The Italian NPEs market...belonging to Società Gestione Crediti Delta (Sgcd). Over the last years,...

The Italian NPEs market

Minds made for shaping financial services

From darkness to daylight

Contents

Foreword

1. Recent asset quality trends……………

• Key metrics

2. Regulatory framework: pressures

and opportunities…………………………..

• NPEs regulatory framework

• IFRS 9 first time adoption

3. Update on the Italian real estate

market…………………………………………….

4. NPEs transactions………………………….

• Portfolio sales

• GACS scheme

• Outlook and pipeline

5. Evolution of the servicing market….

• Competitive scenario

• M&A trends

6. Appendices…………………………….……….

• Alternative options for effective

management of unlikely-to-pay loans

• Focus on non-performing leasing assets

1

3

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18

25

41

34

Foreword

The Italian NPEs market: from darkness to daylight

2

2018 has been a record year for the Italian non-performing exposures (NPEs)1 transaction market, with announced portfolio disposals reaching almost €80b in terms of gross book value (GBV), an increase in excess of c.40% compared to 2017 figures.

After a slow start, the last months of 2018 were particularly active, mainly thanks to: i) the jumbo deal carried out by Banco BPM on a €7.8b bad loans portfolio together with its servicing platform; ii) multi-originator securitizations backed by mutual and cooperative local banks; iii) the disposal of unlikely-to-pay (UTP), leasing and other bad loans portfolios by Monte dei Paschi di Siena (MPS) for an aggregate amount of €3.5b; iv) the disposal to Cerberus of an unsecured bad loans portfolio with a GBV of c.€2.2b belonging to Società Gestione Crediti Delta (Sgcd).

Over the last years, Italy made a considerable effort in reducing its NPEs from the peak level of €341b reported in December 2015 to €209b as at September 2018 (c.-39%), but it still represents the Country with the highest amount of distressed loans in Europe.

While lower bad loan inflows have played a relevant role in the Italian banks' deleveraging path, portfolio disposals have been the real driver. In particular, the Garanzia cartolarizzazione sofferenze (GACS) scheme on senior notes introduced in early 2016 by the Italian Legislator has sensibly contributed to the resurgence of the Italian securitization market, with an aggregate GBV in excess of €50b sold so far.

The clean-up of billions of NPEs from banks' balance sheets has generated significant opportunities for the servicing industry and the focus will now be moving on extracting value from managed portfolios.

Also, the effort made by competent authorities in order to ensure adequate NPEs provisioning levels and lower incidence ratios on banks' loan books has progressed. On the one hand, the European Central Bank (ECB) and the European Banking Authority (EBA) published their guidelines to banks on the management of such exposures. On the other hand, the European Commission (EC), the Council of the EU and the European Parliament recently reached a provisional agreement on the prudential backstop, a set of measures that will require banks to comply with minimum loss coverage factors on new NPEs, a matter on which the ECB had also expressed its opinion earlier in 2018.

The proposed sterilization of the effects deriving from massive NPEs disposals from the calculation of the loss given default (LGD) under the internal ratings-based (IRB) framework has also created an additional incentive for banks to undertake ambitious deleveraging plans.

Having progressed this far, we now see new challenges and opportunities for the Italian financial system, among others:

• New asset classes, such as UTP loans and early stage NPEs, which would require a proactive management approach, specialized skills and deal structures;

• Portfolio niches, such as leasing and small and medium enterprises (SMEs) backed portfolios;

• Investments in innovation and IT platforms to enhance operational capabilities and implement more efficient recovery techniques, a crucial step to keep the servicing business profitable going forward;

• Increasing secondary market activity, with investors starting to dispose part of recently acquired portfolios focusing on the asset classes they can better manage.

While most of the volumes seem at this point to have been dealt with, the pipeline is still significant with over €20b deals already ongoing and several others to hit the market over the next few months.

In addition, focus will now be moving on new asset classes, portfolio niches and developing credit management capabilities… 2019 is going to be another busy year!

How can EY help?The Italian NPE market is a core market for us

Deleveraging is at the centre of several financial institutions’ agendas. Transactions emerging from this process are often complex and require both breadth and depth of financial expertise to deliver value for vendors and purchasers.

EY teams can provide services to investors and financial institutions, including:

• Portfolio analysis and segmentation

• Data analytics

• Business modeling and valuation

• Process management

• Tax, structuring and legal support

• NPE & Corporate Restructuring expertise

• Real estate services

• Borrowers' analysis

• Industry expertise & industrial approach

1 The terms non-performing exposures (NPEs) and non-performing loans (NPLs) are, in practice, used interchangeably. Please refer to: European Parliament, Non-performing loans in the Banking Union – Stocktaking and challenges, October 2018.

