The Italian Unlikely to Pay Market - May 2018 - www.pwc.com/it
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May 2018
The Italian Unlikely
to Pay Market
www.pwc.com/it
Contacts
Pier Paolo Masenza Fedele Pascuzzi
Financial Services Deals Leader Business Recovery Services Leader
M: +39 348 2505003 M: +39 348 9999560
pierpaolo.masenza@pwc.com fedele.pascuzzi@pwc.com
Vito Ruscigno Alessandro Biondi
Co-Head of NPL Co-Head of NPL
M: +39 348 2709820 UTP Specialist & Special Situations
vito.ruscigno@pwc.com M: +39 348 1565448
alessandro.biondi@pwc.com
Salvatore Lombardo
Business Recovery Services Partner
UTP Specialist & Special Situations
M: +39 348 1505332
salvatore.lombardo@pwc.com
Contents
The Unlikely to Pay segment – The market in 2017 and our view on 2018 05
Foreword | The market in 2017 and our view on 2018 06
1. Asset Quality and Unlikely to Pay key figures 08
2. Unlikely to Pay distribution – Top 10 Italian banks 09
3. UtP ratio on NPE – Breakdown of Top 10 Italian banks 10
4. Unlikely to Pay coverage ratio - Top 10 Italian banks 11
5. Unlikely to Pay inflows and outflows from 2015 to 2017 – Top 10 Italian banks 12
6. Restructured loans trend within the Italian banking system 13
7. The UtP is a complicated asset class thus requiring several alernative
management solutions 14
8. UtP performance from 2015 to 2017 – collections and returns to performing 15
9. Will the Regulators’ requirements for proactive management of NPE be a game
changer for UtP? 17
10. What should banks do to tackle the UtP challenge? The answer is “proactive
management” 18
11. Which strategic options are available to fix the UtP issue? 19
12. ECB Guidance on forbearance measures 20
13. Forbearance measures’ trend from 2015 to 2017 21
14. Servicing of UtP as new market opportunity 22
15. UtP portfolios and single names transactions in 2017 23
16. Investor’s equity injection/underwriting of senior debt 24
17. View on 2018 - strategic drivers will lead the banks’ decisions on their UtP
management 25
Appendix 26
Disclaimer: PwC analysis are based on FY15, FY16, FY17 banks’ financial statements (tab. A.1.6, A.1.7 and A.1.8) and Data Provider dataset
4 | The Italian Unlikely to Pay market | Is now the momentum?
The Unlikely to Pay segment
PwC | 5
Foreword | The market in 2017 and our view on 2018
Last year, our report on the Italian Unlikely to Pay Between these two sub-categories UtP include all the
(UtP) market was entitled “Ready to tackle the exposures involved in some kind of restructuring
challenge?” to underline the potential momentum of measures. Moreover, UtP are different depending on
the Italian banks to address the issue of their non borrower’s characteristics, such as industry, size,
performing exposures classified as UtP. vintage (how long the exposure is classified as UtP),
available guarantees and collaterals (secured vs.
One year later we can say that 2017 witnessed few unsecured). Each of the above characteristic may
and limited movements in the UtP market. As a lead to different management and deleveraging
matter of fact, the Italian banks are still working on strategies.
the implementation of best practices in the
management of their NPE (UtP included) and Will the Regulators’ requirements for proactive
furthermore are still lingering and pondering on how management of NPE be a game changer for UtP?
to best structure and effectively implement disposal ECB guidelines, whose application in Italy will be
plans of their UtP exposures (sales of UtP, net of extended across the board, even to the less significant
several bailouts, were limited in terms of numbers of banks, the calendar provisioning (within the ECB
transactions and in EUR volumes in 2017). Addendum) providing for higher and faster
provisioning for NPE, and the application of IFRS9
UtP is a major issue for the Italian banking system from 1 January 2018, all represent some of the
for several reasons. The NPE figures at the end of extensive measures required by the Regulators. We
2017 still show a huge amount of UtP (€94bn of GBV) believe that these recent requirements mandated by
in the books of the banks. By the end of 2017 the UtP the European Regulators will undoubtedly drive the
reached and even surpassed the levels of bad loans in Italian banks’ management of the current stock, next
terms of NBV (€66bn vs €64bn respectively). Since wave of NPE and the UtP deleveraging plans as well.
