npl evolution in italy june 2016 v-f
TRANSCRIPT
NPL evolution in Italy
Last update – June 2016
Cerved Credit Management
2
Agenda
NPLs in Italy
The impact of Law 132/2015
GACS and the Atlante Fund
Decree 59/2016 and next steps
3
Impaired loans in Italy amount to 341 € bn
Source: Cerved on Bank of Italy data
87
133157
237
195
282
327341
4
More than 80% of bad debts originated from loans to corporates
81%Corporates
19%Households(Mortgages &
Consumer Loans)
Source: Cerved on Bank of Italy data
5
The increase in new bad debts has not been offset by an adequate outflow
Source: Cerved on Bank of Italy dataNote: * Adjusted for Total cash exposure to borrowers signalled to the Central Credit Register as per Bank of Italy
*
6
The action plan of the Italian government to reduce NPLs
Aug 2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS Atlante Fund
Decree 59/2016
Measures to shorten bankruptcies, to facilitate voluntary agreements, to speed up the foreclosure process and to introduce tax deducibility on loan losses and impairments
Guarantees to facilitate the removal of bad debts from the books of commercial banks
Private initiative backed by the Italian government
Atlante aims to ensure success of banks re-capitalizazion and to buy bad debts
Further measures to speed up recovery rates
7
NPLs transactions on the rise in 2015
3.75.0
8.3
19
• Disposals more than doubled in 2015 compared to 2014
• Unicredit was the most active banking group in the disposal of portfolios (€ 4.7bn), followed by MPS (€ 3bn)
• Strong appetite from both new players on the market and incumbents
5.0
Source: Cerved on PwC data
8
Agenda
NPLs in Italy
The impact of Law 132/2015
GACS and the Atlante Fund
Decree 59/2016 and next steps
9
Law 132/2015
Measures to shorten bankruptcies
Measures to facilitate successful voluntary arrangements with creditors and thereby reduce the number of bankruptcies
Measures to facilitate debt restructuring agreements and forbearance
Measures to speed up the foreclosure process on both movable and non-movable assets
Stricter limits on seizures of salaries and pensions
Tax deductibility of loan losses and impairments
The Italian Parliament passed a new law on 6th August (no. 132/2015) containing urgent measures to modify insolvency proceedings and other judicial procedures:
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
10
Simulation of Law 132/2015’s impact on NPLs stock
The evolution of bad debts stock has been estimated considering:
• New bad debt inflows
• Estimated with Cerved’s forecasting model which is based on a macroeconomic scenario that assumes moderate recovery until 2020 as per IMF
• Bad debt extinguished outflows
• Estimates based on duration of insolvency proceedings and foreclosures procedures
• Duration of such procedures has been modified considering the expectation of operators and experts on the impact of Law 132/2015
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
11
The generation of new bad debts is forecast to decrease to 28€ bn in 2020
• Based on a wide range of statistical models, Cerved can forecast new bad debts ratio under different macroeconomic scenarios
• Based on the IMF macroeconomic scenario, the new bad debt ratio is forecast to decelerate until 2020, but still much higher than the pre-crisis level
Source: Cerved
2015 2016 2017 2018 2019 2020
GDP 0.8% 1.2% 1.5% 1.5% 1.5% 1.4%
Unempl. rate 12.2% 11.8% 11.4% 11.0% 10.6% 10.4%
Inflation 0.1% 0.8% 1.4% 1.5% 1.6% 1.7%
Interest rate 3.9% 3.7% 3.7% 3.7% 3.7% 3.7%
Macroeconomic scenario
Source: Cerved on Istat and IMF (October 2015)
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
12
Based on Cerved data collected from the Italian Business Register and evidence of Cerved Credit Management on problematic loans under management
The average duration of bad debts has been estimated as a weighted average of lengths and volumes of insolvencies in each segment
Insolvency Proceedings
Duration of insolvency procedures and administrative time to resolve bad debts
1
7.8
0.5
Lag between doubtful account and start of insolvency proceedings
Average duration of bankruptcies
Lag between closing of bankruptcy and removal of doubtful account
2.9
2.1
1
Lead time required to repossess property and begin acution
Average duration of auction
Lag between end of auction and cash-in
2
4.2
Court procedure
Time for debtcollection
Foreclosure on real estate Seizure of 20% of salary
Average duration of bad debts: 7.3 years
Average years
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
13
The impact of law 132/2015 on bankruptcies and auctions length
In November Cerved and ABI (Italian Banking Association) carried out a survey on the perceived impact on the time required to extinguish bad debts and on the recovery rates). Cerved and ABI estimated:
-28% length of bankruptcies
-20% length of the real estate auctions
In the Notes on financial stability and supervision1, Bank of Italy estimated the impact of the law 132/2015 as follows:
-50% length of bankruptcy in a favorable scenario (-18% to -33% in a less favorable one)
-25% length of the real estate auctions
7.3 4.7 yrs7.3 6 yrs Weighted average time to extinguish bad debts in 2020
Weighted average time to extinguish bad debts in 20202