1Recent asset quality trends

recording a CAGR of approximately -16% from December 2015 to September 2018 when the same figure reached €209b. This trend is expected to persist in light of heavy NPEs disposals, lower impaired loan inflows and a mild economic recovery in the country.

3 BOI, Banks and Money: National Data – September 2018.

The overall stock of Italian banks' gross NPEs has sharply increased from €133b at the end of 2009 to a peak of €341b as at December 2015 (CAGR of 17%), with gross bad loans (the Italian sofferenze) accounting for the greatest portion (see Figure 1.1). However, this upward trend has strongly reverted over the last years,

1 BOI, Banks and Financial Institutions: Credit Conditions and Risk by Sector and Geographical Area – December 2018.


The coverage ratio (measured as the ratio of loan loss provisions to the total stock of loans) of NPEs increased sharply over the first six months of the year, from 50% in December 2017 to 54% in June 2018. Both values are higher than the reported European averages (45% in December 2017 vs. 46% in June 2018).2 With regard to bad loans only, the coverage ratio reported an even steeper increase (see Figure 1.2). The result is attributable both to the pressure imposed by European supervising authorities to increase minimum provisioning

levels and to a higher attention paid by banks to this ratio, which has started to be conceived as a source of competitive advantage among peers. The trend was further confirmed during the first semester of 2018, mainly thanks to the opportunities deriving from the implementation of IFRS 9 first time adoption (FTA) rules. This is crucial to ensure the enhancement of asset quality and sustain growth in loan origination, a necessary condition for the recovery of the Eurozone economy.

2 EBA, Risk dashboard – 3Q18.

Key metrics

4

Figure 1.1: Gross NPEs evolution (€b)1

Figure 1.2: Net bad loans and coverage ratio evolution3

60 79 108 125

155 183 200 200

165 120

73 79

87 112

127

143 141 125

99

89 133 158

195

237

282

326 341

324

264

209

2009 2010 2011 2012 2013 2014 2015 2016 2017 3Q18

Bad loans Other NPEs Total NPEs

27 37

52

65

80 84 89 87

64

40

54% 53% 52%48% 49%

54% 56% 57%62%

67%

2009 2010 2011 2012 2013 2014 2015 2016 2017 3Q18

Net bad loans Bad loans coverage ratio

Figure 1.3: Gross NPEs ratio to total loans (%)1 Figure 1.4: Net NPEs ratio to total loans (%)1

The ratio of total distressed assets to loans to clients (defined as the NPEs ratio) of the entire Italian financial system also reported a sharp decline over the


3 BOI, Economic Bulletin – April 2018.

Figure 1.5: Indicators of credit quality (QoQ%)4 Figure 1.6: New NPEs rates (QoQ%)5

This scenario is confirmed by the research carried out by ABI-Cerved,2 which highlights that both corporates and SMEs are experiencing a positive economic trend. However, differences persist among sectors and geographies. RE shows greater default rates than other industries, although a survey carried out by BOI3

highlighted that the number of house sales increased by 4.1% in 4Q17 and, even if prices are sticky, the short-term view remains positive. In terms of geographic location, new bad loan rates of southern Italian firms are higher than those of firms located in the north and center of the country.

In terms of inflows, the ratio of new NPEs to the total stock of performing loans has steadily decreased over recent years, in line with the improved economic environment and GDP recovery. The latest data from December 2017 reported 2.1% (see Figure 1.5), which is in line with average percentages observed before the pre-crisis period (i.e., 2006 and 2007). Over the same period, debt repayment capacities improved among firms and households, with new NPEs rates standing at 3.4% and 1.2% respectively. As illustrated in Figure 1.6, the pace of improvement has been faster for firms than for households.

2 ABI-Cerved, Outlook Abi-Cerved sulle sofferenze delle imprese – December 2018

5

0.0

1.0

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New NPE rate New bad loan rate

first six months of 2018, reaching 10.2% (gross ofprovision) and 5.0% (net of provision) vs. 11.5% and 6.1% in 2017 (see Figure 1.3 and Figure 1.4).

0.0

2.0

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Households Firms Total

4 BOI, Financial Stability Report, No. 1 – 2018, April 2018.5 BOI, Financial Stability Report, No. 2 – 2018, November 2018.