the Italian UtP exposures are concentrated within a
few top banks we believe that these players will pave If the aforementioned assumption is true, which
the way for the identification and execution of management and deleverage strategies will the
differentiated structured deleveraging strategies for Italian banks execute in 2018? Depending on their
the entire system. strategic drivers, the Italian banks could pursue one
or more of the potential strategic options which
Alongside their massive gross and net figures would be aimed at deleveraging their UtP. Capital
accounted for in the banks financial statements, the requirements and short/medium-term plans of
UtP feature a massive stock of loans (circa 50%) reducing their NPE ratio could lead to massive UtP
which do not successfully emerge from their status sale opportunities (single names and/or small
and remain as UtP year after year. UtP is by portfolios). Industrial capabilities’ self-assessment
definition a category of borrowers in temporary along with identification of potential upside coming
financial difficulties that the banks should manage in from the proper restructuring of the UtP could even
order to move them back into the performing lead the banks to internal management or external
category. The Bank of Italy reported that 62% of the management (through specialised servicers) of the
restructuring agreements (which comprise most of UtP.
the UtP exposures), after four years, are still in place
and did not result in a positive or conclusive We also see in the market a rising interest in
outcome. structuring and executing securitization operations
with UTP as underlying assets that could introduce a
When considering this class of exposure, it is critical disruptive and innovative solution in facing the
to note that UtP is a complicated asset class requiring Italian UtP issue.
several alternative management solutions.
We believe that 2018 is definitively the right moment
The UtP category may typically include borrowers for the Italian banks to firmly and decisively
featuring overdue instalments (similar to Past Due progress on their path to tackle the UtP challenge.
exposures) on the one hand, and on the other hand,
borrowers whose critical financial situation could
easily lead to the status of bad loans.
6 | The Italian Unlikely to Pay market | Is now the momentum?
PwC | 7
1 Asset Quality and Unlikely to Pay key figures
341
326 324
14
12 7
283
18 264
127 117 5
237 131
21
194 109 94
13
157 91
132 12 74
16
66
85 200 200 NBV
57 184
9 156 165 64bn
33 125
107
78
59
42
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Bad Loans (€ bn) Unlikely to Pay (€bn) Past Due (€bn)
Source: Bank of Italy Report – «Condizioni e rischiosità del credito» updated Dec17
37% 5.5% 30%
(*) Calculated as arithmetic average
8 | The Italian Unlikely to Pay market | Is now the momentum?
2 Unlikely to Pay distribution – Top 10 Italian
banks
At the end of 2017 the overall UtP exposure is highly Despite the declining trend, UtP stock is an issue to be
concentrated within the Top 10 Italian banks (80% of tackled promptly: 37% of the NPE of the Top 10 Italian
the total UtP exposure vs 76% in 2016); when banks are UtP as at 31Dec17, with several banks (4 out of
considering only the Top 3 Italian banks, such 10) featuring gross UtP ratio on NPE over 40%.
percentage is 53% (51% in 2016).
The UtP exposure declining trend, started in 2015 (-3%
from FY 2014 to FY 2015), continued in 2016 and 2017
(-8% and -20% YoY respectively).
20%
94
€ Bn 18.4
2% 0.5%
2% 0.5
4% 1.8
4% 2.0
53% 3.3
6% 4.0 -11% Vs. PY-8% Vs. PY
+1% Vs. PY
5.2 -17% Vs. PY
10% NA Vs. PY
9.0 +1% Vs. PY
12% -22% Vs. PY
11.6
19% -24% Vs. PY
17.9 Carige 3.1 3%
-10% Vs. PY Creval 2.2 2%
ICCREA** 1.2 1%
22%
20.3 Banca IFIS 0.7 0.7%
-17% Vs. PY
C.R. Bolzano 0.4 0.4%
Others 10.5 11%
Unicredit Intesa MPS Banco UBI BNL** BPER Cariparma BP Credem Others Total
Sanpaolo BPM Sondrio
40% 34% 26% 39% 41% 30% 32% 40% 42% 35% Gross UtP/ NPE
11% 12% 37% 20% 13% 19% 20% 11% 15% 5% Gross NPE Ratio
(*) The list of Top 10 Italian banks is based on the Gross Book Value of Total Exposure as at 31Dec16 (source: ABI)
(**) BNL exposure as at 31Dic16 (to date their financial statement as at 31Dec17 is not available); ICCREA exposure as at 30Jun17
Source: PwC analysis of banks’ financial statements as at 31Dec17
PwC | 93 UtP Ratio on NPE – Breakdown of Top 10
Italian banks
Despite the gross UtP exposure declining trend over the period 2015 / 2017
(CAGR of -14%), their weight on the NPE of the Top 10 Italian banks
remains significant (37%).