(1) M. Marcucci, A. Pischedda, V Profeta, The changes of the Italian insolvency and foreclosure regulation adopted in 2015, Notes on financial stability and supervision n. 2(2) Cerved calculations based on the reduction of lengths estimated by the Bank of Italy
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
Bank of Italy favorable scenario
175 €bn
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
-
50,000
100,000
150,000
200,000
250,000
Bad debts reduced by 20-40€ bn versus the baseline scenario thanks to Law 132/2015
Forecast
197 €bn
Bad debt stock€ bn
Source: Cerved on Istat and IMF
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
216 €bn Baseline scenario
Banks and investors expectations (ABI-Cerved)
14
15
Early evidence of Law 132/2015: increase in number of procedures completed by courts
Law 132/2015
6,383 bankruptcies completed-4.7% YoY
7,234 bankruptcies completed
+13.3% YoY
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
16
Duration of bankruptcies was declining already before the introduction of L. 132/2015
Average duration of bankruptcies procedures in 2015 was 7 years and 5 months, lower than the approx. 8 years in 2014.
Law 132/2015
-7.8% -7.9%Shortening in duration of bankruptcies started before the introduction of Law 132/2015: the average length contracted by 7.8% between January and August 2015 (pre-reform) and by 7.9% between September and March 2016 (post-reform), compared to the previous year.
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Heterogeneity in the duration of bankruptcies
• Information relative to the duration of bankruptcies indicates a wide variability in 2015:
• a fourth of the bankruptcies closed were represented by procedures lasting less than 2 years;
• half of the bankruptcies closed were represented by procedures lasting less than 4 years;
• three-fourths of bankruptcies lasted less than 10.4 years.
• There is a ‘long tail’ of c. 25% of procedures with a duration of more than 11 years, of which some of these with a duration of more than 20 years
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
17
Average: 7.4 years
75%
25%
50%
18
Agenda
NPLs in Italy
The impact of Law 132/2015
GACS and the Atlante Fund
Decree 59/2016 and next steps
19
1 2 3 4 5 6 7 8 9 10
21.0
23.0
26.2
10%
15%
15% e impatto atteso sui RR
10% e impatto atteso sui RR
Average duration of bad debts
Net present value for an investorBased on different scenarios
Low prices offered by investors have slowed down the NPL market
17.8
ABI-Cervedscenario
(6 yrs)
Baselinescenario(7.3 yrs)
Bankitalia scenario (4.5 yrs)
28.9
• The shorter the time needed to extinguish bad debts, the higher the price expected by a NPL investor
• The higher the discount rate, the lower the price: cash to be obtained in the future is worth less in the present when interest rates are higher
• If a positive impact on recovery rate is also considered, valuations of investors go up further
Source: Cerved
15% Target IRR and positive impact on Recovery Rate 10% Target IRR and positive impact on Recovery Rate
15% Target IRR
10% Target IRR
20
Banks have reduced the book values of their bad debts, but still far from investors’ prices
Source: Cerved on Bank of Italy data
21
Discount rates
Banks can obtain funding at substantially lower interest rates than investors, especially thanks to refinancing programmes put in place by the ECB
Expected collection
Costs
Information asymmetries between buyers and sellers regarding the timing of future collection
Investors face charges to set up an acquisition vehicle, as well as contract costs and servicing costs
Times
Information asymmetries between buyers and sellers regarding the amount of future collection
Reasons behind bank-investors price gap
22
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
Since January 2016 a state guarantee scheme (GACS) is available
Garanzie sulle cartolarizzazione delle sofferenze (GACS) are available for senior tranches of securitized bad debts:
Bank securitizes NPLs in a special purpose vehicle
SPV
The SPV buys NPLs and issues two categories of bonds:• Senior (higher priority compared to other
bonds in the event of liquidation)• Junior (lower priority)
SPV
bondsenior
junior
Two conditions must be met: (i) Investment grade rating on the senior tranche of securitized NPLs, and (ii) Independent Servicer
BBB
State guarantees are available on the senior tranche, if rated as investment grade
investors
BBB
1
2
3
4
23
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
The impact of GACS on prices
price
% tranche senior
Hypothesis:
- Average length: 7.3 years
- Cost of Junior Tranche: 15%
- Cost of Senior Tranche: 3%
0% 20% 30% 40% 50% 60% 100
105
110
115
120
102 103
105
108
112
24
GACS strengthened by the Atlante Fund
Hypothetical incremental path on NPLs’ transfer price (Source: Quaestio)
Source: Quaestio capital management. Based on the following assumptions. Securitisation: % tranche senior=65%; yield on senior notes = 5%;IRR required on the junior tranche=15%. GACS effect: cost of senior notes = Italy risk + guarantee fee; Atlante effect: sale of a junior tranche of an ABS GACS to the Atlante Fund (IRR=6%); Analysis of incremental sensitivity: reduction of costs associated with servicing from 8% to 7%; reduction of the time to recovery from 7 to 5 years; increase in recovery rate from 35% to 40%.
