Credit Village: more NPLs, fewer collections and lower prices after the lockdown

24 April, Bebeez

According to the latest survey by Credit Village, Covid-19 will have a significant impact on NPLs, considered that banks wouldn’t be able to issue new credit to companies and households in the short term. As a result, impaired loans are expected to increase in the next 12 months, while credit collections are likely to decrease.

In real estate, open-market property prices will report a moderate decline, while times to liquidate real estate assets put as a guarantee will be longer. Finally, most of the people surveyed believe that Reoco activities will increase.

Source: Bebeez

Translator: Cristina Ambrosi

Banca d’Italia: Banks doubled NPL operations

12 December, Il Sole 24 Ore

According to Banca d’Italia, NPL disposals registered a significant breakthrough in 2018. Thanks to the State guarantee on securitisations, banks had been able to dispose of NPLs for 67 billion euro. Meanwhile, the amount of new bad loans had drastically reduced to 19 billion in 2018, the lowest level since 2009.

Collection rates have generally improved, both for securitisations (from 26% to 30%) and NPLs sold through ordinary operations (from 44% to 46%). The average collection rate was 38% for secured loans and 22% for unsecured loans. The quota of transferred holdings reached 50% in 2018, while prices increased up to 23% of the gross book value (it was 17% in 2017).

For what concerns 2019, the stock of impaired loans has reduced by 21.4% p.a., also in this case, thanks to securitisations.

Source: Il Sole 24 Ore

Translator: Cristina Ambrosi

Credit management: the expansion of servicers, the new challenge of UTPs

12 August, La Repubblica

The next few years will reveal the actual capacity of servicers (like DoValue, Prelios, Cerved and Intrum) to collect the credits they acquired from banks.  For this purpose, the creation of partnerships will be fundamental, like in the case of Credito Fondiario and Banca Ifis, which constituted a shared platform.

A new challenge is represented by the rising trend of UTPs, as seen in the recent sale by Intesa Sanpaolo to Prelios of UTPs for 3 billion euro. In this case, the capacity of servicers of restructuring debt is critical to be successful.

Source: La Repubblica

Translator: Cristina Ambrosi

The returns of the NPL market

27 July, Milano Finanza

Between 2015 and 2018, NPEs for 190 billion euro were transacted. Impaired loans had dropped to 180 billion in 2018 from the original 341 billion of 2015. The NPL market reported transactions for other 16.5 billion euro in the first seven months of 2019, and an additional 45 billion euro is expected for the end of the year.

Concerning servicers, in 2018 were collected credits for only 7.8 billion euro of the 82.3 billion appointed to servicers, while the collection rates have been progressively decreasing with the years. The considerable stock of NPLs, in fact, means significant amounts assigned to credit collection, but also a reduction of the collected values and an increase of the collection costs, resulting in reduced profitability.

Source: Milano Finanza

Translator: Cristina Ambrosi

PwC: the volume of NPEs reduced to 180 million in 2018

24 July, Azienda Banca

The NPEs volumes on the Italian market kept reducing until reaching 180 billion euro at the end of 2018. Band loans had gone from 200 to 97 billion between 2015 and 2018.

Banks aim at further reducing their NPE ratio by approximately 1.6%, with a focus on UTPs, resulting in an increase of the debt collection activity.

Meanwhile, the servicing market is getting stronger, with five main players registering 53% of the revenues for the sector.

Source: Azienda Banca

Translator: Cristina Ambrosi

NPLs trends at the Italian Restructuring Forum by Debtwire

27 May, Start Magazine

Securitisations are generally aligned with banks’ business plans. The operation by Mps named Siena Npls 2018 had a net cumulative ratio of 97%, a little bit less for the Fino portfolio of UniCredit with 85%.

Moody’s warned about the delays in collection times, although this mostly concerns minor operations. Therefore, investors shouldn’t worry.

Thanks to the extension of Gacs, securitisation with Government guarantee are going on and are expected to intensify in the next few months.

Source: Start Magazine

Translator: Cristina Ambrosi

Credit management: MCS-DSO acquired Serfin 97 S.r.l.

08 February, StopSecret

At the end of 2018, MCS-DSO, the France leading company in credit management and collection, completed the acquisition, through its holding DSO Italia, of Serfin 97 s.r.l., a company specialised in credit management and collection. With offices in Rome and Durrës, Albania, Serfin employs approximately 500 people, and it reported a turnover for about 12 million euro in 2017.