NPE breakdown from 2015 to 2017 by bank
Unicredit Intesa Sanpaolo MPS
3% 2% 1% 6% 2% 1%
2%
1%
32% 36% 33% 26%
32% 3% 34% 37%
34%
40%
64% 66% 62% 65% 57% 64% 73%
65%
57%
2015 2016 2017 2015 2016 2017 2015 2016 2017
Banco BPM* UBI BNL
1% 1% 2% 1% 1% 2% 1%
0%
44% 46% 36% 30%
47% 39% 41% 41%
62% 68%
51% 55% 61% 52% 58% 58%
2015 2016 2017 2015 2016 2017 2015 2016 2017
BPER Cariparma BP Sondrio
2% 1% 1% 2% 2% 1% 8% 4%
11%
35% 36% 32% 45% 40% 40% 45% 42%
43%
62% 63% 68% 53% 58% 58% 47% 54%
45%
2015 2016 2017 2015 2016 2017 2015 2016 2017
Credem
Past Due Gross UtP CAGR 2015-2017
5% 3% 3% Unlikely To Pay
32% 36% 35%
Bad Loans
64% 61% 62% (*) Ratios of Banco BPM in FY 2015 and 2016 (pre-merger) were calculated as sum of the
figures of Banco Popolare and BPM (merged together in Banco BMP from 1 January 2017)
Source: PwC analysis of banks’ financial statements as at 31Dec17 and 31Dec16
2015 2016 2017
10 | The Italian Unlikely to Pay market | Is now the momentum?4 Unlikely to Pay coverage ratio - Top 10
Italian banks
UtP Coverage ratios vs. Gross UtP ratios
Top 10 Italian Banks featured general higher provisions of UtP Ratios of Banco BPM* showed a reduction of the
in 2017 vs 2016, resulting in higher coverage ratios (avg. 30.4% gross UtP ratio (7.6% in 2017 vs 9.5% in 2016) as well
in 2017). as UtP coverage (27.3% in 2017 vs 28.0% in 2016).
Likewise, UBI dropped its Gross UtP ratio from 5.9%
In particular UniCredit and Intesa Sanpaolo, both below the to 5.3% and UtP Coverage from 23.3% to 22.9%.
average Gross UtP ratio (4.3% and 4.1% respectively),
increased their UtP provisions reaching UtP coverage equal to
43.2% (UniCredit) and 27.9% (Intesa Sanpaolo) at the end of
2017.
MPS, third bank in terms of UtP exposures, showed gross UtP
ratio (9.5%) lower than in 2016 (11.5%) with an average UtP
coverage of 40.6% in 2017 compared to 40.3% in 2016. The Bubble size: Unlikely to Pay
former is due to the recognition of bad loans previously gross exposure 2017
classified as UtP.
Bubble size: Unlikely to Pay
gross exposure 2016
50%
YoY shift (FY16-FY17)
45% UCG
MPS
UtP Coverage Ratio (31/12/2017)
40%
BNL
35%
Avg. Top 10
(30.4%) BP Sondrio
30%
ISP Banco
BPM*
25%
20% UBI BPER
Cariparma
15%
Credem Avg. Top 10
(5.5%)
10%
1% 3% 5% 7% 9% 11% 13%
Gross UtP Ratio (31/12/2017)
(*) Ratios of Banco BPM in FY 2016 were calculated as sum of the figures of Banco Popolare and BPM
Source: PwC analysis of banks’ financial statements as at 31Dec17 and 31Dec16
PwC | 115 Unlikely to Pay inflows and outflows from 2015
to 2017 – Top 10 Italian banks
In 2017, total outflows of the Top 10 Italian banks In particular, UtP gauged a firm decline of inflows
remained stable at around €44bn, despite lower outflows from performing loans over the last 2-year period: 16%
to bad loans: 21% in 2016 vs 16% in 2017*. in 2016 vs 14% in 2017*.
The inflows in 2017 decreased from €33bn to €30bn, mainly UtP which remained UtP during 2017 amounted to
due to the lower inflows from performing and past due €44.5bn (i.e. 50% out of €89bn), proving how the main
exposures*. issue for the Italian UtP lies mainly in their massive
stock and a management not yet able to target
UtP In/Outflow deleverage solutions.
