The Italian NPL market – on the runway and now cleared for take-off!

The Italian non-performing loan (NPL) market is one of the largest potential markets with around €194bn of gross NPLs and over €330bn of gross impaired loans (as of May 2015). The registered gross NPL ratio of Italian banks has shifted from 2.8% at the end of 2007 (before the financial crisis began) to 10.1% in May 2015.


At our annual conference earlier this year there was a clear feeling of Italy being one of the most promising NPL markets for the next coming years. The trend in the market since then combined with the recently announced regulatory reforms firmly support such a view.


Catalyst for provisioning level review

The asset quality review (AQR) in 2014 provided a good incentive for Italian banks to review their provisioning levels. The NPL coverage ratio of the top 10 Italian banks moved from 54.7% at the end of 2013 to 56.1% a year later.


The transaction market is showing clear signs of recovery as our Italian NPL Market research report indicates. In the first half of 2015 deals have doubled compared to 1H 2014 (€5bn versus €2.5bn). 2015 started with the disposal of UCCMB (platform plus €2.4bn NPL portfolio) to Fortress and Prelios. This was followed by the portfolio disposals of Findomestic (BNP Paribas Group), Sofigeco,, Banco Popolare and Unicredit. We expect more to come by the end of 2015, starting with the sale of the Archon Italian platform (Goldman Sachs Group) and NPL related assets which are in the completion phase. Indeed our pipeline of sell side transactions is the strongest that we have seen for many many years.


Fertile Italian market

So, as we predicted, 2015 is emerging as a turning point in the Italian deleverage process. We estimate NPL transactions will exceed €20bn (face value) this year. The Italian market seems to be particularly fertile: the size of the market, the increased coverage ratio, investors’ appetite and liquidity of the market, all being spurred on by recent reforms in the banking system.


The Italian Prime Minister, Mr Renzi, received approval from the Italian Parliament to reform the mutual banking sector, requesting the transformation of the Banche Popolari (which has total assets in excess of €8bn) into joint stock companies. Different banks will therefore be forced to dispose of their bad loans before moving towards mergers and acquisitions or potential listings on the stock exchange.


Streamlining the workout process

In addition to this the Italian government recently (June 27) issued a Decree aiming at improving and streamlining the complex and slow workout process of NPLs (i.e. changes in the insolvency and foreclosure proceedings process) as well as aligning the Italian fiscal treatment of loans – loss provisions with European standards, allowing for their full deductibility in the year in which loan loss provisions are booked in banks’ P&L [profit and loss accounts].


The implementation of such measures will help in addressing some of the reasons underlying the bid-ask gap, thus enhancing the liquidity of the NPL market.


So, on the runway and cleared for take-off - but I am sure there will be plenty of turbulence over the next few months.    


To what extent does the Italian market represent an opportunity for you? How much will streamlining of the workout process close the bid-ask gap? Share your thoughts below or schedule a meeting to discuss your situation in confidence.

Richard Thompson |  Global Leader, Portfolio Advisory Group
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