131 4 Gross Bad Loans dropped by €27bn 132 94 135 12 109 vs YE-2018 and by €95bn vs YE-2017. 16 91 4 85 74 Gross Unlikely to Pay showed a slower 79 9 66 57 61 ecline wi n a 33 €79bn at YE-2018. Gross Past Due 42 59 78 107 125 156 184 200 200 165 97 70 remained relatively stable. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Gross Bad Loans (€ bn) Gross UTP (€ bn) Gross Past Due (€ bn)

Srce wC anali n anca alia ance e iiini ﬁnaniarie cniini e ricii el crei er eri e territori", March 2020

Chart 15: Net Bad Loans Trend Chart 15 shows how the volume of net Bad Loans follows the same decreasing trend from 2015 through 2019. The 67.3% 61.0% 62.2% total amount at YE-2019 decreased to 56.5% 54.0% 55.6% 50.3% 48.7% €27bn. The Bad Loans coverage ratio 43.7% 42.9% for the Italian system experienced a 39.7% reverse trend compared to previous 34.0% 47 60 62 80 84 89 87 64 ear an ecreae 39 cmare a 32 24 27 3.5% 3.8% 5.0% 5.4% 5.7% 5.6% 4.3% 1.4% 2.3% 2.8% 2.2% 1.9% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Net Bad Loans (€ bn) Net Bad Loans / Loans to Customers (%) Bad Loans coverage ratio (%)

Source: PwC analysis on ABI Monthly Outlook and Bank of Italy data - March 2020 e an aa mi incle ﬁnancial inermeiarie

27 The Italian NPL market

Chart 16a: Gross Bad Loans ratio by region* (YE-2019) Looking at the composition of gross Bad Loans: > 8% 2.2% 3.8% • In terms of gross Bad Loans 6-8% 3.6% 4.0% ratio the highest percentages 3.5% 3-6% are recorded in Umbria (8.4%), 5.0% 4.0% < 3% Abruzzo-Molise (8.2%), Campania 7.1% (7.4%) and Sardinia (7.3%); overall, 6.4% northern regions tend to show lower 8.4% 8.2% 1.7% gross Bad Loans ratio compared to Source: PwC analysis on Banca central and southern regions; alia ance e iiini 7.4% ﬁnaniarie cniini e ricii el credito per settori e territori», March • Lombardy collects approx. 21.3% 7.3% 6.8% 2020. Note: Bad Loans ratio in the region of total Italian Bad Loans, while it 7.2% f ai i inence Caa shows a relative low Bad Loans ratio Depositi e Prestiti, included in Bank of Italy database; (*) Unique percentage for 6.6% 1) Valle d’Aosta and Piemonte 2) Abruzzo and Molise • As shown in Chart 17, at YE-2019 3) Puglia and Basilicata the “Corporate & SME” sector still represents the greatest share Chart 16b: Breakdown of gross Bad Loans by region* (YE-2019) (75.0%) of Italian gross Bad Loans, followed by the Consumer loans > 10% (17.1%); 1.3% 1.6% 6-10% 21.3% 8.0% • The percentage of Secured Bad 5.5% 2-6% Loans (45%) decreased compared 9.5% 1.8% < 2% to YE-2018 (48%) . Most of Secured 3.3% a an i rereene 8.6% “Corporate & SME” and 22% by 2.2% 2.9% Retail (Chart 18). 11.2%

7.5%

2.6% 5.6% Source: PwC analysis on Banca alia ance e iiini 1.9% ﬁnaniarie cniini e ricii el credito per settori e territori», March 2020. Note: (*) Unique percentage for 5.3% 1) Valle d’Aosta and Piemonte 2) Abruzzo and Molise 3) Puglia and Basilicata

28 | PwC Italian NPL Market

Chart 17: Breakdown of gross Bad Loans by counterparty** (YE‑2019)

rrate amil ine nmer ther

Source: PwC analysis on Banca d'Italia "Banche e istituzioni finanziarie: condizioni e rischiosità del credito per settori e territori", March 2020 Note: (**) “Other” includes PA and financial institutions.

