What are the main insights from the NPL Italy 2022, that was held in Milan?
MARKET MAIN TRENDS
- 2022 started slowly as in the previous year, with a recent pick-up mainly related to recent GACS (Intesa €4bn, ICCREA €650mn)
- The market has changed in comparison to the first wave of NPLs when the need of the bank to reduce NPE ratios pushed for high volumes and fast processes
- The year-end transaction is expected to be in general in line with estimates (€11bn UTP + €35bn NPL)
- There are a few jumbo deals to come on the market and higher flowing activity
- The end of the debt moratorium (used more in Italy than other countries) is expected to cause an acceleration in deterioration with the SMEs segment most hit (to be understood the implication of state guarantees on c. €280bn through FCG and SACE)
On the regulations side
- Regulators’ pressure to maintain banks’ NPE ratios at current <5% and bank policies to reduce NPE (e.g. ISP’s zero NPE) are expected to support volumes
- After the much-awaited NPL template, EBA is expected to publish a paper covering best practices on NPL trades
- UTP’ are now representing the highest portion of banks’ stock
- In 2022, still humble although, some jumbo deals pending from 2021 are now rumored to be close to completion (mainly with a portfolio approach rather than single name one)
- Segment expected to be most hit by the gloomy economic scenario both in terms of inflows (Stage 2 to UTP) and outflows (UTP to NPL)
- The positive trend of the secondary market is expected to continue sustaining volumes and collection of GACS’ business plans until GACS 2.0 will be announced
- New niche opportunities can be found in second-tier regional markets where investors have specific knowledge
Investors, in particular international ones, are now seeking higher returns net of inflation although the market has not repriced yet pushing to wait&see/opportunistic stances
Investors sit on a high level of liquidity that is not finding investment opportunities, supporting a soft correction in the market for new transactions
Hard assets (RE, hospitality, and logistics above all) are expected to slow down and reprice (also in light of up to 30% higher construction costs) but not stop
- A wave of integration is expected among big and generalist players, while smaller and specialized ones are to remain independent and increase vertical integration
- Automation and technology is key to reducing costs by improving processes and supporting core activities through AI and models.
- Players are looking at external tech and startups to move faster.
- UTP remains a segment with very specific needs and tailor-made strategies that are less adapted to be automated.
- Bad data quality remains an issue, although it is expected to improve thanks to smaller flow transactions with fresher data (vs recent peaks).
- Opportunities in RE securitization will push some players to become RE Asset Managers.
- The market started to use the tool in 2018 with GACS and since then it further developed thanks to the flexibility it gives in terms of structures into 3 main categories:
- Rated GACS
- Private unrated transactions
- Rated transactions with no GACS
GACS remains at the center of the discussions
- General underperformance on collections (even before the Covid impact) in comparison with the Business Plan and decent results in terms of profitability.
- GACS experience is considered to be positive for most of the stakeholders (sen, mezz noteholders, originators, and servicers) but not clear the results for the Government.
About GACS 2.0:
- It is expected in September with market participants desiring an extension to UTP but not expecting it to materialize (in particular considering difficulties to issue a rating and typical exposures being rather chunky).
- The new format should not penalize mezzanine investors who are key to the asset class.
Financial markets turmoil
- to impact guarantee cost linked to CDS levels.
- To push solution to cover interest rate risk of unhedged private transactions.
Investors have shown very different approaches based on transaction type:
- Passive and rather detached on public deals.
- Very active with day-to-day involvement in private transactions.
Expected return on the investment:
- The IRR is expected to raise in the future in order to adjust the nominal increase due to the consequences related to the war in Ukraine and the cost-related issues;
- As a consequence, the NPE asset will be affected in pricing.
Master Servicers’ role is expected to become more and more important moving from a “regulatory need” to the main reference for external counterparties in light of increasing push of Bank of Italy on their role.
The secondary market is active although not huge, driven by transactions aimed at:
- Get rid of assets
- Cherry-pick exposures
- Buy portfolio to then split them
- Build portfolios with a critical mass
- Sustain GACS BP: although very tricky to keep the trade-off with profitability
- Trade of Notes