The Italian NPL Market

The Italian NPL market The NPL volcano is ready to erupt

June 2016

Foreword Contents Volumes of transactions doubled in 2015 compared to 2014, 1. Macroeconomic scenario 4 with the amount of disposed loans reaching €19 billion at the end of last year. Q1 2016 began with €5 billion new deals in the market, both in consumer, secured and secured leasing 2. Italian real estate market 6 areas. The Government has put in place various reforms to give a 3. Legal framework 8 clearer and leaner context for NPL market players: acting on improving procedures and shortening foreclosure timelines via legal and regulatory measures; facilitating NPL portfolio 4. Italian banking system dynamics 12 funding (GACS) and improving the tax regime. In the meantime the investor base is confirming its interest 5. Italian banks overview 14 and commitment to the Italian market, not only through portfolio investments but also via more complex structured 6. The NPL servicing market 18 deals involving platforms and financial institutions. In addition, there is the new role of the recently formed Atlante fund: will it be an accelerator of deal flow or will its 7. Market recent activity and outlook 22 impact be marginal given its limited capitalisation? Will it be counterproductive by improving the situation of a few selected banks but at the cost of increasing, directly or indirectly, the NPE exposures of healthier banking institutions and Appendix 24 increasing interlinkage? With gross NPE stock in excess of €340 billion and pressures on banks to reduce these exposures, Italy remains one of the largest global markets for Non-Performing Assets. There is greater government and regulatory support for, and commitment to, the sale and resolution of NPL credits versus prior market cycles to accelerate bank sector rehabilitation and improvement to the real economy. In addition, banking sector wide pressures imply a more comprehensive NPL sales cycle than prior Italian NPL market cycles. Is the NPL volcano ready to erupt?

Fedele Pascuzzi [email protected]

Patrizia Lando [email protected]

Lucia De Vecchi [email protected] Key message: As demonstrated by the main macroeconomic drivers, the Italian economy has taken a significant step towards recovery during 2015 and it is expected to continue to improve over the next two years. This is primarily driven by improvement in the European Real Estate market, lower interest rates, a stronger job market, higher GDP growth and expected benefits of structural and 01 political reforms.

Macroeconomic scenario

4 The Italian NPL market | The NPL volcano is ready to erupt Forecasts of the major economic- Chart 1: Main macroeconomic drivers in Italy financial institutions show that the Italian economy is recovering. This 14% domestic recovery will largely offset the 12% effects of the emerging markets’ 10% slowdown on the Italian economy. 8% After a prolonged negative 6% macroeconomic trend, GDP growth 4% turned positive in 2015. This trend is 2% forecast to continue and accelerate throughout 2016 and 2017. With a 0% growth rate of 1.4% projected for 2017, -2% Italian GDP growth will converge with -4% the European average (Chart 1 and 2). GDP (%) Inﬂation (%) Unemployment Public deﬁcit (% Balance of rate (%) GDP) payments (% GDP) The public deficit is expected to continue its downward trend as a result of higher 2014 2015 2016 2017 tax collection and a lower interest Source: PwC analysis on European Economic Forecast 2015 payments on public debt.

The Italian government, through PM Chart 2: European GDP vs Italian GDP Matteo Renzi, introduced the “Jobs Act” in 2014. The Act aims to improve 2.0% flexibility in the job market providing an 1.6% 1.5% 1.5% 1.5% increase in new permanent contracts 1.5% and services. A reduction in unemployment rate from 11.9% in 2015 1.4% 0.9% 1.3% to 10.5% in 2017 is anticipated.(1) 1.0% 1.2%

Investments in Commercial Real Estate in Europe increased by 18.0% during 0.5% 0.7% 2014, (total € 253 billion), driven by lower lending rates and economic 0.0% recovery. While the UK remains the 2014 2015 2016 2017 2018 most significant share of investment activity at 34%, Italy continues to -0.5% account for a very small share, at only -0.4% 3.2% (€ 8.2 billion) of the total amount Uem Italia invested in 2015 (Chart 3). This share Source: PwC analysis on Prometeia forecast December 2015 and volume of inward property investment versus that of the U.K., Chart 3: Real estate investment market in Europe Germany and France is lower than would be expected given the relative sizes of the economies.

As Italy appears poised for a stronger recovery and given the late property cycle status and advanced bank sector recovery of the other markets – this could indicate more significant flows into Italian property (including via NPL investment). However, foreign investment and market activity is concentrated in the leading Italian sub-markets and prime locations.

Source: PwC analysis on BNP Paribas Real Estate Report *Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia

(1) PwC analysis on Prometeia forecast

PwC 5 Key message: After a positive performance during 2014, the real estate market continued its momentum with a 4.7% increase in NTN(2) in 2015 from 2014. Commercial and residential real estate showed an increase in volumes invested, albeit from a low level of activity. This trend is more robust in the 02 main city markets: Rome and Milan. Italian real estate market

NTN Investments in CRE The number of standardized real estate units sold (“NTN”) In 2015, Real estate investment volumes reached € 8.2 billion, reached 963,902 in 2015 (Chart 4), an increase of 4.7% from an increase of 55% from 2014. Foreign capital remains the 2014. The Residential sector showed the largest increase from largest portion of the transactions volume of Italian 2014, +6.5%, reaching 444,636 NTN. As shown in Chart 4 the investments at 74% (€ 6.1 billion), up € 2.1 billion from 2014. increase in residential NTN started in 2014 and is continuing The Office market segment kept its upward trend during 2015, its positive trend. accounting for 37% of total investments (€ 3.0 billion). The Retail sector registered a decrease in volumes from 2014 level Chart 5 demonstrates that the North of Italy (52% share ) is (-47%) due to lack of product supply, stabilizing at € 1.4 billion the largest and strongest regional sub-market. In addition, of in 2015. The Industrial and Logistics segment represented the the residential real estate units sold, the biggest increase from least significant market sector by volume (€ 305 million) 2014 was also in northern Italy (+8.0%). (Chart 6). The hotel segment is experiencing an increasing level of interest from international investors. The quality of supply is the main limit to a strong market recovery.

