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Banca Ifis: NPL market at risk of a bubble

07 October, Il Sole 24 Ore

In the past few years, banks have sold a considerable amount of NPLs (over 100 billion), although servicers may sometimes lack the adequate means to manage these credits. As Banca Ifis reports, the seven biggest servicers in Italy saw their workload increased by 73% between 2016 and 2018, although the personnel grew only by 21%. This has lead servicers on automatizing and standardizing their processes and funds to re-sell their NPL portfolios to improve their financial results.

The root cause is in the due diligence of portfolios. When a bank sells an NPL portfolio, the fund interested in buying it has a servicer assessing the portfolio. This might result in a conflict of interest, as the servicer may be tempted in granting excellent performances just to obtain the management of the portfolio.

As Banca Ifis reports, many NPL transactions had been closed at uncompetitive prices, like 19% or 28% of the portfolio nominal value, and some funds might have sold some part of their NPL portfolios to improve their returns, namely trading NPLs. This resulted in the creation of a secondary market, where NPL portfolios are being sold not by banks, but by funds. Banca Ifis estimates that the NPL secondary market will grow by 39% in 2019.

Source: Il Sole 24 Ore

Translator: Cristina Ambrosi