POLITECNICO DI MILANO Department of Management, Economics and Industrial Engineering MSc in Management Engineering ITALIAN NPLs, A MACROECONOMIC CHALLENGE Supervisor: Prof. Giancarlo Giudici Master Thesis of: Andrea Disarò Matr. 820307 Academic Year 2016/2017 _______________________________________________________________________________________ 1 Index of contents ABSTRACT ...................................................................................................................................................... 5 INTRODUCTION ............................................................................................................................................. 7 1. THE NPLs DEFINITIONS AND CLASSIFICATIONS ............................................................................ 10 1.1 An heterogeneous definition .................................................................................................................. 10 1.2 The European Banking Authority (EBA) definitions ............................................................................ 11 1.3 Banca d’Italia definitions ...................................................................................................................... 14 1.4 The role of Centrale dei Rischi .............................................................................................................. 17 2. THE ITALIAN NPLs MARKET OVERVIEW .......................................................................................... 18 2.1 The NPLs stock, a European issue ........................................................................................................ 18 2.2 The Italian NPLs market........................................................................................................................ 24 2.2.1 Italian economic scenario overview ............................................................................................... 24 2.2.2 Italian NPLs in numbers ................................................................................................................. 26 2.2.3 Italian banking industry overview .................................................................................................. 30 2.2.4 Italian servicing industry overview ................................................................................................ 40 2.2.5 Italian NPLs market, recent transactions and outlook .................................................................... 45 3. CAUSES AND CONSEQUENCES OF THE LARGE EUROPEAN NPLs STOCK ................................ 49 4. POSSIBLE SOLUTIONS FOR THE NPLs ISSUE .................................................................................... 58 4.1 The secondary market solution, opportunities and issues ..................................................................... 60 4.1.1 The bid-ask gap analysis ................................................................................................................. 60 4.2 GACS – The Italian public guarantee .................................................................................................... 67 4.3 Atlante ................................................................................................................................................... 75 4.4 Systemic alternatives for the NPLs resolution....................................................................................... 79 4.4.1 European ACM – The bad bank alternative ................................................................................... 79 4.4.2 TARP – US strategy overview ....................................................................................................... 83 4.5 A theoretical proposal for NPLs disposal .............................................................................................. 91 5. CONCLUSIONS ....................................................................................................................................... 104 Appendix I – Italian RE foreclosure process overview ................................................................................. 105 Appendix II – The REOCO application to NPLs .......................................................................................... 108 Appendix III – The securitization process ..................................................................................................... 115 Appendix IV – Basel III in synthesis ............................................................................................................. 118 Appendix V – Dictionary .............................................................................................................................. 120 References ..................................................................................................................................................... 125 Ringraziamenti .............................................................................................................................................. 129 _______________________________________________________________________________________ 2 Index of figures Figure 1: Forebearance measures and cure periods ......................................................................................... 13 Figure 2: NPL classification, summary and comparison ................................................................................ 16 Figure 3: European member states grouped by NPE ratio .............................................................................. 19 Figure 4: Euro Area – NPE ratio (Bank nonperforming loans to total gross loans) (%) – 2000-2016 ............ 20 Figure 5: Euro Area - GDP per capita growth (annual %) & NPE ratio (%) .................................................. 21 Figure 6: Euro Area, Germany and Italy - GDP per capita growth (annual %) .............................................. 22 Figure 7: Italy – Main economic drivers ......................................................................................................... 25 Figure 8: NPLs breakdown by counterpart ...................................................................................................... 28 Figure 9: Italy – NPLs stock composition and trend 2008-2017 (Q1) ............................................................ 29 Figure 10: Selected European Members – NPEs ratios ................................................................................... 30 Figure 11: Italy – NPLs ratios 2008-2016 ....................................................................................................... 32 Figure 12: Net Bad loans and Equity for the Top 10 Italian banks ................................................................. 38 Figure 13: Gross NPE and Texas ratio for the Top 10 Italian Banks .............................................................. 39 Figure 14: Recoveries/Gross Bad Loans for the Top 10 Italian Banks ........................................................... 39 Figure 15: (Sales Proceeds + Losses on disposals + Recoveries)/Gross Bad Loans - Top 10 Italian Banks .. 40 Figure 16: NPL transactions trend in the Italian market (2012 - 2017 YTD) ................................................. 46 Figure 17: NPLs – Vicious liquidity spiral ...................................................................................................... 50 Figure 18: Euro Area - GDP per capita growth (annual %) vs NPE ratio (%) & unemployment annual growth (%) ................................................................................................................................................................... 53 Figure 19: Market of lemons scheme – NPLs demand and supply ................................................................. 61 Figure 20: GBV – NPV gap main components ............................................................................................... 64 Figure 21: GACS – Securitization structure and involved stakeholders ......................................................... 68 Figure 22: 7ys Recovery curve assumption ..................................................................................................... 70 Figure 23: TARP program funding – Aggregated CFs (2008 – 2017) ............................................................ 86 Figure 24: UE vs USA NPE comparison after 2008 financial crisis ............................................................... 90 Figure 25: 10ys recovery curve assumption .................................................................................................... 93 Figure 26: REOCO – Strategy and application ............................................................................................. 110 Figure 27: REOCO – Investment structure ................................................................................................... 111 Figure 28: Simulation – REOCO vs wait&see/Judicial scenario NPV ......................................................... 114 Figure 29: Securitization structure - Tranching example .............................................................................. 117 _______________________________________________________________________________________ 3 Index of tables Table 1: Italy - Assets sales by type 2015-2016 .............................................................................................. 26 Table 2: Italy – NPLs breakdown by typ ........................................................................................................