% flows =
Initial UtP exposure
Inflows
€ Bn Outflows 33
(43) Inflows
Outflows 30
(44)
99 (5%)
(13%)
9% 89 (7%)
(21%) (13%)
8%
15% 75
16% (16%)
(4%) 5%
(14%) 14%
56%
Remain UtP 50%
Remain UtP
(1)
UTP To Collected To bad Others From From other Other UTP To Collected To bad Others From From other Other UTP
Exposure performing loans outflows performing NPL inflows Exposure performing loans outflows performing NPL inflows Exposure
31.12.2015 31.12.2016 31.12.2017
(*) Inflows and outflows in 2017 for BNL were estimated equal to the flows occurred in 2016
Source: PwC analysis of banks’ financial statements as at 31Dec17 and 31Dec16
12 | The Italian Unlikely to Pay market | Is now the momentum?6 Restructured loans trend within the Italian
banking system
5,8% 6,7% 7,2% According to Bank of Italy, after 4
10,4% years:
• 62.2% of the restructuring
agreements (which qualify most
of the UtP exposures) are still in
29,7% place
• 22.5% of the restructuring
agreements resulted in
58,9% liquidation/bankruptcy
71,2% procedures)
81,4% • 10.4% of the restructuring
agreements resulted in a
32,5% positive and conclusive outcome
Financial stability
17,2%
Same procedure
10,8% 22,5% Other restructuring procedure
8,2% 13,8% Liquidation/ Bankruptcy
9,4%
3,2% Extinction/ Incorporation
1,3% 1,9% 2,8% 4,9%
After 1 year After 2 years After 3 years After 4 years
(*) This trend is related to the years from 2010 to 2014 (restructuring processes begun in 2010). By «Restructured exposures» Bank of Italy refers to
exposures subject to the following procedures according to the Italian Bankruptcy Law:
- «Concordati preventivi»
- «Accordi di ristrutturazione»
- «Piani di risanamento»
- «Accordi stragiudiziali»
Source: Bank of Italy – «Questioni di Economia e Finanza» (No. 311, March 2016)
PwC | 137 The UtP is a complicated asset class thus requiring
several alernative management solutions
Not all UtP exposures are equal. According to Bank of Italy Moreover, UtP are different depending on borrower’s
criteria, the UtP are classified as such according to the characteristics, such as industry, size, vintage (from how
judgment of the banks about the debtor’s unlikelihood to long the exposure is classified as UtP), available guarantees
fulfil its credit obligations. and collaterals (secured vs. unsecured).
As a result UtP category may include on one end borrowers Each of these features must lead to a specific management
featuring overdue instalments (similar to Past Due strategy for the UtP. Therefore, the punctual comprehension
exposures) and on the opposite end borrowers whose critical of the UtP characteristics is essential for their proper and
financial situation could lead easily to the status of bad loans. effective management by the Italian banks.
Between these two sub-categories UtP include all the
exposures involved in some kind of restructuring measures.
Type of borrower
Industry Size “Vintage” Collateral
UtP ✔ ✔ ✔ ✔
“Overdue”
UtP “under
restructuring”
Type of UtP
(Recovery plans ex art.
67 & art. 182bis Italian ✔ ✔ ✔ ✔
Bankruptcy Law, other
restructuring
procedures)
“Non performing”
UtP ✔ ✔ ✔ ✔
(Almost bad loans)
14 | The Italian Unlikely to Pay market | Is now the momentum?8 UtP performance from 2015 to 2017 - collections
and returns to performing
For the Top 10 Italian banks, the portion of UtP For the Top 10 Italian banks, the collections of UtP
returned to performing increased from 2015 (4.0%) to increased over the period 2015-2017 from 9.1% to
2017 (5.1%). 9.8%.
A similar trend for the cure rate was confirmed even for the In general, Top 10 banks outerformed the overall
Italian banking market (3.7% in 2015 v.s. 3.9% in 2016). market in 2015 and 2016, both in cure rates and
collections.
UtP Exit to performing + Collections
Recovery rate (%) =
UtP Initial exposure + Inflows
15,0%
13,9%
13,2%
13,3%
12,4%
9,8% 9,8%
9,1% 9,4%
8,7%
5,1%
4,0% 4,1% 3,9%
3,7%
2015 2016 2017*
Top 10 Market Top 10 Market Top 10
% to Performing (Top 10) % Collected (Top 10) % to Performing (Market)
% Collected (Market) Recovery Rate (Top 10) Recovery Rate (Market)
(*) Figures for 2017 do not include returns to performing and collections for BNL
Sources: PwC analysis of banks’ financial statements as at 31Dec17, 31Dec16 and 31Dec15, and of data provided by ABI «Associazione Bancaria
Italiana»
PwC | 1516 | The Italian Unlikely to Pay market | Is now the momentum?
9 Will the Regulators’ requirements for proactive
management of NPE be a game changer for UtP?
