Similar to the banks of other large European economies, one of the biggest issues facing Italian banks is managing large stocks of NPLs. From 2008 to the end of 2015, there was a steady upward trend in Italy’s NPL stock; the upward trend levelled off in 2016 and is expected to slightly decrease in 2017, as the overall Italian economy finally emerges from the recession.
Italy’s NPL stock is now valued at around €360 billion, or 18 percent of total loans. This percentage, the so-called “NPL ratio”, is higher than that of any other country in the Eurozone (except Cyprus and Greece), and well over the EU zone average of 5.6 percent.
However, an important aspect of the Italian NPL market is that during the same period that the stock of NPLs has been increasing, the Bank of Italy acted to ensure the steady increase of NPL coverage ratios, which are now at an average of 45 percent, in line with the European average. For bad debts, which are the category of NPLs that are least likely to be repaid, the coverage is around 60 percent. In Italy, collateral held by banks against all non-performing exposures (NPEs) amounts to approximately €160 billion. So, while the stock of NPLs is high, and the NPL ratio is high, the coverage ratios - albeit different from bank to bank - are also high on average, providing risk mitigation at a macro level.
As Italian banks try to move NPLs off their balance sheets, in line with the guidelines issued by the European Central Bank, the secondary market for NPLs will grow and its liquidity will become increasingly important. The total value of NPLs that will be disposed of by Italian banks in 2017 is expected to exceed €50 billion. The following disposal by major Italian banks have already been announced: UniCredit for €18 billion, Monte dei Paschi di Siena for €27 billion, Carige for €1.9 billion and Credito Valtellinese for €1.5 billion.
To improve the liquidity of the NPL secondary market, and to facilitate the reduction of NPL stock, the Italian Government has made available to banks a state guarantee on the securitisation of NPLs (the “GACS”). In simple terms, the Italian Government has agreed to issue a guarantee in respect of the senior tranches of securitisations having received a rating equal to or higher than “investment grade” from an independent rating agency accepted by the European Central Bank.
The issuance of a GACS may be requested by any Italian bank that securitises and sells its NPLs against payment of a commission at market price.
GACS are available until August 2017, and for a potential further period of 18 months, subject to Treasury Decree and authorisation by the European Commission.