(2) NTN is the number of standardized real estate units sold, taking into account the share of the property transferred.

6 The Italian NPL market | The NPL volcano is ready to erupt Chart 4: Trend NTN residential real estate (2004-2015) Chart 5: Residential NTN by geographical areas 2015

South 27%

North 52%

Centre 21%

Source: PwC analysis on OMI quarterly note Source: PwC analysis on OMI quarterly note

Chart 6: 2015 Investments in CRE Italian market by sector

Total capital 82 bn

oreign ﬁ 61 bn

Domestic 18 bn

ther (3) 02 bn

Source: PwC analysis on BNP Paribas Real Estate Report *Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia

Table 1: 2014-2015 Italian NTN comparison by sector

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Tot 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Tot 2015

Residential 98,446 107,647 94,888 116,543 417,524 95,455 116,523 105,105 127,553 444,636

Office 2,134 2,182 1,897 2,805 9,018 1,997 2,101 1,913 2,831 8,842

Retail 6,242 6,092 5,428 7,991 25,753 5,918 6,725 5,826 7,765 26,234

Industrial 2,131 2,444 2,015 2,992 9,582 1,979 2,250 2,059 2,954 9,242

Appurtenances(4) 77,456 84,117 73,543 95,502 330,618 74,621 89,238 80,164 100,825 344,848

Others 29,348 31,772 29,236 37,997 128,353 28,411 33,322 30,179 38,188 130,100

Total 215,757 234,254 207,007 263,830 920,848 208,381 250,159 225,246 280,116 963,902

Source: PwC analysis on OMI quarterly note

(3) The sector “Other” includes hospitals, clinics, barracks, telephone exchanges and fire stations (4) Appurtenances comprehend properties such as basements, garages or parking spots.

PwC 7 Key message: Over the last year the Government has implemented several measures aimed at acting on improving procedures and shortening foreclosure timelines via legal and regulatory measures; facilitating NPL portfolio funding 03 (GACS) and improving the tax regime. Legal framework Foreclosure and insolvency law reforms

Guarantee Scheme (GACS) – A government sponsored GACS is a provision for a government guarantee on senior solution to facilitate the financing of NPL purchases. notes issued by an Italian SPV. The notes are backed by NPLs assets that are serviced by external servicers, which are As per the recent Law n. 49/2016, the new Guarantee Scheme independent from the originating bank. for Securitisation of NPLs (Garanzia Cartolarizzazione Sofferenze or “GACS”) is aimed at increasing liquidity in the The intervention of the Italian Government is limited to the market by facilitating leverage on portfolio sales. This tool is coverage of the interest and capital payment obligation on the part of a wider set of initiatives and reforms the Government senior tranches of notes. The guarantee can be called on the is continuing to implement. amount outstanding on the senior notes at their legal final maturity date. Payment will be made between 4 and 9 months from the time the representative of noteholders issues a request for payment.

8 The Italian NPL market | The NPL volcano is ready to erupt A set of criteria governs the eligibility Reform to the legal and 99 A new security interest over for the senior notes to receive the insolvency process for movable assets (“pegno mobiliare guarantee. Among these: resolution of NPLs non possessorio”) similar to the The recent Law n. 132/2015 has “floating charge”. –– The senior notes need to be rated addressed many legal issues related to investment grade and the rating credit recovery, legal and technical 99 The possibility for banks and is not revocable. solutions, but in particular: other authorized financial institutions to agree to the –– The bank has to sell at least 51% 99 Extended the use and filing of transfer of title over defined Real of the junior tranche. digital documentation to reduce Estate asset(s) in case of default administrative burdens, (“patto marciano”). –– It must obtain deconsolidation improving the timing and and de-recognition of the assets simplifying recovery procedures. 99 The digital registry of foreclosure sold. and insolvency proceedings. 99 Modified the auction process by –– The bank cannot be affiliated allowing the possibility to offer a 99 The provisional execution of an with the servicer. discounted auction price (up to injunction order for a claim not 25% discount) from the initial challenged by the borrower and –– The waterfall allows for the price set by the judge. no opposition to enforcement repayment of the principal on the procedures allowed if the asset senior to be subordinated only to 99 Introduced the pre-bankruptcy disposal process has already been the payment of interest on the composition plan allowing the started. mezzanine (if issued), but not the possibility of competitive junior notes. auctions and permitting the 99 Some amendments to bankruptcy reduction in the number of law allowing creditors’ meetings –– The premium for the guarantee is financial creditors representing and hearings to be held using a senior cost in the waterfall and, up to 25% of the total exposure. electronic tools. to assure the aid-free nature of the scheme, is at a market-rate: Law n. 49/2016, provides for the Most players believe the measures put in based on the average price of a application of a minimal fixed (€200) place are valid and beneficial. However, basket of single name CDS register tax for assets bought in the it will take some time for the full effect covering investment grade rated framework of a foreclosure or of such measures to be observed and to Italian companies, for the same insolvency procedure (against 9% of be factored into the valuation model of duration of the notes. sale price as was previously applied). the investors and finally, to translate into higher selling prices. Law Decree n. 59/2016 provides for measures on foreclosure, insolvency proceedings and guarantees aimed at reducing the length of judicial procedures and simplifying the auction process. Among these:

Chart 7: Recent legal reforms

August 2015 May 2016 Law Law Decree 132/2015 59/2016

April 2016 Law 49/2016

PwC 9 Legal framework Regulatory reforms

Key message: Starting from January 2015, the Government implemented a set of legal and regulatory reforms of the banking sector aimed at making the system more efficient and facilitating the consolidation process.