• ECB’s NPEs Guidance (March 2017)
• Calendar Provisioning (Addendum ECB): “Prudential
provisioning backstop” equal to 100% after 7 years of vintage for
ECB & Bank of Italy secured NPE, 2 years of vintage for unsecured NPE
• Bank of Italy extended ECB Guidance also to Less Significant
Institutions (LSI)
• Action Plan, aimed at involving EU Institutions (including European
Commission) into the adoption of best practices for the management
European Authorities of the NPE stock
• EBA Guidance about NPE’s appropriate classification and
sustainable management, and about forborne exposures
• “GACS” is aimed at increasing liquidity in the market by facilitating
leverage on portfolio disposals
• EU Directive about credit servicers and purchasers and about
Lawmakers collateral recovery plans
• EU Regulation “Anacredit” for the collection of granular data on
EU banks’ credit exposures
• Entered into force in 1 January 2018, IFRS 9 introduces an “early
warning and forward looking approach” to credit impairment
Accounting Standards testing methodology, resulting in the classification of certain portions
(IFRS 9) of the current portfolio in loans’ higher risk categories
• Banks will be required to accrue provisions based on expected
losses and not only upon the occurrence of specific events
PwC | 1710 What should banks do to tackle the UtP
challenge? The answer is “proactive
management”
Carry on portfolio segmentations for
1
(i) a better understanding of the asset quality of their UtP
(ii) a proper portfolio classification
(iii) a preliminary identification of management
strategies
Assess borrowers’ performance throughout the
2
analysis of financial statements, intermediate reports,
Business Plan, Budget and any further financial
documentation about the borrowers’ performance and
details of their financial position
Regularly monitor the Central Credit Register to be
3 informed on the total exposure to the system and
relevant movements (overdraft withdrew or decrease,
bad loan classification)
Operational risks
4 Use early warning indicators: from internal
(companies and individuals) and external sources
(risks concerning the operational structure
of the borrowers)
Market risks
5
Produce and regularly update an overall rating on
(external variables such as those regarding
borrowers’ risk based upon info gathered from several
the environment where the borrowers
sources operate)
Implement improved NPE operating model:
6 dedicated workout units, procedures for classification
and segmentation, tailor made management strategies on
a single name basis
Financial risks
(financial soundness of the borrowers and /
or relevant customers and / or suppliers)
18 | The Italian Unlikely to Pay market | Is now the momentum?11 Which strategic options are available to fix the
UtP issue?
The strategic options identified through the on going due Sale of UtP could be even executed through portfolios
diligence carried out by the bank on the borrower’s case transactions which require preliminary strategic
could result in the return of the loan in the performing segmentation to maximize loans’ value for the banks.
category through the implementation of internal
Otherwise, banks may decide to outsource the
forbearance measures or in the sale of the loan or in the
management on NPE (such as UtP) to a specialised
classification of the exposure as bad loans (thus
credit servicer.
requiring the prompt liquidation of the borrower’s asset
through judicial procedures)
Servicing
• Forbearance measures: • New opportunities of value
− Grace period/Payment creation
moratorium • New market opportunities
− Extension of maturity/term
• Mandatory will be the transition
− Debt consolidation from past due management to a
− New credit facilities proactive management of the UtP
− Recovery plan by Italian (e.g. new credit facilities)
Bankruptcy Law (e.g. art. 67 & • Part of the industrial
182 bis) management required by ECB
• Segmenting by industry/
type of UtP (overdue/ UtPs’ • Best practices’ implementation
restructured/ defaulted) adding value
strategy
Investor’s equity
Loan sale injection/ underwriting of
• True sale/securitisation senior debt
• Single names’ sale on a best offer • Industrial partner to revamp and
basis (opportunistic criteria) establish the underlying
borrower’s business (long term
• Single names’ sale based on a
approach)
structured plan (strategic
criteria) • Financial partner to inject cash
• Sale of UtP portfolios within a strategic exit plan
(short/medium term approach)
PwC | 1912 ECB Guidance on forbearance measures
Internal management
The ECB guidance emphasizes that the main objective of In particular, on the basis of the type of difficulty of the
forbearance measures is to allow debtors to exit their non- debtor, either short- or long-term forbearance measures
performing status or to prevent performing borrowers from (or a combination of the two) maximizing recoveries shall
reaching a non-performing status. be identified, by granting, simultaneously, the
sustainability of the adopted measures (e.g. debt service
Therefore, the guidance actively addresses the theme, by capacity).
guiding banks in the identification of the optimal balance of
forbearance measures aimed at granting the exit from short-
and long-term difficulty status of the debtor.
Main forbearance measures* – Application examples
Adoption of short-term measures Adoption of long-term measures
Area of
intervention Financial difficulty Measure Financial difficulty Measure
• Temporary financial • Temporary payment of • Permanent
• Excessively high
Interest difficulty of minor entity interest only (no capital
interest rates for the
reduction of interest
to be overcome within reimbursement) rates
debtor
24 months
• Temporary
• Temporary financial • Misalignment between • Rescheduling of
reduction of
Instalments difficulty of moderate
instalment amount
repayment plan and amortization plan (e.g.
entity to be overcome reimbursement capacity partial, bullet, step-up)
• Full interest payment
within 24 months of the debtor
• Temporary financial • “Grace period” for the
difficulty of moderate/
• Excessively high • Extension of debt
Maturity payment of interests
instalments for the maturity
serious entity to be and capital
debtor
overcome within 24 mo.
