NPL evolution in Italy

Last update – June 2016

Cerved Credit Management

Agenda

2

NPLs in Italy

The impact of Law 132/2015

GACS and the Atlante Fund

Decree 59/2016 and next steps

Impaired loans in Italy amount to 341 € bn

3

Source: Cerved on Bank of Italy data

87

133

157

237

195

282

327 341

More than 80% of bad debts originated from loans to corporates

4

81%

Corporates

19%

Households

(Mortgages &

Consumer Loans)

Source: Cerved on Bank of Italy data

The increase in new bad debts has not been offset by an adequate outflow

5

Source: Cerved on Bank of Italy data

Note: * Adjusted for Total cash exposure to borrowers signalled to the Central Credit Register as per Bank of Italy

*

The action plan of the Italian government to reduce NPLs

6

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS

Atlante

Fund

Decree

59/2016

Measures to shorten bankruptcies, to facilitate voluntary agreements, to speed up the foreclosure process and to introduce tax deducibility on loan losses and impairments

Guarantees to facilitate the removal of bad debts from the books of commercial banks

Private initiative backed by the Italian government

Atlante aims to ensure success of banks re-capitalizazion and to buy bad debts

Further measures to speed up recovery rates

NPLs transactions on the rise in 2015

7

3.7 5.0

8.3

19

• Disposals more than doubled in

2015 compared to 2014

• Unicredit was the most active

banking group in the disposal of

portfolios (€ 4.7bn), followed by

MPS (€ 3bn)

• Strong appetite from both new

players on the market and

incumbents

5.0

Source: Cerved on PwC data

Agenda

8

NPLs in Italy

The impact of Law 132/2015

GACS and the Atlante Fund

Decree 59/2016 and next steps

Law 132/2015

9

Measures to shorten bankruptcies

Measures to facilitate successful voluntary arrangements with creditors and thereby reduce the number of bankruptcies

Measures to facilitate debt restructuring agreements and forbearance

Measures to speed up the foreclosure process on both movable and non-movable assets

Stricter limits on seizures of salaries and pensions

Tax deductibility of loan losses and impairments

The Italian Parliament passed a new law on 6th August (no. 132/2015) containing

urgent measures to modify insolvency proceedings and other judicial procedures:

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

Simulation of Law 132/2015’s impact on NPLs stock

10

The evolution of bad debts stock has been estimated considering:

• New bad debt inflows

• Estimated with Cerved’s forecasting model which is based on

a macroeconomic scenario that assumes moderate recovery

until 2020 as per IMF

• Bad debt extinguished outflows

• Estimates based on duration of insolvency proceedings and

foreclosures procedures

• Duration of such procedures has been modified considering

the expectation of operators and experts on the impact of Law

132/2015

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

The generation of new bad debts is forecast to decrease to 28€ bn in 2020

11

• Based on a wide range of statistical models, Cerved can

forecast new bad debts ratio under different macroeconomic

scenarios

• Based on the IMF macroeconomic scenario, the new bad

debt ratio is forecast to decelerate until 2020, but still much

higher than the pre-crisis level

Source: Cerved

2015 2016 2017 2018 2019 2020

GDP 0.8% 1.2% 1.5% 1.5% 1.5% 1.4%

Unempl. rate 12.2% 11.8% 11.4% 11.0% 10.6% 10.4%

Inflation 0.1% 0.8% 1.4% 1.5% 1.6% 1.7%

Interest rate 3.9% 3.7% 3.7% 3.7% 3.7% 3.7%

Macroeconomic scenario

Source: Cerved on Istat and IMF (October 2015)

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

Based on Cerved data collected from the Italian Business Register and evidence of Cerved Credit

Management on problematic loans under management

The average duration of bad debts has been estimated as a weighted average of lengths and volumes of

insolvencies in each segment

Insolvency Proceedings

Duration of insolvency procedures and administrative time to resolve bad debts

12

1

7.8

0.5

Lag between doubtful

account and start of

insolvency proceedings

Average duration of

bankruptcies

Lag between closing of

bankruptcy and removal

of doubtful account

2.9

2.1

1

Lead time required to

repossess property

and begin acution

Average duration

of auction

Lag between end of

auction and cash-in

2

4.2

Court procedure

Time for debt

collection

Foreclosure on real estate Seizure of 20% of salary

Average duration of bad debts: 7.3 years

Average years

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

The impact of law 132/2015 on bankruptcies and auctions length

13

In November Cerved and ABI (Italian Banking

Association) carried out a survey on the perceived

impact on the time required to extinguish bad debts

and on the recovery rates). Cerved and ABI estimated:

-28% length of bankruptcies

-20% length of the real estate auctions

In the Notes on financial stability and supervision1,

Bank of Italy estimated the impact of the law 132/2015

as follows:

-50% length of bankruptcy in a favorable scenario

(-18% to -33% in a less favorable one)

-25% length of the real estate auctions

7.3 4.7 yrs 7.3 6 yrs Weighted average time

to extinguish bad debts

in 2020

Weighted average time

to extinguish bad debts

in 20202

(1) M. Marcucci, A. Pischedda, V Profeta, The changes of the Italian insolvency and foreclosure regulation adopted in 2015, Notes on financial stability and supervision n. 2

(2) Cerved calculations based on the reduction of lengths estimated by the Bank of Italy

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

Bank of Italy favorable

scenario

175 €bn

-

50

100

150

200

250

20

04

20

05

20

06

20

07

20

08

20

09

20

10

2011

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Bad debts reduced by 20-40€ bn versus the baseline scenario thanks to Law 132/2015

Forecast

197 €bn

Bad debt stock € bn

Source: Cerved on Istat and IMF

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

216 €bn Baseline scenario

Banks and investors

expectations (ABI-Cerved)

14

Early evidence of Law 132/2015: increase in number of procedures completed by courts

15

Law 132/2015

6,383 bankruptcies

completed

-4.7% YoY

7,234 bankruptcies

completed

+13.3% YoY

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

Duration of bankruptcies was declining already before the introduction of L. 132/2015

16

Average duration of bankruptcies

procedures in 2015 was 7 years and 5

months, lower than the approx. 8 years in

2014.

Law 132/2015

-7.8% -7.9% Shortening in duration of bankruptcies started before

the introduction of Law 132/2015: the average length

contracted by 7.8% between January and August

2015 (pre-reform) and by 7.9% between September

and March 2016 (post-reform), compared to the

previous year.

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Heterogeneity in the duration of bankruptcies

• Information relative to the duration of

bankruptcies indicates a wide variability

in 2015:

• a fourth of the bankruptcies closed

were represented by procedures

lasting less than 2 years;

• half of the bankruptcies closed

were represented by procedures

lasting less than 4 years;

• three-fourths of bankruptcies lasted

less than 10.4 years.

• There is a ‘long tail’ of c. 25% of

procedures with a duration of more than

11 years, of which some of these with a

duration of more than 20 years

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

17

Average: 7.4 years

75%

25%

50%

Agenda

18

NPLs in Italy

The impact of Law 132/2015

GACS and the Atlante Fund

Decree 59/2016 and next steps

21.0

23.0

26.2

1 2 3 4 5 6 7 8 9 10

10%

15%

15% e impatto atteso sui RR 10% e impatto atteso sui RR

Average duration of bad debts

19

Net present value for an investor Based on different scenarios

Low prices offered by investors have slowed down the NPL market

17.8

ABI-Cerved

scenario

(6 yrs)

Baseline

scenario

(7.3 yrs)

Bankitalia

scenario

(4.5 yrs)

28.9

• The shorter the time needed to

extinguish bad debts, the higher

the price expected by a NPL

investor

• The higher the discount rate, the

lower the price: cash to be

obtained in the future is worth less

in the present when interest rates

are higher

• If a positive impact on recovery

rate is also considered, valuations

of investors go up further

Source: Cerved

15% Target IRR and positive impact on Recovery Rate

10% Target IRR and positive impact on Recovery Rate

15% Target IRR

10% Target IRR

Banks have reduced the book values of their bad debts, but still far from investors’ prices

20

Source: Cerved on Bank of Italy data

21

Discount rates

Banks can obtain

funding at

substantially

lower interest

rates than

investors,

especially thanks

to refinancing

programmes put

in place by the

ECB

Expected

collection

Costs

Information

asymmetries

between buyers

and sellers

regarding the

timing of future

collection

Investors face

charges to set up

an acquisition

vehicle, as well as

contract costs

and servicing

costs

Times

Information

asymmetries

between buyers

and sellers

regarding the

amount of future

collection

Reasons behind bank-investors price gap

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

Since January 2016 a state guarantee scheme (GACS) is available

22

Garanzie sulle cartolarizzazione delle sofferenze (GACS) are available for senior tranches

of securitized bad debts:

Bank securitizes NPLs in a special purpose

vehicle

SPV

The SPV buys NPLs and issues two

categories of bonds:

• Senior (higher priority compared to other

bonds in the event of liquidation)

• Junior (lower priority)

SPV

bond senior

junior

Two conditions must be met: (i) Investment

grade rating on the senior tranche of securitized

NPLs, and (ii) Independent Servicer

BBB

State guarantees are available on the

senior tranche, if rated as investment

grade

investors

BBB

1

2

3

4

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

The impact of GACS on prices

23

price

% tranche senior

Hypothesis:

- Average length: 7.3 years

- Cost of Junior Tranche: 15%

- Cost of Senior Tranche: 3%

102

103

105

108

112

100

105

110

115

120

0% 20% 30% 40% 50% 60%

GACS strengthened by the Atlante Fund

24

Hypothetical incremental path on NPLs’ transfer price (Source: Quaestio)

Source: Quaestio capital management.