Reforms of Cooperative banks Art. 106 Single Register The largest part of the collection In January 2015 the Italian Government Financial Intermediary agencies are aggregated under Unirec, a started the implementation of several The Decree n. 53/2015 concludes the private association, which performs a reforms focused on the cooperative reform of the non-banking financial supervision activity on the associated banks segment (“Banche Popolari”) intermediaries which began in 2010. agencies (i.e. verification of the aimed at making the banking system The reform was designed to consolidate existence of shareholders and managers more efficient and facilitating the all non-banking financial intermediaries integrity requirements, compliance with consolidation process. that provide financing of any form to the code of conduct, etc.). public, to converge their regulation In March 2015, the Government under Article 106 TUB and ensure a Article 106 TUB intermediaries can approved Law n. 33/2015 in urgent supervisory regime by the Bank of Italy exercise financing activities as well as measures for banking system and (Single Register Financial collection of disposed receivables and investments, which transformed the 10 Intermediary). payment services relating to the largest cooperative banks into a joint securitization, while Article 115 TULPS stock company. In order to be eligible under Article 106 intermediaries can only conduct credit of the Banking Act, all the financial recovery. In February 2016, the Government intermediaries interested had to submit approved the reform of the smaller a request for approval of such Securitisation structures often provide cooperative banks (so called “BCC”), designation to the Bank of Italy. The 106 for delegation of credit recovery with a net equity lower than €200 eligibility requirements are pervasive activities from 106 financial million. and similar to the ones needed to obtain intermediaries to 115 entities. However, This BCC reform foresees the set up of a a banking license in terms of the 106 servicer keeps full responsibility parent company with a minimum equity governance, prudential requirements, for any activity outsourced to Article of €1 billion, with the majority of equity control systems, and financial reporting. 115 servicers. owned by the cooperative banks. The banks will either have to adhere to or be The NPLs servicing market includes transformed into joint stock companies. financial intermediaries under Article The parent company will have a 106 (and thus supervised by the Bank of supervision and coordination role over Italy). It also includes the collection the BCC, thus granting more stability and agencies regulated under Article 115 of oversight to the system. This should the Public Security Act, which are not strengthen the Italian cooperative supervised by Bank of Italy but simply banking system and improve their capital need to obtain a license from the Central market funding and governance profile. Police Station with lower level of supervision and qualifying requirements.

10 The Italian NPL market | The NPL volcano is ready to erupt PwC 11 Key message: The combination of regulatory changes at European and Italian level is signaling a requirement for a deep restructuring of the Italian banking sector. However, real implementation and more than surface level change is necessary to reach the more efficient and profitable banking sector that is required to deliver sector stability and meaningful credit growth to the real 04 economy.

Italian banking system dynamics

12 The Italian NPL market | The NPL volcano is ready to erupt The Italian banking system is going After the merger the new entity will Atlante is a fund formed for the purpose through a deep reorganization as a be the third largest bank in the of purchasing shares in banks which result of several factors originating from Italian market. As part of the plan remain unsold to the market, both European regulatory changes, local Banco Popolare will strengthen its purchasing NPL portfolios or specific events and consumer and equity with a €1 billion capital subordinated notes issued by NPL technological changes impacting the increase and will implement over securitisation. The fund has €4.25 broader global banking sector. the next 3-4 years a resolution plan billion of equity contributed by 67 for addressing its NPL exposures. institutions, with no investor holding Since the implementation of the Single more than a 20% stake. It has a 5 year Supervisory Mechanism (“SSM”) some • Banca Carige’s new board rejected term with the possibility of extension to Italian banks have been under pressure an offer from Apollo fund for the 8 years. Its return objective is from the ECB for strengthening their acquisition of the entire NPL approximately 6%. equity base and reducing NPL portfolio at 17.6% of GBV and a exposures. This, combined with the share capital injection of This scheme, which gained the blessing sectorial and business model issues that €600million to provide liquidity to of ECB, is a tool to provide short term all banks in all national markets are the bank. However, the Apollo offer moderate cost capital and support the facing today (technology disruption, and structure itself could be a sale of NPL portfolios at higher prices, changing consumer preferences, the template for other transactions as a helping stabilizing the system. Its return banking business model), represents an means to facilitate larger scale bank objective enables it to acquire NPLs at a even more serious challenge for Italian resolution and foreign capital higher price than other market banks, which rely heavily on traditional investment. participants, enabling banks to reduce retail business, already overburdened by their immediate loss on sale. high fixed costs (e.g. branches, • MPS, in combination with its Expectations are for an increase in sale personnel, etc.), significant cost income ongoing NPL deleveraging activity, price of 4% of GBV in comparison to a ratio as well as a shrinking interest is considering possible strategic market sale to traditional NPL investors. margin. options to create value from its NPL Combined with the GACS it could assist servicing platform. The rationale in the resolution of a significant amount In this framework, the availability of would be to form a partnership with of NPLs. significant amounts of liquidity from a highly specialized player which international financial players could generate an upfront economic The limit to the effectiveness of Atlante represents a potential opportunity for and financial benefit, combined to make a material impact on the NPLs addressing some of the issues of the with a long term value creation disposals will largely be its size (equity Italian banking system. In particular linked to the enhancement of the resource). Its return objective is lower sourcing equity capital and imposing credit collection performances. than the return demanded by the more transparency and market majority of existing international discipline. • Following its recent failure to gain investors, so it is likely to be capitalized admission to the Italian Stock only by existing Italian market Among the recent events: Exchange, Quaestio Capital participants. Management has underwritten €1.5 • The Government rescued four local billion of share capital via the Given its size, however, we do not troubled banks (Banca Marche, Atlante Fund which now holds believe that that the fund will Cariferrara, Banca Etruria and 99.33% of Banca Popolare di substantially limit market opportunities Carichieti) by transferring their Vicenza’s capital. for distress investors at market returns. €8.5 billion of NPE to a single vehicle (called REV), and placing • Like Banca Popolare di Vicenza, One potential concern expressed by them on the market for sale. The Veneto Banca is experiencing some market analysts is that it may sales process for these new banks is similar challenges in weaken those institutions investing in ongoing and both local banks and recapitalization and rehabilitation the Atlante fund, who in turn are international investors have due to severe losses, largely as a increasing their interlinkage with expressed their interest. The NPEs result of the provisioning on their weaker institutions and their indirect within REV will also be disposed NPL exposures. The ECB has given NPE exposures. This raises the over the near term. The value at the Bank until 30th June to probability of earning a lower return on which such loans were transferred complete its capital increase. Veneto the equity invested versus other market from the originating banks was Banca is also considering merger, investment opportunities, including equal to 17.6% of GBV (25% on not only the IPO. In that context, new lending. secured and 8% on unsecured). one possible solution for the bank may be Atlante. • After some months of discussions, the merger plan between two of the big cooperative banks, Banco Popolare and Banca Popolare di Milano has been approved by the two boards and the deal is expected to be completed before year end.

