21 March, Il Sole 24 Ore
Italian banks will have to make more provisions on credits for the time ahead. Consequently, also the transfers of loans, especially of the unsecured ones. This is a segment that might see changes in the strategy of banks, with an increase of pricing, but also the sales of third-party products and, perhaps, the transfer of the internal management platforms.
On the overall, there will be several changes in the credit strategies of the Italian banks, due to the introduction of the ECB addendum on NPLs. After a long wait, the Surveillance Authority released a publication that confirmed what was expected in October (secured bad loans will be 100% devaluated after 7 years, the unsecured ones after 2 years). The measure will be effective starting from 2021.
The most evident effect will be the progressive increase of provisions. The estimates are for extra 3-4 billion euro, equal to 30 base points of the Cet1. A contained requirement, after all, if we consider that Italian banks on average can rely on a buffer of 351 base points compared to the minimum threshold, according to the Equita Sim calculations.
Therefore, the real consequence will be on credit management strategies. Especially those regarding unsecured bad loans, which will be 100% devaluated after 2 years. The stock currently represents one-fifth of the total NPL stock, equal to approximately 20 billion euro net.
The cost to keep this type of NPLs will be too high, in case the things go badly for the holder. Basically, at the first signs of default, the credit should be written off. The collection of this type of loans is complicated. First of all, it’s labour intensive. To the point that they are sold in big portfolios to specialised companies for very little value. The selling price doesn’t exceed 5% of their value. Hence, it wouldn’t be very convenient for banks to keep these loans on their books. The consequences might be two. The first is obviously the increase of their transfers to the specialise investors.
This trend is getting stronger, with a forecast, according to Equita Sim, of 43 billion euro of NPLs coming on the market in the next two years, in order to align the Npe ratio with the national average. The other effect will be the lesser incentive to include these loans on the financial statement. Hence, banks will be less incentivised to issue unsecured loans. “The change of the approach towards risk will impact mainly the consumer credit sector, with small-and medium-businesses being the most impacted by this change”, explains Giovanni Razzoli, analyst for Equita Sim.
Not only. Besides pricing, which will see a general increase in the cost of credit and the boom in the request for guarantees, also the business model of banks will change. In fact, banks might consider becoming “pure distributors of third-party products, especially for what concerns unsecured consumer credit loans of specialised companies that are not under the surveillance of the ECB”.
As this was not enough, the ECB has just released another document on bad loans management. The document implies that starting from January 2019 the banks will have to adopt strategies to deal with the burden of NPLs both in terms of governance and in terms of operational models. There will be no material impact on the Cet1, but certainly, this will create another incentive to sell the servicing business. As it is happening to Intesa Sanpaolo. In case also Banco Bpm, Ubi and Bper decide to go for this solution, the release of capitals will be comprised between 10 and 27 base points on the Cet1.
Source: Il Sole 24 Ore
Translator: Cristina Ambrosi