Based on the following assumptions. Securitisation: % tranche senior=65%; yield on senior notes = 5%;IRR required on the junior tranche=15%. GACS effect: cost of senior notes = Italy risk

+ guarantee fee; Atlante effect: sale of a junior tranche of an ABS GACS to the Atlante Fund (IRR=6%); Analysis of incremental sensitivity: reduction of costs associated with servicing from

8% to 7%; reduction of the time to recovery from 7 to 5 years; increase in recovery rate from 35% to 40%.

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

20.7%

28.3%

33.8%

2.6% 1%

4% 0.3% 1%

4.2%

Straight sale ABS No GACS ABS GACS ABS GACS Atlante

Final price Servicing costs reduction

Reduction in time to

recovery

Recovery rate increase

Final price + Sensitivity

Aug

2015

Jan

2016

Apr

2016

May

2016

L.132 bankruptcy

reform law

GACS Atlante

Fund

Decree

59/2016

The impact of GACS and Atlante on NPLs

25

-

50

100

150

200

250

20

04

20

05

20

06

20

07

20

08

20

09

20

10

2011

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Forecasts

175 €bn Shorter lengths of

procedures

216 €bn Baseline scenario

(7.3 years)

Shorter length of

procedures

+ potential

effectiveness of GACS

scheme and Atlante

Fund

107 €bn

Bad debt stock € bn

Agenda

26

NPLs in Italy

The impact of Law 132/2015

GACS and the Atlante Fund

Decree 59/2016 and next steps

L.132

bankruptcy

reform law

GACS

Atlante

Fund

Decree

59/2016

May 2016

Apr 2016 2016

Jan 2015 Aug

Decree 59/2016

27

PLEDGE OF INSTRUMENTAL ASSETS IN

ADDITION TO REAL ESTATE COLLATERAL

AUTOMATIC REPOSSESSION OF THE REAL

ESTATE ASSETS IN FAVOUR OF THE BANK

COMPULSORY EXPROPRIATION

Other actions to reduce NPLs in Italy

28

The gov’t action plan is based on a systematic approach: it introduces

new measures on bankuptcies and other judicial procedures, fiscal

incentives, stimulates NPL market by a new guarantee scheme and

by supporting the launch of a new Fund

The correct implementation of new measures is crucial to ensure

success of the action plan

In particular, it is urgent to make NPLs more transparent, in order to

reduce information asymmetry between banks and investors

More actions to strengthen the action plan exist, e.g.:

• More simple GACS price scheme

• Allow access to database (Agenzia Entrate, Centrale Rischi

Bankitalia, etc) to players who can help investors to price NPLs

• High heterogeneity by courts: incentives towards best

practices could help very much

Systematic

approach

Implementation is

important

More transparent

NPLs

More actions

Average bankruptcy lengths varies from 3 to 16 years across the country

29

2.2X

5.1X

Source: Cerved

In case of convergence, bankruptcy lengths below three years by 2020

30

Within the 10% of the

faster provinces,

bankruptcies close

in less than 5.5 years 7.8

5.5

2.75

2015 2016 2017 2018 2019 2020

totale

10% più veloci

Convergence hypothesis

Source: Cerved

Note: * Other provinces, excluding the 10% faster provinces

Other

provinces

10% faster

provinces

*

Years

High variability in the duration of real estate auctions

31

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Torino Padova Trapani Bari Roma Brescia Milano

Length of real estate auctions Average years, closed procedures in 2015

Length of most

efficient court is

25% below the

average

Source: T6, Tavolo sulle esecuzioni immobiliari

Note: statistics are referred only to real estate auctions started after 2009, therefore lengths could be underestimated

With GACS, Atlante and convergence toward more efficient courts, bad debts stock at pre-crysis level in 2020

32

216 €bn

0

50

100

150

200

250

20

06

2007

20

08

20

09

20

10

2011

20

12

20

13

20

14

2015

20

16

20

17

20

18

20

19

20

20

175 €bn

155 €bn

Optimistic scenario of

Bank of Italy

Optimistic scenario of Bank

of Italy + Convergence

toward more efficient courts

87€ bn Optimistic scenario of Bank

of Italy + Convergence

toward more efficient courts

+ GACS and Atlante fund

Source: Cerved elaboration on T6 data

Bad debts stock € bn

Baseline scenario

(7.3 years)