PwC 13 Key message: Gross non performing exposures in Italy have shown continuous growth over the period 2008-2015, with volumes at the end of 2015 equal to four times those of 2008. Therefore, since the onset of the credit crisis, while other national markets have largely resolved their NPL problems and rehabilitated their banking sectors, the NPL problem has continued to 05 deteriorate in Italy. Italian banks overview

In December 2015, gross Non Performing Exposures (NPE) Chart 8: Breakdown of gross NPL as of YE-2015 reached €341 billion, four times higher than 2008 (CAGR 2008 – YE-2015 +22.2%) but substantially stable versus H1-2015. About 58.0% of the total amount of NPE, equal to €200 billion, is related to NPLs. Secured 47% Compared to 2008, the ratio of NPE to gross loans is five times 53% Unsecured higher (4.9% in 2008, 22.0% in 2015). However, in YE-2015 the ratio demonstrated a growth rate lower than the year before (3.2% in 2014, 1.0% in 2015).

Similarly, net NPLs showed a considerable increase in the 2% period 2008 – 2015, going from €24 billion to more than €89 billion, an average CAGR of 20.6%. 19% Corporate Retail Looking at the stock composition: Other –– Approximately half of total gross NPLs is represented by loans collateralised by real estate. 79%

–– The amount of net NPL is largely covered by real estate collateral. Source: PwC analysis data of Bollettino Statistico di Banca d’Italia and ABI Monthly Outlook –– Almost 80% of the loans are towards SME and Corporates, thus confirming that the rise in the NPL stock is strictly connected to the economic and financial crisis that hit the Italian economy in 2008.

14 The Italian NPL market | The NPL volcano is ready to erupt Chart 9: Gross NPL trend YE-2015 250

220 210 14 12 200 178

18 143 127 131 21 113 109 129 13 118 93 200 91 98 184 100 78 12 74 156 16 75 66 63 125 49 57 9 46 107 50 35 33 78 25 59 42

2008 2009 2010 2011 2012 2013 2014 2015 ross L (n) ross L / Loans to ustoers () nliel to a (n) ross E / Loans to ustoers () ast due (n)

Source: PwC analysis data of Bollettino Statistico di Banca d’Italia and ABI Monthly Outlook

Chart 10: Net NPL trend YE-2015 70

60 57 54 50 50

40 38 35 89 84 30 28 80 23 60 62 20 47 14 39 10 24

00 2008 2009 2010 2011 2012 2013 2014 2015

et L ( n) et L / Loans to ustoers () Source: PwC analysis data of ABI Monthly Outlook

PwC 15 Chart 11 provides a snapshot of the net All illustrate a high level of NPLs to NPLs of the Top Italian banks, including equity ratio as compared to larger the ratio of net NPLs to equity and to international peers. total loans.

Chart 11: Net NPL, net NPL/equity ratio and net NPL to loans ratio YE 2015

2075 1014

1497 801

973 592 524 420 430 322 646 429 313 297 296 160 149 31 87 82 68 079 44 43 51 44 44 026 29 07

et L (n) et L / Euit Ratio () et L ratio ()

Source: Financial Statements as of YE-2015, YE-2014, YE-2013.

