Navigating Tranquility
The gross NPE stock on Italian banking books reached €52.6 billion at the end of 2023, confirming the decreasing trend of recent years (continuously declining since the 2015 peak), even if at a slower pace compared to previous years. This reduction occurred despite a series of shocks impacting the markets, such as the pandemic, conflicts in Ukraine and the Middle East, the commodities crisis, inflation, and the consequent interest rate hikes.
Since year-end 2020, the gross UtP stock has exceeded gross bad loans with €29 billion of UtP vs. €19 billion of bad loans at the end of 2023. Over the last three years, the annual inflows of new non-performing exposures have stabilized, reaching its minimum level (€12.0 billion) at the end of 2022. In 2023, the new inflows saw a slight increase (€13.4bn), confirming the trend reversal noted since 2022, with a slow but steady growth trajectory. However, Cerved Rating Agency sees positive prospects for 2024, estimating a slight decline in the credit risk of Italian companies in the most optimistic scenario expected by the end of 2024.
A crucial contribution to banks' deleveraging came from the use of the GACS structure, which expired and was not renewed in mid-2022 (46 transactions with a total GBV of approximately €118 billion).
After the extensive deleveraging process undertaken by banks starting in 2017, NPE transaction volumes have decreased in recent years, stabilizing around €21 billion in 2023, essentially returning to pre-2017 levels. The first quarter of 2024 marked the lowest number of transactions related to the sale of non-performing exposures in recent years. Looking ahead, the volume of NPEs sold by banks on the primary market is expected to remain limited compared to the past. There is a tendency toward a higher number of transactions consisting of segmented portfolios sold through ad hoc operations to specialized investors, often based on recurring relationships, rather than large mixed portfolios. Contribution funds for the disposal of UTP portfolios will continue to play an important role in the market.
The secondary market for NPE sales is gaining momentum, reaching over €8 billion in 2023, At the highest levels in recent years. However, the potential of this market remains untapped, and we expect it to grow, especially in proportion to the primary market.
Overall, Italian banks have experienced an increase in ROE in recent years (14.1% in 2023 vs. 9.2% and 5.6% respectively in 2022 and in 2021 for significant banks), mainly due to the surge in interest rates, while asset quality has somewhat improved. Looking at 2024-2025, the relatively slower-than-expected decrease in rates should result in a more supportive trend for net profits at the sector level.
All these elements may suggest that NPEs are no longer a significant problem. However, it is worth considering that there are over €300 billion of total NPEs in the market, including those sold to investors, which are largely still outstanding and require management, and over €200 billion of Stage 2 loans that require close monitoring.
Italy ranks third in Europe for Stage 2 loan stock (led by France with €461 billion and Germany with €241 billion at 2023-end). Between 2022 and 2023, the stock of Stage 2 loans on banks' books decreased by 9% and now represents 9.6% of total loans.
Between 2020 and 2022, the use of state-guaranteed loans increased. As of May 2024, the outstanding MCC-guaranteed loan portfolio is equal to €180 billion, of which €107 billion refers to the loans issued under the COVID measures (spring 2020 – June 2022). Since the implementation of these liquidity measures for businesses over three years ago, the amount has more than halved. The average remaining duration of existing loans is three and a half years, compared to their initial six-year term. To date, enforcements on guarantees by banks due to debtor defaults have totalled €3.3 billion (less than 2% of the initial total).
In 2023, credit management operators continued to shift their focus towards Stage 2 and UtP loans, moving from a gone-concern to a going-concern approach. Central to this transformation will be the use of technology and innovations that enable the maximum utilization of the vast amount of data available to servicers and originators, allowing for increasingly precise and predictive analyses.
The industry is expected to undergo a substantial transformation to meet the evolving needs of banks, introducing new services and adopting novel approaches to capitalize on emerging business opportunities. In recent years, there has been a significant wave of market consolidation, leading to the creation of more robust players prepared to tackle the challenges of the industry's transformation.
In June 2024, the Italian government approved the legislative decree implementing the Secondary Market Directive (SMD), which aims to establish a secondary credit market at the European level.
Furthermore, there are still €250 billion no longer on bank balance sheets but in the hands of investors. One of the system's priorities will have to be finding solutions with social value to manage this residual stock, minimizing the impact on families and businesses.