Thanks to the agreement, the French giant born from the merger between MCS Groupe and DSO Group confirmed its intentions to pursue its internationalisation strategy, growing and strengthening its position as a primary player in the NPL market. MCS-DSO president Jean-François Bensahel commented: “this operation represents a crucial step for the transformation of our group into a European player. Thanks to our excellent position in the market, we are a strategic partner in the management and collection of credits for companies and banks operating in Italy”.

The French group acquired 80% of Serfin, while the remainder of the capital is indirectly held by Stefano Massa, who remains the Ceo of the Italian branch. With this agreement, Serfin has confirmed its solid status as a group, allowing the company to broaden its offer and to accelerate the growth, especially from a technologic point of view. Stefano Massa stressed how “this operation offers the opportunity to create value for our clients as well as it provides us with the potential for operational and commercial partnerships”.

Source: StopSecret

Translator: Cristina Ambrosi

The NPL binge ended up in chaos. Funds started selling credits

10 February, Il Sole 24 Ore

Debtors who can’t find anybody to talk to, not even when they want to pay their debts. Judges who terminate foreclosures because credit managers aren’t paying the required contributions. These examples might be borderline but, speaking with the people working in the sector, they give an idea of where the problem lies: banks had sold NPLs in significant quantities (over 100 billion in the span of few years), but who bought them is not always equipped to manage them properly. Banks may have got rid of the burden, but the problem of bad loans hasn’t been solved yet. It has just been moved somewhere else. Since bad loans are connected to families, enterprises and people, we must ask ourselves: are these bad loans in good hands?

A few data are enough to be doubtful about it: the first seven non-banking servicers operating in Italy (servicer is the name for those companies working on credit collection on behalf of investors that bought the NPLs from banks) from the end of 2016 to the end of 2018 had seen their workload growing by 75%, although their staff had increased only by 21%. That means that they’d doubled the managed NPLs (from 139 billion in 2016 to 241 billion in 2018) but they only slightly increased the number of people working on those NPLs. On the one hand, it resulted in more standardised, quick and less accurate procedures; on the other hand, it had caused funds to re-sell NPLs to other investors only for the sake of the financial performance, which means trading NPLs.

The NPL binge

In July 2017, Pwc in its report defined Italy “the place to be”. After all, banks had sold out a great number of bad loans, and they did it at dirt low prices in a rush to get rid of them. As a result, investors from all over the world dashed to get some those NPLs: Fortress, Pimco, Crc, Bayview, Anacap, Cerberus, Bain Capital Credit, Hoist Finance and Varde Partners; along with the specialised divisions of merchant banks and Italian investors such as Algebris and Banca Ifis. As the expert observed, “the feeling is that investors were mostly moved by a purely financial and speculative logic: getting as many NPLs as possible without really thinking how to manage them”.

Once acquired the band loan portfolios, investors gave them to servicers (in some cases, the same servicers that they bought together with the NPLs, in other cases via a mandate) to take care of the actual credit collection. Servicers ended up managing huge quantities of NPLs. And hiring more people is not easy. Cerved, the second servicer in Italy, used to manage NPLs for 15.5 billion at the end of 2016 employing 813 people. Today, the company manages NPLs for 41 billion (nearly the triple) with only 1,230 people. DoBank, Italy’s market leader and almost entirely merged to Italfondiario, has maintained the quantity of managed credits steady (around 80 billion) but has reduced the staff from 3,800 employees in 2016 to 3,000 at present. Credito Fondiario (which also operates as a master servicer) has increased the NPLs from 6.7 to 50 billion, while the staff has gone from 110 to 250 people. It’s evident that such companies, like all the others of the sector, are focused on efficiency and technology. But the risk of under-capacity is real, especially for the smaller and younger ones.

“Not all the servicers have enough resources to invest in staff and technology in order to manage portfolios that quickly”, confirms Andrea Mignanelli, Cerved Credit Management Ceo. “The necessary staff depends on the type of credit – clarifies Guido Lombardo, Chief Investment Officer for Credito Fondiario – some companies have grown thanks to the right technology, while I believe others bite more than they could chew”. “The main problem is technology – adds Antonella Pagano, Intrum Italy Business Development Director – NPL management requires an adequate hi-tech structure to be able to load the documents”. That’s the point: everybody is after efficiency and synergies, but only a few are successful in the process. In some cases, servicers assign to a single manager even hundreds of defaulting debtors, making it impossible to look after them all properly.

