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Unlikely to pay: the threat nobody talks about

10 December, Affari Italiani

The banks’ assets are at stake for many reasons. The main concerns are due to the increase of the spread on the Italian state bonds with consequences on public debt and banks, as well as on the significant amount of bad loans still present in the banking system.

While the spread is an external factor, banks can intervene on non-performing loans. However, the GDP trend and NPLs are closely related: the more the GDP decreases, the more bad loans will increase. A potential new recession might have inevitable negative consequences on the NPL situation. Therefore, it’s crucial to act on these assets.

Although the figures have improved from the previous years, they’re still worrying. According to Eba, the accounts of the main Italian banks reported NPLs for 159 billion (21% of the total NPLs in Europe amounting approximately to 748 billion), while the NPL ratio reached 10%. In December 2015 NPLs reached the peak of 259 billion (22.5% of the total NPLs in Europe amounting approximately to 1,150 billion), and the NPL ratio was over 16%. Only Greece, Cyprus and Portugal are nowadays worse than Italy.

Impaired loans are a burden for the banks, with inevitable consequences on the issuance of loans. It’s very likely that they slowed down and weakened the recovery after the second recession in 2011-2015. In conclusion, the connection between GDP and bad loans works in both ways. However, the efforts have focused so far on the disposal of NPLs without paying much attention to the other categories of impaired debts. If this is acceptable for past-due credits, it’s not for unlikely to pay (UTP).

Unlikely to pay, what and how much they are

Together with past-due credits, UTPs are three of the impaired loan categories included in the Banca d’Italia guidelines. Bad loans and unlikely to pay follow two different logics: the former are irreversible credits, as the debtor is defaulting, while the latter are referred to the unlikely repayment of the debt by the debtor, without enforcing the guarantee.

The credit management approach is very different. In case of bad loans, the objective is to liquidate since we’re dealing with uncollectible credits and with a bankruptcy proceeding involving the debtor. In the case of unlikely to pay, the goal is to manage the credit, as the debtor is currently going through a difficult time and the loan might return being performing.

According to Banca d’Italia, the gross impaired loans in Italy in June 2018 amounted to 225 billion, 90 billion of which were represented by unlikely to pay with a 40% impact on the total. The picture radically changes if we analyse the exposures net of provisions: the total net impaired loans are 103 billion, while the unlikely to pay are 56 billion (55% impact), while bad loans are 41 billion.

What to expect?

Whereas a couple of years ago talking about impaired loans meant talking about bad loans, the attention has recently shifted towards UTPs, as also seen by the latest operations by Mps and Unicredit.

How will the market evolve? It’s hard to say. However, it’s possible that the changes in the calendar provisioning will have an impact on the timing of the operations on UTPs by banks, especially regarding unsecured loans. The new operations will likely involve specialised legal firms with the necessary expertise in credit management.

For what concerns the existing stock, new operations are possible, although for lower amounts than those of the operations carried out in the last two years: like 17.7 billion transferred to Unicredit in July 2017 or 24.1 billion sold by Mps in May 2018, as well as the strategic partnership between Sanpaolo and Intrum in April 2018.

UTP management is highly specialised. For this reason, ad-hoc strategies will be necessary (even a case by case approach). While bad loans are a certainty for banks, as the goal is to liquidate the holdings, UTP, if correctly managed, can return being performing and grant significant earnings. In any case, it’s necessary to act to avoid a worsening of the banking system.

Source: Affari Italiani

Translator: Cristina Ambrosi

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