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”.