March 30, 2023 4:19 pm


Rising headwinds throughout Italian economy point to surge in NPL risk ahead

Rising country-specific headwinds are mounting in Italy which could influence the pace of non-performing loans (NPLs) in the year ahead. 2023 looks set to be highly eventful. Market participants will have to be vigilant across a lot of separate, and inter-related, risks and opportunities.

In this article, we will try to summarise the key trends and developing challenges ahead. These include:

  • an outlook for the Italian NPL market over the next two years;
  • the de-leveraging milestones of Italian banks in 2022;
  • authorities’ plans to modify and renew the GACS scheme;
  • the emerging Superbonus scheme-induced liquidity crunch in Italy’s construction sector; and
  • the partial sale and voluntary liquidation of Credimi; and
  • a summary of the key NPL transactions in 2022.


NPL forecasts: €56 billion in the next two years

New impaired loans in the Italian banking sector are estimated to increase to €56 billion in the next two years, according to Banca Ifis, reflecting a moderation in anticipated flows in light of the improved macroeconomic outlook. The influx in new impaired loans is estimated to drive between €40 and €33 billion NPL transactions over the next two years, Banca Ifis forecast, of which around 35% will be secondary transactions.  The high levels of NPL activity are supported by development of sales platforms that facilitate secondary and tertiary transactions, increased appetite among smaller investors and sales of non-core assets in GACS portfolios.

Italian banks have significantly deleveraged balance sheets of non-performing loans (NPLs) during 2022, improving risk and capitalisation profiles, spurred on by concerted de-rising prior, and subsequent to, the pandemic. NPLs on Italian banking books decreased 37.2% to €67.0 billion at the end of September 2022, according to Italy’s central bank, representing a reduction of €24.9 billion. More than half of remaining deteriorated loans, €36.5 billion or 53.3%, are designated as unlikely-to-pay (UtP), as at the third quarter 2022. By comparison, the equivalent Q3 2021 figures were €36.5 billion and 49.2%, respectively. Italian NPL stocks peaked at the end of 2015 at €341.1 billion, implying less than 20% of the original bad debt mountain remains. However, Italy’s stock of Stage 2 loans – often a precursor to NPLs – were 13.1% in Q3 (Q2: 13.6%) significantly higher than the EU average of 9.8% (Q2: 9.7%), implying a higher prospective risk in Italian banks.


GACS renewal key to 2023 NPL activity

Italian authorities are close to a deal with European Union competition authorities to reintroduce the asset protection programme, GACS, for two years with an option of another 12-month extension, according to Reuters.

GACS, which expired last June, has helped Italian banks de-leverage €117 billion in bad debts since 2016. Italy wants to renew the scheme, under which the state provides guarantees to help banks offload bad loans, while tightening state guarantees to investors who purchase bad bank loans repackaged as securities. The revised GACS scheme is expected to be less generous for banks and to increase taxpayer protections by reducing guarantees in bad debt securitisation deals.

Unlike Greece’s HAPS, Italy’s GACS only covered denounced loans and did not address the unlikely-to-pay (UTP) loans. “The large stock of Italian UTPs still need to be worked out and securitisations outside of GACS could be a solution for these portfolios in 2023,” according to the DBRS European NPLs 2023 Credit Outlook.

The NPL ratio for banks followed by EBA at the end of Q2 2022 stood at 2.6% while, on the Italian Central Bank website, this ratio stands at 3.5% for all Italian banks – suggesting higher NPL ratios for smaller banks. Despite data collection challenges involved with these types of transactions, 2023 could potentially bring more pooled transactions for smaller banks.


Italy’s Superbonus scheme tiggers liquidity crunch in construction sector

Prime Minister Giorgia Meloni’s government intends to overhaul Italy’s ill-conceived “superbonus” residential renovation discount scheme, which has triggered a new wave of residential non-performing exposures (NPEs).

The Superbonus scheme was introduced in May 2020 by the Five Star Movement-led government aimed to renovating residential buildings and improving energy efficiency. The scheme allowed homeowners to receive 110% of renovation expenditure covered by the government.