Chart 18: Secured gross Bad Loans trend (% on total Bad Loans)

Counterparty rrate

amil ine

etail

ther

29 The Italian NPL market

Chart 19: Breakdown of gross Bad Loans by economic sector (YE-2019) The breakdown of gross Bad Loans by economic sector (Chart 19) shows that Real Estate and Real Estate and Construction accounts 6% 4% Construction: 34.7% 22% for 34.7% followed by manufacturing 7% products (34.0%) and wholesale and retail trade (14.0%). Construction Professional 14% Real Estate services 13% Manufacturing Industrial products Wholesale Other 34% and retail trade

Srce wC anali n anca alia ance e iiini ﬁnaniarie cniini e ricii el crei er eri e territori», March 2020

Chart 20: Breakdown of gross Bad Loans by ticket size (YE-2019) The breakdown of gross Bad Loans by ticket size (Chart 20) shows that > €1mln: 54% large-size exposures (over €1mln) 10% represent 54% of total GBV, whereas 27% mid-size exposures (from €75k to 17% €1mln) and small-size exposures (below Less than 75k €75k) represent 35.9% and 9.9% of the € 75k to 250k total respectively € 250k to 1mln € 1mln to 5mln 19% 27% More than € 5mln

Focus: UtP Srce wC anali n anca alia ance e iiini ﬁnaniarie cniini e rischiosità del credito per settori e territori», March 2020 The gross UtP stock composition at YE-2019 illustrates the following:

• Piemonte, Valle d’Aosta, Friuli Venezia Giulia and Lazio are the regions with the lowest incidence of UtP (UtP ratio lower than 3%), whereas Umbria, Marche, Campania and Sicily are the region with the highest levels of UtP ratio (above 5.0%);

• In terms of volumes, the highest UtP concentration is in Lombardy and Lazio (respectively, 24.4% and 15.9% of total volumes).

30 | PwC Italian NPL Market

Chart 21a: UtP ratio by region** (YE‑2019)

3.3% 2.% 3.5% 3.8% 2.4% 4.8% 4.% 5.2% 4.5% 5.2% 4.4% 2.1%

5.2%

3.5% 3.5%

3.5% Source: PwC analysis on Banca d’Italia «Banche e istituzioni finanziarie: condizioni e rischiosità del credito per settori e territori», March 2020. Note: (*) UtP ratio in the region of Lazio is influenced by Cassa Depositi e Prestiti, included in Bank of Italy database; (**) Unique percentage for 5.1% 1) Valle d’Aosta and Piemonte 2) Abruzzo and Molise 3) Puglia and Basilicata

Chart 21b: Breakdown of UtP by region** (YE‑2019)

2.3% 1.3% 24.4% 8.8% 4.4% 10.7% 2.4% 2.8% 7.0% 1.% 1.8% 15.9%

.1%

1.4% 3.4%

1.1%

Source: PwC analysis on Banca d’Italia «Banche e istituzioni finanziarie: condizioni e rischiosità del credito per settori e territori», March 2020. Note: (**) Unique percentage for 4.8% 1) Valle d’Aosta and Piemonte 2) Abruzzo and Molise 3) Puglia and Basilicata

31 The Italian NPL market

Key Message

During 2019 Italian companies’ closures continued their declining trend started in 2018 but with lower decrease compared to last years. Voluntary Liquidations and Voluntary Arrangements are the only exceptions to this trend due to greater recourse to these legal procedures.

Chart 22: Business closures by procedure (% YoY) In 2019, the decrease of Italian companies’ bankruptcies and other insolvency proceedings continued: 5.0% as shown in Chart 22, at the end 0.7% of 2019 there was a 1.0% drop in -1.0% -0.5% -2.4% -1.5% bankruptcies and a 1.5% drop in other -6.8% -6.3% insolvency proceedings. In this context, -10.9% it is relevant to outline that Voluntary -16.1% -15.5% Arrangements have increased (+5.0%) at YE-2019, after two years of sharp decline. -28.8%

Bankruptcies Voluntary Other Procedures o/w Voluntary An increase has been reported also for liquidations (non voluntary) arrangements* Voluntary Liquidations (+0.7%). YE-2017 YE-2018 YE-2019

Chart 23 shows the distribution Source: PwC analysis on “Osservatorio su fallimenti, procedure e chiusure di imprese”, Cerved, March 2020 Note: “Other insolvency proceedings” = “Procedure concorsuali non fallimentari”; “Voluntary arrangements” = of business closures across Italian “Concordati preventivi”. regions. The increase of Voluntary liquidations (see also Chart 22), is more relevant in northern Italy, while in southern regions there is a low decrease on average.

Regarding Bankruptcies and other insolvency proceedings, the situation is uniformly distributed among all the Italian regions.