Chart 12 depicts the Top 10 Italian MPS (34.8%) in terms of gross NPE ratio collateralisation of the loans, vintage of banks in terms of NPE ratio and and by Unicredit (51.1%) and UBI the portfolio, tax policies on write off coverage: the average of which is 18.4% (27.8%) in terms of coverage ratio. We etc.). and 43.4% respectively. However, a note that the coverage ratio is not material variance among the banks directly comparable as it is influenced by exists, with the two extremes several factors which vary among the represented by Mediobanca (5.9%) and different banks (such as level of

Chart 12: Top 10 Italian banks – NPE peer analysis as of YE-2015

Gross NPE Ratio (%)

60 edioana 50 L ER o (%)

Average = 43.4% i t

I a R 40 ariara e g

oolare r e

I v

30 o C

E P

20 N

10 Average= 18.4% 0 0 5 10 15 20 25 30 35 40

Source: Financial Statements as of YE-2015

16 The Italian NPL market | The NPL volcano is ready to erupt Chart 13 provides a snapshot of the those described above. Average NPL NPL ratio and coverage, which once ratio stands at 10.4%, while the NPL again provides a fairly diversified coverage ratio is equal to 55.6%. picture with similar trends compared to

Chart 13: Top 10 Italian banks – NPL peer analysis as of YE-2015

80 Gross NPL Ratio (%)

70 o (%)

65 i t

I a

edioana ariara ER R 60 L e g a 55 Average = 55.6% r e v

50 C L P

45 N I oolare 40

35 Average= 10.4% 30 0 5 10 15 20

Source: Financial Statements as of YE-2015

• The year-end snapshot indicates that movements in the gross NPL ratio for large variances between individual compared to2014, with the exception the top 10 banks. The average stands banks. of MPS, there are no material at 10.4% versus 9.7%, but there are

Chart 14: Top 10 Italian banks – NPL movements (YE-2015 vs YE-2014)

YE-2015 YE-2014

Gross NPL Ratio (%)

65 I L

60 edioana ariara ER Average= 55.6%

) 55 % (

o at i R

50 g a ve r o C

45 Average= 10.4% oolare P N

40 I

30 0 2 4 6 8 10 12 14 16 18 20

Source: Financial Statements as of YE-2015, YE-2014.

PwC 17 Key message: we foresee significant activity for the credit servicing industry in the next several years, benefitting from NPLs portfolio sales and the envisaged reopening of the NPLs securitisations, as well as the continued 06 outsourcing of loan servicing by banks.

The NPL servicing market

18 The Italian NPL market | The NPL volcano is ready to erupt Since the financial crisis, the Italian The credit servicing industry currently market NPLs transactions and the credit servicing segment has experienced represents a large opportunity and Atlante fund sponsored and GACS solid growth, both due to higher should see meaningful growth over the guaranteed NPLs transactions. consumer credit volumes and an ever next several years. increasing number of financial International players, understanding institutions outsourcing their NPLs to Another source of business for the prospects for this profitable trend dedicated servicing and collection structured independent servicers is the and looking for new opportunities to entities. envisaged reopening of NPL exploit, have already broadened their securitisation market. focus to include a credit servicing This market development has been business and a number are interested in accompanied by a high level of In the case of GACS, the presence of a acquiring platforms. competition among credit servicers, servicer which is independent from the which has led to pressure on fees. originating bank is a pre-requisite for Moreover, clients often require a obtaining the State guarantee. All customised service for their operations Atlante sponsored NPL transactions will and demand both flexibility and the likely seek to use the GACS for funding. ability to communicate and manage data Therefore, third party servicing consistently with the client bank’s needs. platforms will benefit from both private

Chart 15: Main servicers’ revenues and AUM as of YE-2015

8 8

0 6 0 , 0 0 5 1 9 4 , 3 4 0 5 7 4 6 5 € m 02 4

Note: The AuM volumes above comprise 9 4 9 all the asset under management, including 8 4 , 2 2

the loans for which the servicer has only a 1 0 2 5 master servicer activity and does not act 0

4 2 ,

2 8 8 9 0 178 9 1

as special servicer. However, the majority 1 8

60 5 8 , 9 3 9 , 1 1 9 7

0 8

6 of the volume consists of loans under 1

0 1 ,

6 , 5 4 , 1 5 0 5 9 1 1 4 1 special servicing, except for Prelios and

0 , 7 4 0 9 , 0 3 , .7 8 9 2 Fonspa which have a predominant 2 4 8 2 , 50 , 1 1 component of volume under master servicing (70% and 94% respectively). a ire uer relios

ered Primus Capital’s business model is mainly onsa oan T Ls

rediteh based on the outsourcing and monitoring arr redit Italondiario Ofﬁcine CST

riu aital of external debt collection agents and Total () Reenues () lawyers.

Revenues includes “Revenues from Servicing Activities” (A.1) and “Other Revenues” (A.5) Source: PwC analysis on data provided by Servicers

Table 2: Main NPL non-captive special servicers

Total AUM Total AUM Deb t Coll External R ev enues S p ecial Mas ter B ank of Italy Comp any (€m) (€m) Emp loy ees Ag encies Lawy ers 3 11215 R ating itch R ating S P S erv icing S erv icing S urv eillance 3 11215 AUM (€m) AUM (€m) 3 11214 3 11215 3 11215 3 1122015 (€m) oan 4 5,088 4 5,088 - na 618 1 09 6 81 900 R1- and 1- tron anin rou Italondiario 4 3,106 4 0,951 2 ,155 3 9,700 597 1 4 00 564 R1- and 1- tron lo nio e art 106 T ered 1 2,499 1 2,499 - 10,000 6 39 1 37 3 30 750 R1- and 1- na rt 115 TL relios 9 ,450 2 ,816 6 ,634 8 ,700 59 4 50 400 95 R2/2 oe erae lo nio e art 106 T a 6 ,980 6,975 5 5,500 169 27 4 6 178 na oe erae rt 115 TL uer 7 ,198 7 ,198 - 4 ,700 132 1 3 250 284 R2, 2, 2 na rt 106 T 5 ,198 5 ,198 - 4,300 116 25 1 ,523 202 R2/R2/2 oe erae rt 107 T onsa 4 ,689 1 ,231 3 ,459 na 82 - - 160 R3/3 erae anin rou rius aital 3 ,110 3 ,110 - na 15 2 30 50 na na rt 106 T rediteh 2 ,414 2 ,414 - na 206 360 8 6 151 na na lo nio e art 106 T arr redit 1 ,880 1,880 - na 1,033 - - 182 na na rt 115 TL Oﬁine T 1 ,299 1 ,299 - na 106 - 2 61 71 na na rt 115 TL ire 5 ,103 4 ,116 9 87 1,500 210 15 172 402 na na rt 115 TL T Ls 2 ,000 2 ,000 - 1,500 50 25 4 47 na na rt 106 T Source: PwC analysis on data provided by Servicers