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
Straight s
ale
ABS No GACS
ABS GACS
ABS GACS Atla
nte
Final pric
e
Servici
ng costs
reducti
on
Reducti
on in tim
e to re
cove
ry
Recove
ry rat
e incre
ase
Final pric
e + Sen
sitivi
ty
20.7%
28.3%33.8%
2.6% 1.0%
4.0% 0.3% 1.0%
4.2%
25
Aug2015
Jan2016
Apr2016
May2016
L.132 bankruptcy reform law
GACS AtlanteFund
Decree 59/2016
The impact of GACS and Atlante on NPLs
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
-
50,000
100,000
150,000
200,000
250,000 Forecasts
175 €bn Shorter lengths of procedures
216 €bnBaseline scenario (7.3 years)
Shorter length of procedures+ potential effectiveness of GACS scheme and Atlante Fund
107 €bn
Bad debt stock€ bn
26
Agenda
NPLs in Italy
The impact of Law 132/2015
GACS and the Atlante Fund
Decree 59/2016 and next steps
27
L.132 bankruptcy reform law
GACS Atlante Fund
Decree 59/2016
May2016
Apr20162016
Jan2015Aug
Decree 59/2016
PLEDGE OF INSTRUMENTAL ASSETS IN ADDITION TO REAL ESTATE COLLATERAL
AUTOMATIC REPOSSESSION OF THE REAL ESTATE ASSETS IN FAVOUR OF THE BANK
COMPULSORY EXPROPRIATION
28
Other actions to reduce NPLs in Italy
The gov’t action plan is based on a systematic approach: it introduces new measures on bankuptcies and other judicial procedures, fiscal incentives, stimulates NPL market by a new guarantee scheme and by supporting the launch of a new Fund
The correct implementation of new measures is crucial to ensure success of the action plan
In particular, it is urgent to make NPLs more transparent, in order to reduce information asymmetry between banks and investors
More actions to strengthen the action plan exist, e.g.:• More simple GACS price scheme• Allow access to database (Agenzia Entrate, Centrale Rischi
Bankitalia, etc) to players who can help investors to price NPLs• High heterogeneity by courts: incentives towards best
practices could help very much
Systematic approach
Implementation is important
More transparent NPLs
More actions
29
Average bankruptcy lengths varies from 3 to 16 years across the country
2.2X
5.1X
Source: Cerved
30
In case of convergence, bankruptcy lengths below three years by 2020
Within the 10% of the faster provinces,
bankruptcies close in less than 5.5 years
2015 2016 2017 2018 2019 2020
7.8
5.5
2.75
totale
10% più veloci
Convergence hypothesis
Source: CervedNote: * Other provinces, excluding the 10% faster provinces
Other provinces
10% faster provinces
*
Years
31
High variability in the duration of real estate auctions
Torino Padova Trapani Bari Roma Brescia Milano -
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Length of real estate auctionsAverage years, closed procedures in 2015
Length of most efficient court is 25% below the
average
Source: T6, Tavolo sulle esecuzioni immobiliariNote: statistics are referred only to real estate auctions started after 2009, therefore lengths could be underestimated
32
With GACS, Atlante and convergence toward more efficient courts, bad debts stock at pre-crysis level in 2020
216 €bn
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0
50,000
100,000
150,000
200,000
250,000
175 €bn
155 €bn
Optimistic scenario of Bank of Italy
Optimistic scenario of Bank of Italy + Convergence toward more efficient courts
87€ bn Optimistic scenario of Bank of Italy + Convergence toward more efficient courts + GACS and Atlante fund
Source: Cerved elaboration on T6 data
Bad debts stock€ bn
Baseline scenario (7.3 years)