The risk of an NPL bubble

The problem is often upstream, in the due diligence of portfolios. When a bank sells its NPLs, the fund usually appoints a servicer for the assessment of the portfolio (and of the potential future earnings). As Sistemia Ceo Paolo Sgritta observed, “this might represent a potential conflict of interest”. Servicers, in fact, might be induced to promise and estimate excellent performances in the hope the investor would buy the portfolio and appoint them for the management. “This has recently resulted in some risked statements by some servicers”, adds Sgritta. After all, some experts commented that the competition between funds has become so harsh that NPL prices have excessively risen in comparison with the quality of credits.

According to Banca Ifis, the average price of mixed portfolios (secured and unsecured loans) in Italy has grown from 19% of the gross value in 2017 to 28% in 2018. “In 2016 and 2017, we saw some competitions for NPLs being completed at prices totally misaligned with the market – tells Claudio Manetti, Fire Ceo –such attitude has drugged this type of transactions, so to speak”. Many funds had obsessed with buying NPLs to increase their assets, to grow quickly, because Italy was “the place to be”. Sooner or later, it will come the time to deal with the issues related to NPLs. “Funds came to Italy expecting to make big money, but I’m afraid for many it won’t be like that”, continues the manager. After all, it has already happened.

A trading cards market

That’s it. In the middle of the banquet, some might be tempted to “adjust” its financial performance by selling some parts. That means, trading NPLs. “By selling some parts, you improve the financial performance of the entire portfolio”, says the manager. This might be the reasons behind the rise of a secondary market for bad loans. In this case, the sellers are not banks, but the funds that bought from banks. According to Banca Ifis, in 2015 and 2016 the secondary market respectively generated 31% and 51% of the total NPL transactions. In 2017 and 2018, due to the intense sale activity of banks, the secondary market reduced to 4% and 2% of the total. The outlook for 2019 is for a return, according to Banca Ifis, setting at 39%. Therefore, this year nearly one NPL transaction every two won’t be carried out by banks, rather by investors selling NPLs to other investors. Just like trading cards.

Let’s be clear. The existence of a secondary market is totally normal. Those who buy NPL mixed portfolios often prefer to sell some portions to more specialised operators. But the widespread feeling in the industry is that the real intentions might be others. The purpose, in fact, might be “adjusting” the performance and making easy profits trading NPLs.

There’s so little transparency on the secondary market that it’s hard to tell who might have done something like that. What is certain though is that several operations raised some suspicions. For instance, Crc and Bayview. The former bought (with some leverage) some NPL portfolios for then re-selling them. In 2019 the company sold a portfolio for 425 million, and in 2019 it put for sale another portfolio for 2 billion — all in the span of few years. Besides, there is the NPL portfolio worth 6 billion put on the market by Dgad International (Credit Agricole group). The fund Anacap decided to change servicer by appointing Sistemia because the former one (which one is hard to tell) wasn’t providing adequate results. Banca Ifis itself is very active on the secondary market, having carried out considerable NPL sales at the end of the year. “They’re residues of portfolios we no longer work on”, explained Banca Ifis. After all, there’s still the question: what will be the impact on the families and enterprises behind NPLs? Making a prediction is difficult. Certainly, more transparency would be beneficial for the sector.

Source: Il Sole 24 Ore

Translator: Cristina Ambrosi

Sga working on a project concerning UTPs

26 January, Il Sole 24 Ore

Sga is working on a model to help Italian banks getting rid of UPTs (unlikely-to-pay) while helping companies. According to Il Sole 24 Ore, the Treasury-owned company has been working at the project for quite some time. Sga is working at the implementation of a national platform for the management of UTPs. The project is still at the initial stage, as it hasn’t found the right set up. According to the rumours, the Prelios has been selected as the technical partner. The company will be working with other advisors on the dossiers, like Bain & Co concerning the industrial part and the firm RccLex for the legal part.

The object of the fund is to act as a vehicle for UTP portfolios (single holdings included) amounting to a couple of billion of euro. The project would concern medium-sized Italian banks, but it might be extended in the future also to Ubi, Banco Bpm, Bper and other medium financial institutions.

As already mentioned, the details of the project haven’t been defined yet. There’s the possibility, for instance, that the capital to acquire the portfolios might be provided by Sga itself. The advantage for Sga is the opportunity of accessing the market by issuing obligations almost at the same cost as the State ones. Sga might also involve other institutional investors in the securitisation of the riskiest tranches.