PwC 19 Chart 16: Borrowers geographical breakdown (mix in %)

16 21 32 28 35 44 43 27 36 37 50 41 22 48 86 28 19 45 19 21 36 42 29 27 18 19 30 62 45 46 35 34 35 44 30 32 31 34 31 29 4 2 7 oan Italondiario ered relios redit uer onsa rius rediteh arr redit Oﬁine T ire T Ls eriin aital orth entre outh - Islands na

Chart 17: Type of loans managed by GBV (mix in %)

28 66 47 78 55 52 999 94 87 96 28 66 87 72

45 53 28 34 45 48 34 22 na 13 na 01 6 13 5 oan Italondiario ered relios redit uer onsa rius rediteh arr redit Oﬁine T ire T Ls eriin aital eured nseured

Chart 18: Type of loan resolution – Secured (mix in %)

8 8 5 20 12 12 17 20 25 28 46 25 35 30 61 82 28 84 100 83 46 68 88 70 45 45 27 50 na 8 8 na na 18 oan Italondiario ered relios redit uer onsa rius rediteh arr redit Oﬁine T ire T Ls eriin aital

udiial Etraudiial Loan ale Other

Chart 19: Type of loan resolution – Unsecured (mix in %)

5 5 12 3 5 33 93 95

66 65 69 31 88 90 77 95 100 100

36 34 30 26 na na 5 12 6 5 11 2 oan Italondiario ered relios redit uer onsa rius rediteh arr redit Oﬁine T ire T Ls eriin aital

udiial Etraudiial Loan ale Other

Source: PwC analysis on data provided by Servicers as of YE-2015

20 The Italian NPL market | The NPL volcano is ready to erupt PwC 21 Key message: Transaction volumes in 2015 surged to c. €19 billion GBV, a significant increase versus the volumes in previous years due to an intense activity on both primary and secondary deals. Despite this, the market is still very focused on consumer and retail unsecured credits, with some SME and secured transactions occurring. As a result of the combination of many different factors discussed herein, volumes are expected to increase 07 meaningfully, with Q1 2016 registering €5 billion new deals. Market recent activity and outlook

In 2015, volumes of disposals have more than doubled The investors base grew, with new players in the market compared to 2014, with the amount of disposed loans (Hoist Finance, PVE) and in addition, some incumbents increasing to approximately €19 billion. In Q1 2016 the strengthening their presence in the market (mainly Fortress, market registered 8 new deals amounting €5 billion. Deutsche Bank, and Cerberus). Banca Ifis has continued to be extremely active both buy side and sell side on secondary The most active banking groups in the disposal of portfolios deals. during 2015 was Unicredit, with sales of approximately €4.7 billion, MPS with sales of €3 billion, and Banco Popolare with Looking ahead we see clear signs of an improvement in the sales of €1.2 billion. conditions for enhancing NPL deal volumes. A key component is the clearer and more favorable legal and regulatory Several deals involving portfolios and/or platforms are on the framework: after the long await for the systemic bad bank market (the four cooperative bad banks, Interbanca by GE, there is now a scheme in place for facilitating the financing of HARIT by the Austrian Heta Asset Resolution, Sigla-Si NPL securitisation deals (GACS). collection). All are attracting the interest of both local and international players.