But the scheme was poorly designed and implemented. Affluent landlords and homeowners were the main beneficiaries, who also complained of delayed access to credit, blocked credit and hidden fees. The scheme allowed property owners to transfer Superbonus credits to builders in lieu of payment, with builders selling credits onto banks. Superbonus credit was proportional to spend, which fuelled inflation and also led to fraud in the construction sector.

Ultimately, the scheme put a strain on Italian finances, costing more than €105 billion to the state budget, according to Meloni. More than €71.7 billion in Superbonus tax credits were extended in the two and a half years to January 31, 2023, official data shows. Italian government estimates of Superbonus fraud are in the billions.

In mid-February, Italy approved a decree preventing the sale of tax credits from the scheme. By this point, many banks had already stopped buying credits, leaving builders with €19 billion in accrued Superbonus credits. Italy’s National Association of Building Builders (ANCE) warned the decree-law will not solve the problem of non-performing loans linked to Superbonus credits. The blockage in the tax credit transfer market has created a liquidity shortage among Italian construction companies. ANCE estimates around 32,000 construction businesses are at risk of bankruptcy.


Credimi: partial sale and voluntary liquidation after short-term funding closure creates liquidity crunch

Banca CF+, formerly Credito Fondiario, has reportedly extended a binding offer to acquire business unit of the fintech platform Credimi, which has suffered from the closure of Italy’s short-term funding markets. The remaining parts of the business is reportedly to enter voluntary liquidation.

Credimi expediated access to credit for SMEs across Europe by assess credit risk through proprietary technology which supported very low operating costs and rapid dispursal of securitized loans, funded by a raft of European banks. These included Intesa Sanpaolo, Deutsche Bank, Banca Generali, Banca Sella and Banca Popolare Pugliese. The fintech digital lender, co-founded by Ignazio Rocco di Torrepadula, has securitized more than €2.2 billion in SME loans since its launch in 2016.

However, as financial conditions have tightened, Credimi has increasingly struggled. First, in compliance with the Bank of Italy’s banking supervision rules over the capital ratios related to the loans disbursed through its platform, requiring successive capital raising rounds which were absorbed by operating losses, according to Be Beez. Second, Credimi has found it difficult to finance the notes in the securitizations which it must hold a stake in to then distribute through its platform. Short term funding became a significant bottleneck for Credimi, which ultimately led to a liquidity crisis for fintech lender.


NPL activity 2022: a brief review

The Italian NPL market closed €38.0 billion worth of deals in 2022, weighted to the first half of the year before the GACS scheme expired. Another €5.7 billion are ongoing deals which are expected to close this year, according to PricewaterhouseCoopers.

In the second half, the securitization mechanism remained available but without State guarantees which impacted risk, pricing and ultimately deal flow. Around €19.8 billion of the closed transactions related to bad loans, €6.1 billion of deals involve UtP portfolios and €6.4 billion relate to other transactions with mixed or not available underlying asset class.

UniCredit and Intesa Sanpaolo led the NPL activity last year. UniCredit sold three deals: a €1.1 billion GACS deal to Itaca SPV Srl; a €1.9 billion mixed portfolio through a securitsation with Prelios and a €1.3 billion mixed portfolio to Illimity. Intesa Sanpaolo sold €12 billion in NPLs in the first half: a €8.5 billion NPL through GACS to Bayview and CRC in the largest deal of first half of 2022; a €1.8 billion NPL to CRC and a €1.4 billion NPL to AMCO. Three GACS deals completed in H1 2022, ahead of the existing GACS scheme expiry in June 2022: Intesa SanPaolo’s €8.5 billion Project Organa, UniCredit’s €1.1 billion Project Itaca and €0.7 billion Iccrea.


This post was written by James Wallace

James Wallace is an editor, journalist, researcher and corporate writer on economics, geopolitics, finance, real estate, private equity, aviation, infrastructure and technology. He co-founded CoStar News in the UK in April 2011, and now works for multiple media organisations and corporations across writing, research, marketing/PR and consulting. He is an aspiring psychologist.


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