Chart 23: Trend of business closures by Italian regions

Bankruptcies Voluntary liquidations Other Procedures (non voluntary)

Increase

Low Decrease (between 0% and 10%) High Decrease (lower than -10%)

Source: PwC analysis on “Osservatorio su fallimenti, procedure e chiusure di imprese”, Cerved, March 2020

32 | PwC Chart 24: Bankruptcies by economic sector (% YoY) Chart 24 shows that the Industrial and Construction sector experienced 0.7% 0.8% a slight increase in Bankruptcies (+0.8% and +0.7% YoY respectively), after two years of declines. -3.0% -6.2% -6.0% -7.1% -7.9% On the contrary, the Service sector reiere a decrease YoY, in line with previous years’ results. -16.4% -18.6% Construction Industrial Services

YE-2017 YE-2018 YE-2019

Source: PwC analysis on “Osservatorio su fallimenti, procedure e chiusure di imprese”, Cerved, March 2020

Chart 25: Voluntary liquidations by economic sector (% YoY) Chart 25 shows that Voluntary Liquidations in the Construction 5.6% sector reduced by 1.5% YoY at YE- 4.4% 2019 (vs -1.9% at YE-2018). 3.2 2.6%

In Industrial and Services sectors the 0.4% 0.5% increase of Voluntary Liquidations in -1.5% 2019 (+4.4% and +0.5% respectively) -1.9% i lwer an e rei ear an reeciel -5.1% Construction Industrial Services

Voluntary arrangement Forced liquidations (%) Other procedures

Chart 26: Other insolvency proceedings by economic sector (% YoY) Chart 26 shows that the trend of other insolvency proceedings has reversed 4.9% in the Construction and Industrial 2.1% 3.6% sectors, with an increase at YE-2019 (+4.9% and +2.1% vs -23.9% and -3.7% -13.2% at YE-2018 respectively).

-12.2% -13.2% Only the Services sector continues its -17.5% -19.7% downward trend even if at a slower -23.9% pace (-3.7% at YE-2019 vs -19.7% at YE-2018). Construction Industrial Services YE-2017 YE-2018 YE-2019

33 The Italian NPL market

Focus on GACS

Key Message Stricter regulations related to the achievement of performance targets protecting the noteholder along with increasing costs to access the guarantee, reduced the appeal of GACS deals for sellers. The number of GACS transactions have more than halved in 2019 compared to 2018, while volumes (in terms of GBV) have shrunk to a third. Moreover, the restrictions imposed by the lockdown to collection activities may lead to performance target trigger events. To offset the impact the Government recently discussed the possibility of a performance targets suspension until 31st of July.

34 | PwC Focus on GACS

The GACS or “Garanzia sulla The most relevant updates introduced cartolarizzazione delle sofferenze” by the new GACS are: is a State guarantee mechanism a a lae a inifican rle in 1. Rating issuance: Senior notes must receive a Non-Performing Exposure disposals rating higher or equal to BBB from an independent during last years. GACS means the rating agency and no longer at least equal to unconditional, irrevocable and payable investment grade level (BBB-). n fir eman aranee ie the Ministry of Economy and Finance 2. Performance objectives related to servicer (MEF) on senior tranches issued replacement: servicer substitution is envisaged under an NPLs credits securitization without any penalties if the ratio between net transaction. Through this mechanism, cumulative recoveries and net recoveries expected the subscribers of the senior notes, in servicer’s business plan is less than 100% for within 120 days from the occurrence two consecutive interest payment dates. of a trigger event (i.e. non-payment of interest or repayment of principal by 3. Performance objectives related to servicer fee: the SPV) will obtain from the MEF the if the ratio between net cumulative recoveries and payment of the due amount. The GACS net recoveries expected in servicer’s business plan ceme wa firl inrce e is less than 90%, a portion not less than 20%, alian ernmen in erar of the total due fee shall be deferred to the total and extended several times, until its reimbursement of senior note or to the date when expiration in March 2019. the ratio returns greater than 100%.

Given the success reached in allowing 4. Performance objectives related to interest the development of a market for banks’ payment on mezzanine notes: if the ratio non-performing loans (and consequently between net cumulative recoveries and net their deleveraging), the Decree Law recoveries estimated in portfolio business plan is 25 March 2019 n. 22 (the so-called less than 90% at the mezzanine interest payment Brexit Decree) renewed, with some date, the related interest is deferred since the full miﬁcain e CS fr mn reimbursement of senior notes capital or since the (extendable for a further 12 months). ratio is greater than 100%.