22 The Italian NPL market | The NPL volcano is ready to erupt Chart 20(5): NPL transactions in the Italian market (€ bn)

onsuer nseured ainl nseured ied eured/nseured eured Other

Total: 4 5 8 19 5

08 30

06 36 26 06 004 02 18 65 31 21 02 43 31 16 17

2012 2013 2014 2015 Q1-2016

Source: PwC market analysis

This, together with the reform activity Table 3 - NPL public transactions in the Italian market in 2015 and Q1-2016 on foreclosure and insolvency (€ mln) procedures, the commitment of several banks to the ECB to reduce their NPE Year Seller Volume Type of Portfolio Buyer 2016 Q1 ana ari 35 eured Confidential exposures suggests an explosive mix. 2016 Q1 Confidential 223 onsuer IO We expect that the activity will be 2016 Q1 Deutsche Bank Spa 240 onsuer ana II 2016 Q1 Confidential 208 onsuer ana II sustained and our prediction of at least 2016 Q1 Confidential 1000 onsuer ana II 2016 Q1 Multiple sellers BCC 300 ied eured/nseured Bayview Fund Management €30 billion GBV of transactions for 2016 2016 Q1 R E 2500 ied eured/nseured Anacap & Confidential is realistic, possibly conservative. 2016 Q1 CreVal 314 ied eured/nseured Credito Fondiario 2015 Q4 Confidential 100 Unsecured Retail Confidential Furthermore, the percentage of secured 2015 Q4 Confidential 100 eured Confidential portfolio disposal will be significantly 2015 Q4 Confidential 1400 onsuer ana II 2015 Q4 Deutsche Bank Mutui 172 eured Algebris higher than 2015. The deleverage 2015 Q4 1700 nseured Deutsche Bank process will occur over the next 3-4 2015 Q4 Multiple sellers BCC 121 ied eured/nseured Balbec 2015 Q4 Consel SpA (Banca Sella Group) 230 onsuer ana II years, but the NPL volcano is now truly 2015 Q4 Banca Etruria 302 ied eured/nseured Credito Fondiario ready to erupt. 2015 Q4 ana II 477 onsuer Confidential 2015 Q4 ana II 503 onsuer Italo Sicav Fund 2015 Q4 ana II 397 onsuer Confidential 2015 Q4 Banca Popolare - Volksbank 60 nseured ana II 2015 Q4 Confidential 365 onsuer ana II 2015 Q4 Morgan Stanley / Prelios 157 eured PVE Capital 2015 Q4 Unicredit 250 ied eured/nseured Cerberus 2015 Q4 Confidential 240 Utility Confidential 2015 Q3 Confidential 160 RE Confidential 2015 Q3 Confidential 400 onsuer ana II 2015 Q3 Confidential 430 Multiple single name Confidential 2015 Q3 Banco Popolare 950 nseured Hoist Finance 2015 Q3 Confidential 22 nseured Confidential 2015 Q3 Unicredit 1200 Mainly Unsecured Anacap 2015 Q3 Multiple sellers BCC 320 ied eured/nseured R 2015 Q2 Seer Capital Management 400 onsuer ana II 2015 Q2 Unicredit 625 nseured R 2015 Q2 UniCredit 205 Leasing - Repossessed Assets Cerberus 2015 Q2 Banco Popolare 210 nseured Hoist Finance 2015 Q2 MPS Consum.it 1300 onsuer Banca IFIS (50%) Cerberus (50%) 2015 Q2 Confidential 200 onsuer Confidential 2015 Q2 Banca Sella 33 onsuer ana II 2015 Q2 Archon 2000 ied eured/nseured Confidential 2015 Q2 Confidential 200 onsuer ana II 2015 Q2 Santander Consumer Bank 234 onsuer ana II 2015 Q1 National Asset Management Agency 182 RE Invel Real Estate Partners 2015 Q1 Sofigeco 408 eured PVE Capital 2015 Q1 Findomestic 400 onsuer ana II 2015 Q1 Unicredit 2400 Platform & Mixed Sec/Unsec Fortress & Prelios

Source: PwC market analysis

(5). The sum of transactions reported include the public and not public transactions

PwC 23 Appendix – Top 10 banks peer analysis

Gross NPL volume (€bn)

60.0 53.9 53.2 49.0 50.0 38.239.2 40.0 34.6

26.6 30.0 24.3 21.6 20.0 10.510.5 8.9 8.1 5.9 6.6 7.0 5.8 7.1 5.5 6.5 7.1 10.0 2.6 2.5 3.1 3.3 0.7 0.6 0.6 2.2 1.9 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM YE-2013 YE-2014 YE-2015

24 The Italian NPL market | The NPL volcano is ready to erupt Net NPL volume (€bn)

25.0 20.4 20.8 20.0 18.7

14.2 15.0 15.0 13.0 9.7 10.0 8.9 8.4 6.5 5.5 6.0 4.3 3.4 4.0 5.0 2.4 2.7 3.0 2.5 2.8 3.0 1.1 1.1 1.3 1.5 0.3 0.3 0.3 1.0 0.8 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015

NPL coverage ratio (%)

65.3 63.4 63.3 70.0 61.8 62.2 61.0 62.5 62.8 61.8 62.0 58.8 59.1 58.2 57.8 58.0 59.0 58.2 60.0 55.7 56.5 56.3 56.5 55.5 55.9 54.6

50.0 41.6 43.0 38.8 38.6 37.9 38.3 40.0 30.0 20.0 10.0 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015

Gross NPL ratio (%)

25.0 19.8 20.0 17.0 14.7 14.5 13.3 15.0 12.0 12.3 12.0 10.4 10.3 10.3 10.3 10.4 10.9 9.3 9.7 8.9 8.4 8.8 8.9 10.0 7.3 7.9 6.7 6.5 7.2 6.4 5.6

5.0 1.6 1.7 1.7 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015

Net NPL ratio (%)

10.0 8.7 8.2 7.5 8.0 6.8 7.1 6.8 6.4 6.4

5.1 5.3 6.0 4.7 4.9 4.3 4.4 4.2 4.3 4.4 4.2 4.4 3.7 3.8 3.9 3.7 3.4 3.1 4.0 2.7 2.9

2.0 0.7 0.7 0.7 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015

Source: Financial Statements as of YE-2015, YE-2014, YE-2013.

PwC 25 Gross NPE volume (€bn)

100.0 85.5 87.2 90.0 82.9 80.0 70.0 63.0 63.4 57.6 60.0 50.0 45.3 46.9 40.0 36.1

30.0 21.8 19.2 20.8 12.7 13.1 13.5 12.9 20.0 11.0 12.3 10.3 11.0 11.4 5.0 5.3 5.9 6.0 10.0 1.8 2.4 2.2 3.9 3.7 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM YE-2013 YE-2014 YE-2015

Net NPE volume (€bn)

42.6 45.0 41.1 40.5 40.0 33.6 33.3 35.0 31.1 30.0 23.1 24.2 25.0 21.0 20.0 14.1 14.3 14.1 15.0 9.3 9.5 9.7 10.0 6.2 6.4 6.3 6.4 6.5 6.4 3.4 3.6 3.6 2.3 3.0 2.2 5.0 1.0 1.2 1.1 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015

NPE coverage ratio (%)

60.0 51.7 51.1 51.1 51.5 51.6 48.9 49.1 47.5 48.5 48.1 50.0 46.0 46.7 43.6 44.2 44.0 41.8 40.7 40.1 40.5 38.6 38.7 39.7 37.3 36.0 40.0 34.2 31.9 30.0 26.5 27.3 27.8 26.9

20.0

10.0

- UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015

Gross NPE ratio (%) 40.0 34.8 35.0 31.7 30.0 24.5 24.8 24.3 25.0 22.6 23.3 21.0 20.3 19.2 18.0 16.9 17.0 17.0 20.0 16.0 16.6 15.9 16.4 15.6 15.4 15.2 15.0 13.7 14.6 15.0 12.6 12.6 10.2

10.0 6.3 5.9 4.4 5.0 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015 Source: Financial Statements as of YE-2015, YE-2014, YE-2013.

