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(Visited 69 times, 1 visits today)

Why Unicredit is selling npls at dirt cheap prices, clearly explained (by Banca d’Italia)

When the 13th December 2016 Unicredit announced an agreement with Pimco and Fortress for the transfer of a portfolio of bad loans, everybody was wondering at which price the huge amount of credits (17.7 billion euro gross, then dropped at 17 billion) would be sold.

The transfer price hasn’t been finalized yet, but, based on the assumptions made on the 13 billion capital increase in program, they’ll probably be close to the 13% of those 17 billion, if not less (the market measures the transfer price of the non performing loans (npl) as a percentage of the gross nominal value).

These numbers made jumping more than one banker, so dirt cheap as they are, also in relation to the average collection rates registered in the last few years. At this prices, can the completion of this huge transfer called Progetto Fino be considered a success by the Ceo Jean-Pierre Mustier?

Not only the bankers, that 12.94% has shaken also the experts of Banca d’Italia. In January, in fact, an analysis by Banca d’Italia revealed that the average collection rate for the bad loans of the Italian banks in the decade 2006-2015 had been equal to 43% of the gross value. In the years 2014-15, the average collection rates dropped at 34.7%.

It’s true that “the collection rates differ a lot from bank to bank”, but 13% is very distant from the average values calculated by Banca d’Italia. How is it possible to explain this difference that seems to deny the figures published by the regulator only a few months ago?

By publishing a nice official explanation on Notes for Financial Stability and Surveillance. A rather unusual initiative, that of analyzing a single operation of a specific subject under surveillance, but it was necessary for the opportunity to give a clear signal to the confused market.

“The aim of this memo is to show the characteristics of the operation FINO, in order to understand if these characteristics can explain the difference between the value of the bad loans  transferred by Unicredit Group and the expected average collection rates”, reads the communication signed by three analysts of the Department for Banking Surveillance of Banca d’Italia, which consider the system’s average collection rate for the years 2014-2015, that is the 34.7%.

As usual, a good starting point is the comparison of the data, that required an adjustment assessed as 1.9 percentage point. Then the difference is explained by the “company” effect (the Fino operation includes only credits towards companies, that have lower collection rates, while the 34.7% of Banca d’Italia considers the collections towards companies and families), the “market sale” effect (the income coming from the transfer on the market is lower than the collections internally obtained), the “vintage” effect (the  loans included in the Fino are very dated and this implies lower collection rates), and by the “collateralisation” effect (the collection rates, and therefore the market prices, are lower for the credits without collaterals, as are most of the credits included in the operation).

Factors contributing to the difference between FINO and average collection rate

Average collection rate 34.7%
“Company” effect 1.3%
“Market sale” effect 12.4%
Data adjustment 1.9%
“Vintage” effect 2.0%
“Collateralisation” effect 13.0%
Remaining gap price 3.1%

 At this stage, there is a gap price of 3.1% left that hasn’t been explained yet. According to the analysts of Banca d’Italia, “ it is within the reasonable confidence interval of the estimate”, even though the structure of the operation and the dimensions of the Fino portfolio may have contributed “to the reduction of the selling price, even though it’s not possible to calculate the exact impact”.

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