• Permanent difficulty • Voluntary disposal
Collateral and good level of of collateral by the
collateralization debtor
In particular cases it is possible to adopt new
(*) In addition to debt forgiveness and/or arrears capitalisation options credit facilities or debt consolidation measures
20 | The Italian Unlikely to Pay market | Is now the momentum?13 Forbearance measures’ trend from 2015 to 2017
Internal management
Forbearance Forborne UtP exposures
Ratio = Total UtP exposures
140
128 128 129 127 125 123
120
120 117 116
32% 32% 104
37% 99
100 40%
41% 42% 94
47%
48% 48%
80 50%
51%
51%
60
68% 68%
40 63% 60% 59% 58%
53% 52% 52%
50% 49% 49%
20
-
Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17
No Forbearance Forbearance
Source: Bank of Italy Report – «Condizioni e rischiosità del credito» updated Dec17
PwC | 2114 Servicing of UtP as a new market opportunity
Servicing
Conditions to be satisfied by the
Servicers for the management of UtP
The UtP servicing could increase
significantly over the next four years
along with the volumes of NPE
outsourced by banks and investors to
external specialised servicers.
% of NPE stock
outsourced to specialists
>40%
10-20%
2x UtP
20%
5-10% UtP
2017 2021E
Banks NPE management outsourcing
22 | The Italian Unlikely to Pay market | Is now the momentum?15 UtP portfolios and single names transactions
in 2017
Loan sale
Seller Buyer € mln
Veneto Banca, Banca Popolare
SGA 9.000
di Vicenza
Quaestio Capital SGR
Banca Marche, Etruria, Chieti 2.200*
Banks’ + Credito Fondiario
bailouts Quaestio Capital SGR (mezzanine)
CRC – Carim – Carismi 2.800*
+ FIDT (junior)
Quaestio Capital SGR
Carife 376*
+ Credito Fondiario
CreVal Credito Fondiario 104
CRC – Carim – Carismi Algebris Investments 286
CreVal Algebris Investments 245**
Commerzbank Fortress Inv. Group 234*
Other
CreVal Cerberus 105
transactions
Hypo Alpe Adria Bank S.p.A. Bain Capital Credit 750*
UniCredit S.p.A. Stinger SPV Srl 35
CreVal Hoist Finance 24
UniCredit S.p.A. DeVar Claims SPV Srl na
(*) Mixed portfolio of UtP and Bad Loans
(**) Transaction closed in Q1, 2018
PwC | 2316 Investor’s equity injection/underwriting of
senior debt
Investors’ equity injections
Deal Type of Derecognition for the
structure investor banks
Buyout of single-named UtP aimed
at revamping the business
Private Equity Funds (distressed Banks can derecognise the loan
throughout debt consolidation and
value investing in equity) through a true sale
proactive management of target
company
Acquirers of asset-backed securities
Banks cannot derecognize the
Synthetic securitisation of non- (including the banks originators
loan if hold the credit risk
performing exposures, potentially underwriting the SPV notes) along
through the junior notes of the
secured by GACS with investors with different risk
SPV
profile
Acquisition of target company with
debtor-in-possession (DIP)
Banks can derecognise the loan
financing to realise new Private Debt Funds investing in
and replace it with shares of the
investments. Often the investment distressed companies
investment vehicle/ fund
vehicle/ fund is participated by
selling banks
Creation of an all-equity SPV, fully
provided with cash; merger of the
SPV with target bank; use of SPV’s
SPAC (Special Purpose Acquisition Banks can derecognise the loan
raised cash to underwrite senior
Company) through a true sale
debt/ equity of distressed
companies with the purpose of
business recovery
24 | The Italian Unlikely to Pay market | Is now the momentum?17 View on 2018 - Strategic drivers will lead the
banks’ decisions on their UtP management
As discussed above, there are four different possibilities The decision of retaining or selling UtP portfolios/ single
of managing UtP exposures. These options imply the names (and, if retained, the choice between internal and
true sale (derecognition) or the active management of external management) will be driven by several strategic
UtP exposures. drivers, entailing regulatory requirements, accounting
principles, banks’ industrial capability and expertise,
In turn, active management could be either implemented long term vision of their NPE management.
by the bank itself or a servicer.