26 The Italian NPL market | The NPL volcano is ready to erupt Net NPE ratio (%)

25.0 21.7

19.3 20.0 18.0 18.0 16.0 16.3 14.9 14.5 15.0 13.9 11.1 11.5 11.2 10.5 10.3 10.4 10.2 10.6 9.9 9.5 9.7 9.1 8.5 9.0 10.0 8.2 8.2 7.9 6.4

3.3 5.0 2.5 3.0

- UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM YE-2013 YE-2014 YE-2015

Yearly loan loss provision/net interest margin (%)

400.0 366.5 350.0 300.0

250.0 223.3 200.0

129.4 150.0 114.3 101.0 89.3 100.0 68.9 60.6 62.9 68.0 53.9 51.1 56.4 54.3 59.5 57.5 57.6 53.7 52.9 51.2 41.8 49.2 49.7 41.5 41.2 50.0 34.6 35.0 29.8 37.0 33.1 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015

Net NPL/equity (%)

160.0 144.5141.6 140.0 120.0 101.4 100.0 80.1 74.4 80.0 67.6 69.9 61.0 59.2 52.4 60.0 48.6 40.1 41.3 42.0 41.1 43.0 42.4 33.2 40.0 29.1 31.9 31.3 31.2 29.6 32.2 21.0 23.9 16.0 20.0 3.9 3.4 3.1 - UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015

Cost of risk* (%)

6.0 5.5

5.0 4.0 4.0

3.0 2.5

1.8 1.9 1.8 1.7 1.6 2.0 1.5 1.5 1.5 1.4 1.3 1.2 1.3 1.2 1.1 1.0 1.0 1.0 1.0 1.1 0.8 0.8 0.9 0.8 0.9 1.0 0.7 0.7 0.6

- UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015 Source: Financial Statements as of YE-2015, YE-2014, YE-2013.

PwC 27 Portfolio Advisory Group

Richard Thompson Italy Turkey +4420 7213 1185 Fedele Pascuzzi Husnu Dincsoy [email protected] +3902 8064 6323 +90 212 376 5302 [email protected] [email protected] Jaime Bergaz +349 1568 4589 Pierpaolo Masenza Ukraine [email protected] +39065 7025 2483 Vladimir Demushkin [email protected] +3804 4490 6776 Austria [email protected] Jens Roennberg Patrizia Lando +4969 9585 2226 +3902 66720014 United Kingdom [email protected] [email protected] Richard Thompson +44 (0)20 7213 1185 Bernhard Engel Vito Ruscigno [email protected] +4315 0188 1160 +3902 8064 6333 [email protected] [email protected] Robert Boulding +44 (0)20 7804 5236 CEE The Netherlands [email protected] Jonathan Wheatley Peter Wolterman +402 1225 3645 +318 8792 5080 Ben May [email protected] [email protected] +44 (0)20 7212 3664 [email protected] Cyprus Joris van de Kerkhof Stelios Constantinou +318 8792 7622 Panos Mizios +357 2555 5190 [email protected] +44 (0)20 7804 7963 [email protected] [email protected] Norway Czech Republic and Slovakia Lars Johansson Marie Dempsey Petr Smutny +47(0) 4816 1792 +44 (0)20 7213 2616 +4202 5115 1215 [email protected] [email protected] [email protected] Poland Natasha Firman Denmark Lukasz Bystrzynski +44 (0)20 7212 3453 Bent Jørgensen +482 2523 4228 [email protected] +45 3945 9259 [email protected] [email protected] Christina Zarifi Portugal +44 (0)20 7213 2045 France Antonio Rodrigues [email protected] Hervé Demoy +3512 1359 9181 +331 5657 7099 [email protected] North America [email protected] Mitchell Roschelle Romania +164 6471 8070 Finland Cornelia Bumbacea [email protected] Harri Valkonen +402 1225 3960 +3584 0539 9339 [email protected] Asia Pacific [email protected] Ted Osborn Spain +852 2289 2299 Germany Jaime Bergaz [email protected] Christopher Sur +349 1568 4589 +4969 9585 2651 [email protected] Chiara Lombardi [email protected] +65 623 637 03 Guillermo Barquin [email protected] Thomas Veith +349 1568 5773 +4969 9585 5905 [email protected] James Dilley [email protected] +85 222 892 497 Pablo Martinez-Pina [email protected] Greece +349 1568 4370 Emil Yiannopoulos [email protected] Latin America +3021 0687 4640 Nico Malagamba [email protected] Richard Garey [email protected] +349 1568 4156 Hungary [email protected] Japan Csaba Polacsek Masahiro Komeichi +36 14 619 751 Antonio Fernandez +81 (0)90 4137 5649 [email protected] +349 1568 4052 [email protected] [email protected] Ireland Aidan Walsh Sweden +353 1792 6255 Per Storbacka [email protected] +468 5553 3132 [email protected]

© 2016 PricewaterhouseCoopers Advisory SpA. All rights reserved. PwC refers to PricewaterhouseCoopers Advisory SpA and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.