Chart 27: Key features of NPE portfolios subject to securitization with GACS

GBV by issuing date (€bn)* GBV by type of exposure Nominal value of issued notes 7% 17.4 71.8 12% Secured 45.8 Unsecured 42% Senior €72bn €17bn Mezzanine 58% 8.0 Junior 0.5 81% 2016 2017 2018 2019 Total

Note: (*) Issue date is different from the closing date

35 The Italian NPL market

As represented in chart 28, data approximately € 72bn, 58% of which Following the general pattern, GACS from Moody’s and Debtwire show secured. Nominal value of issued transactions slowed down last year: that actual cumulative net collections notes is above € 17bn, of which 81% cle eal in fr an erall were below business plan forecasts are represented by senior notes, 12% € 17bn GBV. The most relevant for 8 GACS transactions at YE-2019. by mezzanine notes and 7% by junior transactions in 2019 were the Banco Given (i) historical underperformance notes. In terms of GBV 18 deals out of BPM Project ACE and UniCredit of several GACS transactions, (ii) 25 had a deal size greater than € 1bn, rec rima n an n stricter clauses linked to performance and 8 of them had a deals size greater respectively). targets imposed by the new GACS than € 5bn. Decree and (iii) impacts of lockdown No closed deals in 2020 so far, but measures in collection activities, the Almost all Italian top banks used both Popolare di Sondrio and BPER Government recently allowed for the GACS to implement their deleveraging have NPL securitizations in pipeline, possibility of a performance targets strategies, except for Intesa Sanpaolo for which they will likely ask for the suspension until 31st of July. Waiting and Cariparma. Deals in the Italian GACS guarantee. for the normalization of collection NPL market reached the peak in 2018, activities, this “grace period” could wen n f n al CS i n nl cnfine help servicers to overcome the ial enefie frm e lic banks but is also gaining interest emergency. guarantee. MPS, thanks to the GACS, frm leain firm ilea rer closed the jumbo sale of € 24bn (Siena published in April 2020 shows more rm ae CS NPL 2018), which represents the an alf f leain firm e CS transactions have been closed biggest deal in the Italian market so far scheme or are considering using it in accounting for a total GBV of in terms of GBV. the future.

Chart 28: Cumulative net collection actual data compared with business plan forecasts

Cumulative Collection Ratio Net

300% 294.0

250%

200% 189.1

150% 145.0 143.0 120.0 126.1 127.0 114.0 111.4 91.9 99.5 88.6 97.0 92.0 102.2 95.9 100% 73.3 69.0 50%

0% Ibla S.r.l. (1) Ibla S.r.l. Juno 1 S.r.l. (2) Juno 1 S.r.l. 2Worlds S.r.l. (2) S.r.l. 2Worlds Maggese S.r.l. (1) Maggese S.r.l. Aqui SPV S.r.l. (1) Aqui SPV S.r.l. Maior SPV S.r.l. (2) Maior SPV S.r.l. Riviera NPL S.r.l. (1) Riviera NPL S.r.l. Red Sea SPV S.r.l. (1) Red Sea SPV S.r.l. 4Mori Sardegna S.r.l. (2) S.r.l. 4Mori Sardegna Siena NPL 2018 S.r.l. (2) Siena NPL 2018 S.r.l. POP NPLs 2018 S.r.l. (1) POP NPLs 2018 S.r.l. BCC NPLs 2018 S.r.l. (1) BCC NPLs 2018 S.r.l. Elrond NPL 2017 S.r.l. (1) NPL 2017 S.r.l. Elrond Aragorn NPL 2018 S.r.l. (2) Aragorn NPL 2018 S.r.l. Brisca Securitisation S.r.l. (1) Brisca Securitisation S.r.l. FINO 1 Securitisation S.r.l. (1) FINO 1 Securitisation S.r.l. Popolare Bari NPLs 2016 S.r.l. (1) Bari NPLs 2016 S.r.l. Popolare (1) Bari NPLs 2017 S.r.l. Popolare

Source: (1) PwC analysis on Moody’s report "Sector update – H2 2019: Collections slow with stress expected from coronavirus outbreak"; (2) PwC analysis on Debtwire’s report 28 May 2019