Active management
Sale Type of UtP
Internal Servicer
Strategic drivers Strategic drivers
Capital requirements Portfolio features
“Overdue” (borrower size, industry,
UtP “vintage” in bank’s
balance-sheet, presence of
Financial Statements guarantees, revolving vs.
overhaul following UtP non-revolving etc.)
derecognition
“Restructured”
UtPs Bank’s expertise in
(e.g. recovery plans ex managing restructuring
Regulators’ influence art. 67 & art. 182bis processes
(ECB, Bank of Italy, EBA) Italian Bankruptcy
Law, other
restructuring
Presence/absence of Bank’s industrial capacity
procedures)
upside opportunities for in proactively managing
the bank (following the massive stocks of UtP
restructuring measures)
«Non performing» Regulators’ influence
Bank’s long-term strategic UtPs (ECB, Bank of Italy, EBA)
objectives about their (almost bad loans)
NPE management
PwC | 25Appendix 26 | The Italian Unlikely to Pay market | Is now the momentum?
How will the IFRS9 affect UtP?
The transition to IFRS 9 (from IAS 39) will be critical as As a result, specific instruments as well as right
banks will be required to accrue provisions based on structure and skilled people to proactively monitor
expected losses and not only upon the occurrence of borrowers’ performances will be required.
specific events (e.g. “impairment tests”). Banks will be
asked to adopt a “forward looking” approach and as such
to anticipate losses at the first signals of deterioration.
Loans classification Impairment methodology
New classification criteria will lead to 3 new classes • New impairment criteria, based on the “expected
of loans associated with bank’s business model (“Hold loss” and “forward looking“ approach, will
To Collect”, “Hold To Collect and Sale”, “Held For result in certain portions of the current portfolio
Trading”). The need to properly classify their exposures classified in loans’ higher risk categories (e.g. from
will require the bank to review and strategically refine performing to UtP/bad loans)
their business model associated to the loans’
management: • Higher impairment (by collective and analytical
provisioning) will result through the “forward
• On the one hand, for the “portfolio to hold”, banks looking” approach which will move up losses to be
should strenghten the internal credit incurred over the loans’ lifetime
monitoring functions in terms of expertise as well
as of renovated tools of credit risk measurement • Need to foresee the lifetime losses will require the
(e.g. KPI, index, advanced CRM solutions) banks to implement proactive actions to preliminarly
assess borrowers’ likelihood to pay their debts along
• On the other hand, for the “portfolio to sell”, banks with avoiding further danger rate from performing to
should implement specialised units in charge of the UtP and bad loans
structuring and execution of loans’ sale
transactions (e.g. data preparation and
remediation, securitisation)
PwC | 27Non Performing Exposures classifications
The commonly used term non-performing loans (“NPL”) In Italy, banks are also required to distinguish among
is based on different definitions across Europe. different classes of NPE: (i) Bad Loans, (ii) Unlikely to
To overcome problems, EBA has issued a common Pay and (iii) Past Due; the sum of these 3 categories
definition of Non-Performing Exposures (“NPE”) which corresponds to the Non-Performing Exposures referred
is used for supervisory reporting purposes. to in the EBA ITS.
The exposures are classified as Unlikely to Pay in light of The range of signals and issues may be very wide and
the unlikelihood that relevant debtors will fulfil their differs case by case but a common feature is that each of
credit obligations. them is recoverable and/ or is manageable if tackled
The unlikelihood judgement is made by the Bank based properly and timely. Time is of essence.
on a varied spectrum of signals and issues.
Old New Definition of risk category
• Exposure to any borrower whose loans are not included in other
NPE
categories and who, at the date of the balance sheet closure, have
Past Due amounts or unauthorized overdrawn positions of more
than 90 days.
• A sub-segment is now represented by the Forborne Non-
Performing Exposures (“FNPE”), credits granted to a counterparty
in financial difficulty and which are not classified as Bad Loans and
have been subject to the modification of the terms and conditions
of the contract or refinancing.
• The classification of loans in this category is the result of
Unlikely to Pay the of the bank about the debtors’ unlikelihood
Inadempienze to fulfil its credit obligations. This category substitutes
probabili the old sub- standard loans (“Incagli”) and restructured
loans (“Crediti Ristrutturati”).
Including FNPE * • A sub-segment of the Unlikely to Pay is now
represented by the FNPE.
• Exposure to a borrower in a position of insolvency (not
necessarily recognised by a Court) or a substantially similar
situation, irrespective of the presence of any collateral. Same as
previous classification of Bad Loans or “Sofferenze”.
• A sub-segment of the Bad Loans is now represented by the FNPE.