Since Sga doesn’t have a banking license, it will have to be supported by other fronting banks in order to carry out the traditional banking activities and manage the relations with the creditors. After all, UTPs concern still existing relationships. Unlikely NPLs (which are uncollectable), in the case of UTPs, the debtor is going through a difficult time, and the credit still has chances to return performing. Therefore, a certain managerial expertise is essential to collect the holdings through a restructuring process, with the objective of relaunching the business activity rather than adopting a speculative approach. UTPs generally come with a real estate guarantee. Therefore, it’s likely that there will be an intervention addressing all the companies with real estate developments, land with funded properties that are vacant, shopping centres and hotels to be re-positioned. The returns would be adequate but not excessive as the primary objective here is to relaunch the companies. Hence, the UTP purchases will have to be carried out at prices aligned with the market, also to avoid possible remarks from the EU.

Banks might deconsolidate a part of their UPT stocks, release capitals and acquire new assets. The total UTP stock amounts to about 86 billion gross, while Italian banks are covered for 30% of the gross value. For the ECB Surveillance, getting rid of UTPs has become a priority. As seen the recent Srep drafts sent to the Italian banks showed, there’s the tendency to no longer difference between bad loans and unlikely-to-pay, as they’re both included in the group of non-performing exposures. But, as UTPs are still collectable credits, they’re valued more than bad loans and have a lower coverage.

As a result, banks have the priority to minimise the impact of transfers on the accounts. Hence, it means reducing at the minimum the possible capital losses. The pressure of the Central Bank to increase the guarantees for non-performing loans in the next years will definitely favour transfers.

Source: Il Sole 24 Ore

Translator: Cristina Ambrosi

What a bargain those NPLs

19 January, Milano Finanza

Intesa Sanpaolo and Intrum started working on the collection of bad loans. The task is rather complex, considering a market such as the Italian one where slow justice is often an obstacle for creditors. Nevertheless, thanks to a strong team and solid investments, Intrum is positive about the future. “The new Italian management team is the right mix of expertise from Intrum, Intesa Sanpaolo and from outside”, explains Marc Knothe, Intrum Italy Ceo, to Milano Finanza. “Antonella Pagano, Business Development & Operational Services Director, comes from Intrum, as well as Antonio Rabossi, Legal & Compliance Director. Alberto Marone, Investment Director, and Alessandro degli Esposti, Client Management Director. From Intesa Sanpaolo, we have Stefano Marchetti, Operations Director, Salvatore Ruopolo, Head of Real Estate and Leasing, and Massimo Martinoia, HR Director. Finally, Enrico Baretta, Head of Internal Audit and Pierpaolo Sogli, Chief Financial Officer, come from other companies”.

Have you already started working on the credits of Intesa?

Of course. The joint venture headed by Giovanni Gilli has been operational since December. This final step completes a process started in 1986 that went through the merger between Intrum and Lindorff, the acquisition of Caf, Gextra and Crosfactor, and the expansion of our team, that has gone from 400 to 950 people thanks to the agreement with Intesa.

Are you also looking at other portfolios?

Yes. We’re one of the first three servicers in Italy, but we want to expand our market share even further through the direct purchase of portfolios as well as through management contracts. We’re interested in the platforms that several banks have recently put in the market. We’re currently working with other banks, and we want to continue doing that also in the future.

In these last few months, international investors have been worried by the country risk represented by Italy. What is your approach?

When we announced the agreement with Intesa, we were aware of the political changes currently going on. As investors, however, we have a long-term perspective, and we’re not paying much attention to short-term volatility.

What data are you receiving from the collection curves?

It depends on the portfolio, but, thanks to the recent reforms and the improvement of the legal procedures, times have shortened, especially in certain regions. Generally speaking, the market is aligned with our financial forecasts.

The ECB requires banks to write off new credits in a short time, bad loans included in some cases. With such deadlines, how a full collection would be possible?

Based on our experience, unsecured credits have shorter collection times. Secured loans have some elements that influence their collection and times are generally longer, although we’ve recently seen an improvement of court proceedings.

You manage a significant share of clients of a big bank. What is your collection approach?

As a group, we’re present in many countries, and we follow a precise ethical code. For the banks we work for, reputation is fundamental, and our objective is always to find a friendly compromise with the debtor.

Which developments do you expect from the Italian servicing market?

Technology is definitely important, as the servicing activity requires managing an increasing amount of data. Besides, international investors entered the Italian market with a short-term perspective. For this reason, they might soon put for sale their management companies. We have a long-term view, and we’re always ready for new acquisitions. I expect a consolidation.

Source: Milano Finanza

Translator: Cristina Ambrosi