An initiative by the Italian government to help reduce NPLs in the country’s banking system should prove positive for bondholders – explains Filippo Alloatti, Senior Analyst at Hermes Credit.
The Italian Treasury Minister late last month unveiled a new initiative to minimise non-performing loans (NPLs) in the country's banking system, which will involve securitisations supported by a government guarantee. The programme is known as GACS - Garanzia sulla Cartolarizzazione delle Sofferenze.
Despite some unrealistic expectations in the market, this initiative is not a ‘bad bank’. Each participating bank can create one or more Special Purpose Vehicles, which will acquire NPLs and be financed through the issuance of asset-backed securities.
In contrast to previous bad banks in Ireland and Spain, the Italian bad-debt problem is concentrated in loans to small and medium size enterprises, not to households or the construction industry. The high NPLs in Italy are a function of the GDP decline since the global financial crisis, not a boom and bust in property.
The first securitisations will be few and of limited amounts, which is the stated expectation of Treasury officials. In order to avoid an increase in loan losses and a consequent reduction in capital, banks will likely structure these deals with ad-hoc pools aimed at limiting additional provisions. Investors must also analyse the quality of the relevant collateral, for example residential property, that is acting as guarantee for a large chunk of the Sofferenze. This collateral is being harshly overlooked by the market currently.
ECB president Draghi was clear during a press conference last month, stating: “There will neither be unexpected requests of new provisions against non-performing loans, nor of more capital”.
The scheme is a potential positive for bondholders, and possibly shareholders, given it is voluntary in nature. While it does not solve the bad-loan issue overnight, it does give banks time to chip away at the problem.
Banca Monte dei Paschi di Siena is seeking to partner with an external contractor to build its GACS platform. Intesa Sanpaolo, which is well capitalised and less in need to use GACS, has also left the door open to the scheme. The same is true for UniCredit.
Additional focus on the Italian bank Q4 reports will centre on capital, particularly for the likes of UniCredit, as well as asset quality – especially for Monte dei Paschi, Banco Popolare, Banca Popolare di Milano and Banca Carige. We will also be looking for signs of M&A activity in Italy's cooperative banks, or ‘Popolari’, as this was widely tipped in 2016. Finally, as the rate environment remains extremely unsupportive, we will eagerly await the outlooks from these institutions.