FNPE may become a Forborne Performing Exposure if:
• 12 months have passed from last allowance
(*)FNPE: Forborne Non-Performing Exposures • No past due from last allowance occurred
Source: EBA, EBA/ITS/2013/03/rev1 24/7/2014
28 | The Italian Unlikely to Pay market | Is now the momentum?UtP inflows and outflows from 2014 to 2016 – Top 10
Italian banks (€ mln)
Outflows and inflows | Unicredit
Outflows Inflows
(13,526) 9,337
24,529 (7%)
(16%)
16% 20,339
(12%)
(20%) 7%
15%
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2016 outflows performing 31.12.2017
Outflows and inflows | Intesa Sanpaolo
Outflows Inflows
(8,599) 6,557
19,986 (9%)
(13%) 12% 17,944
(14%) 8%
13%
(7%)
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2016 outflows performing 31.12.2017
Source: PwC analysis of banks’ financial statements as at 31Dec17
PwC | 29Outflows and inflows | MPS
Outflows Inflows
(6,268) 2,625
15,248 (3%)
(9%)
(23%)
4% 11,605
3%
10%
(5%)
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2016 outflows performing 31.12.2017
Outflows and inflows | Banco BPM*
Outflows Inflows
(6,179) 3,938
11,476 (5%)
(10%)
(12%)
21% 8,985
(27%)
13% 1%
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2016 outflows performing 31.12.2017
(*) Figures of Banco BPM in FY 2016 were calculated as sum of the figures of Banco Popolare and BPM
Source: PwC analysis of banks’ financial statements as at 31Dec17
30 | The Italian Unlikely to Pay market | Is now the momentum?Outflows and inflows | UBI
Outflows Inflows
(3,781) 3,808
5,147 (7%) 45% 5,174
(21%)
(22%)
7%
(24%) 23%
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2016 outflows performing 31.12.2017
Outflows and inflows | BNL**
Outflows Inflows
(1,889) 1,186
4,674 (8%)
(5%)
(25%) 4% 3,971
5%
17%
(2%)
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2015 outflows performing 31.12.2016
(**) BNL UtP exposure at 31Dec16
Source: PwC analysis of banks’ financial statements as at 31Dec17
PwC | 31Outflows and inflows | BPER
Outflows Inflows
(1,872) 1,214
3,977 (11%)
(18%)
12% 3,318
(16%) 16% 3%
(2%)
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2016 outflows performing 31.12.2017
Outflows and inflows | Cariparma
Outflows Inflows
(984) 998
2,023 (6%) 30% 2,037
(8%)
(20%)
5%
(14%) 14%
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2016 outflows performing 31.12.2017
Source: PwC analysis of banks’ financial statements as at 31Dec17
32 | The Italian Unlikely to Pay market | Is now the momentum?Outflows and inflows | Banca Popolare di Sondrio
Outflows Inflows
(786) 568
1.988 (7%)
(7%)
(18%) 9% 1.769
7%
13%
(7%)
- - - - - - - - -
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2016 outflows performing 31.12.2017
Outflows and inflows | Credem
Outflows Inflows
(264) 225
504 (4%)
(31%)
20% 465
3%
22%
(15%)
(3%)
UTP Exposure To performing Collected To bad loans Others From From Past Due Other inflows UTP Exposure
31.12.2016 outflows performing 31.12.2017
Source: PwC analysis of banks’ financial statements as at 31Dec17
PwC | 3334 | The Italian Unlikely to Pay market | Is now the momentum?
Outflows - Top 10 Italian banks
From UtP to Performing in 2017 *
11%
9%
7% 8%
7% 7% 7%
6%
5%
4%
3%
Unicredit Intesa MPS Banco UBI BNL* BPER Cariparma BP Sondrio Credem Average
Sanpaolo BPM 2017
From UtP to Collected in 2017 *
31%
21%
18%
16%
13% 13%
10%
9%
8% 7%
5%
Unicredit Intesa MPS Banco UBI BNL* BPER Cariparma BP Sondrio Credem Average
Sanpaolo BPM 2017
(*) Figures for BNL refer to 2016
Source: PwC analysis of banks’ financial statements as at 31Dec17
PwC | 35From UtP to Bad Loans in 2017 *
25%
23%
22%
20%
18%
16% 16%
15%
14%
12% 12%
Unicredit Intesa MPS Banco UBI BNL* BPER Cariparma BP Sondrio Credem Average
Sanpaolo BPM 2017
Remained UtP in 2017 *
59% 60% 60%
57%
53% 51% 50%
48%
45% 44%
27%
Unicredit Intesa MPS Banco UBI BNL* BPER Cariparma BP Sondrio Credem Average
Sanpaolo BPM 2017
(*) Figures for BNL refer to 2016
Source: PwC analysis of banks’ financial statements as at 31Dec17
36 | The Italian Unlikely to Pay market | Is now the momentum?PwC | 37
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