36 | PwC Focus on GACS

Table 7: List of NPE securitisations with GACS since 2016

Rated Notes (at nominal value) Main banks SPV Servicer Issuing GBV (€/bn) % Senior Mezzanine Junior Senior Mezzanine involved date Secured (% GBV) (% GBV) (% GBV) Yield (%)* Yield (%)* Banca Popolare Popolare Bari Prelios Aug-16 0.5 63% 26% 3% 2% 0.3% 5.8% di Bari NPLs 2016 S.r.l. Carige Brisca Prelios Jul-17 0.9 77% 28% 3% 1% 0.5% 5.8% Securitisation S.r.l. Creval Elrond NPL 2017 Cerved Jul-17 1.4 74% 33% 3% 1% 0.3% 5.8% S.r.l. UniCredit FINO 1 doValue Nov-17 5.4 52% 12% 1% 1% 1.3% 4.9% Securitisation S.r.l. Banca Popolare Popolare Bari Prelios Dec-17 0.3 56% 25% 3% 4% 0.1% 5.8% di Bari NPLs 2017 S.r.l. MPS Siena NPL 2018 Cerved, Jan-18 24.6 49% 13% 3% 2% 1.3% 8.0% S.r.l. Prelios, doValue, Credito Fondiario Creval Aragorn NPL Cerved, Jun-18 1.7 75% 30% 4% 1% 0.3% 6.8% 2018 S.r.l. Credito Fondiario Banco BPM Red Sea SPV Prelios Jul-18 5.1 77% 32% 3% 1% 0.4% 5.8% S.r.l. BPER 4Mori Sardegna Prelios Jun-18 1.0 53% 22% 1% 1% 0.7% 7.8% S.r.l. Banco Desio e 2Worlds S.r.l. Cerved Jun-18 1.0 72% 29% 3% 1% 0.2% 7.8% Brianza ICCREA BCC NPLs 2018 Prelios Jul-18 1.0 72% 27% 3% 1% 0.2% 5.8% S.r.l. Cassa di Maggese S.r.l. Prelios Jul-18 0.7 63% 24% 3% 2% 0.3% 5.8% Risparmio di Asti BNL (BNP Juno 1 S.r.l. Prelios Jul-18 1.0 30% 14% 3% 0% 0.4% 7.8% Paribas) UBI Maior SPV S.r.l. Prelios Aug-18 2.7 47% 23% 2% 1% 0.3% 5.8% Banca Popolare Ibla S.r.l. doValue Sep-18 0.3 82% 24% 3% 1% 0.4% 7.8% di Ragusa BPER Aqui SPV S.r.l. Prelios Nov-18 2.1 60% 26% 3% 1% 0.3% 6.8% Banca Popolare POP NPLs 2018 Cerved Nov-18 1.6 66% 27% 3% 1% 0.1% 5.8% di Bari S.r.l. Carige Riviera NPL S.r.l. Credito Dec-18 1.0 39% 18% 3% 1% 0.5% 6.8% Fondiario, doValue ICCREA BCC NPLs 2018- doValue Dec-18 2.0 58% 24% 3% 1% 0.1% 5.8% 2 S.r.l. Banco BPM Leviticus SPV Credito Feb-19 7.4 67% 19% 3% 3% 0.4% 7.8% S.r.l. Fondiario BNL (BNP Juno 2 SPV S.r.l. Prelios Feb-19 1.0 61% 21% 5% 1% 0.4% 7.8% Paribas) UniCredit Prisma SPV S.r.l. doValue Oct-19 6.1 64% 20% 1% 0% 1.3% 8.8% UBI Iseo SPV S.r.l. Credito Dec-19 0.9 92% 39% 3% 2% 0.3% 5.8% Fondiario, doValue ICCREA BCC NPLs 2019 doValue Dec-19 1.3 66% 27% 4% 1% 0.1% 6.3% S.r.l. Banca Popolare POP NPLs 2019 Prelios, Fire Dec-19 0.8 47% 21% 3% 1% 0.1% 9.3% di Bari S.r.l. Total 71.8 Weighted average 58.3% 19.5% 2.9% 1.6% 0.8% 7.2%

Source: PwC analysis on Rating Agencies’ reports Note: (*) Annual yield of notes has been calculated as interbank rate as of March 2020 plus applicable spread and considering floors when applicable to variable rates

37 The Italian NPL market

Italian Banks Overview

38 | PwC Italian Banks Overview

Chart 29: Top 10 Italian banks – NPE Peer Analysis as Chart 29 focuses on the gross NPE of YE-2019 (Bubble size: gross NPE) ratio and the NPE coverage ratio for the Top 10 Italian banks, which show respectively an average of 8.7% and Gross NPE Ratio (%) 50.8%. The differences between 70% banks are clear: on one side Iccrea 65% UCG shows the highest gross NPE ratio with 14.1% while, on the other side, 60% Credem stands at the lower extreme ISP 55% Credem of 3.8%. Considering the NPE Average = 50.8% BPER 50% Cariparma BNL coverage ratio, UniCredit shows the MPS Iccrea ie ale an e 45% Banco BPM lowest (39.0%). However, coverage NPE Coverage Ratio (%) ratios are not perfectly comparable, 40% UBI a e are inence eeral 35% factors that are unique in every bank, Average = 8.7% such as write-off policies, weight of 30% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% secured component and portfolio vintage (time since default date).