1 BOI, Financial Stability Report No. 2 – 2018, November 2018. (Total loans used for the NPEs ratios include loans to customers, credit intermediaries and central banks. The aggregate is in line with that used by the ECB and differs from the one used in previous editions of the Financial Stability Report).

6.85.8

4.7

4.4

11.5

10.2

2017 1H18

Gross bad loans Other gross NPE

2.82.0

3.3

2.9

6.1

2017 1H18

Net bad loans Other net NPE

5.0

6

Figure 1.7: Breakdown of gross NPEs by counterparty1

With regard to borrowers' concentration, the largest share (c.77%) of gross NPEs is toward SMEs and corporates, while the remainder is split among consumers (c.19%), public administration and financial

1 BOI, Financial Stability Report, No. 2 – November 2018. The data are from non-consolidated balance sheets that do not include loans granted by financial corporations belonging to a banking group or by foreign subsidiaries of Italian groups. The amounts correspond to the gross exposure that is collateralized or backed by personal guarantees.

Total bad loans:

€120b

22%

11%

8%

7%

2%

6%

2%

3%

2%

8%

2%10%

1%2%

3%

6%

5%

Figure 1.9: Bad loans distribution by Italian region2Data as at September 2018 shows that bad loans are still mainly concentrated in the north of Italy, with 52% of the total amount. Central regions account for 24%, while the rest is distributed across the south (16%) and the islands (8%) (see Figure 1.9).

A deeper look at regional level indicates how more than half of the total bad loan stock is concentrated across four regions that are key from an industrial standpoint (i.e., Lombardy, Lazio, Emilia Romagna and Veneto). Lombardy registers the highest stake of bad loans exposure at approximately 22%.

Lombardy

€26.7b

Lazio

€12.8b

Emilia Romagna

€12.1b €10.1b

€62b



Figure 1.8: Gross NPEs collateralization1

institutions (c.4%) (see Figure 1.7). Specifically, as at June 2018, approximately 51% of the total stock of Italian gross NPEs was backed by real security (see Figure 1.8).

77%

19%

4%

Firms Consumer Households Other

51%49%

Secured Unsecured

Veneto

(1) (7)(1) (15)

(5) 3

22 5 (1) (7)

(1) (32)

(11)2

15

12

7

Total UTP:

€83b

26%

14%

8%

6%

2%

4%

1%

3%

2%

8%

4%10%

1%2%

2%

4%

4%

Figure 1.10: UTP distribution by Italian region1The same trend can be observed for UTP exposures. Namely, as at September 2018, 55% of the total UTP loans are concentrated in the north of Italy, followed by central regions (27%), the south (12%) and the islands (6%) (see Figure 1.10)A total of 58% of the UTP stock is concentrated in the four main regions (Lombardy, Lazio, Emilia-Romagna and Veneto). As a single region, Lombardy registers the highest stake of UTP exposures (26%).

Lombardy

€21.2b

Lazio

€11.9b

Emilia Romagna

€7.9b

Veneto

€7.0b

€48b

Figure 1.11: Bad loans – inflows and outflows (€b)2


2 The analysis is based on a sample of Italian banks representing approximately 80% of total Italian banking system gross UTP and gross bad loans exposures as at 30 September 2018.


Bad loan outflows among the main Italian banks show a significant increase (€29b from 2015 to 2016 vs. €52b from 2016 to 2017), mainly driven by the high amount of write-offs carried out over the course of 2017 compared with 2016 (20% vs. 9% of the initial panel stock).

With regard to bad loan inflows, in 2017 the level remained substantially stable compared with 2016 (€29b vs. €30b). Looking specifically at different categories, inflows from the non-performing category decreased from 13% to 9% compared to the initial year stock.

200 200

165

Panel outflows:€29b

Panel inflows:€30b



120

163 164 141 92

Panel banks bad loans Other banks bad loans

(6)(13)

(21)

(2) (3)

17

8

9 (6)(12)

(14)

(4)(6)

13 5

13

8

Figure 1.12: UTP loans – inflows and outflows (€b)1

1 The analysis is based on a sample of Italian banks representing approximately 80% of total Italian banking system gross UTP and gross bad loans exposures as at 30 September 2018.

With respect to UTP, in 2017, total panel inflows decreased compared with 2016 (€31b vs. €34b), with lower inflows from performing and non-performing categories counterbalanced by higher other inflows.

Figure 1.13: Texas ratio and Common Equity Tier 1 (CET1) capital ratio peer analysis – 3Q182

2 Group Consolidated Financial Reports as at 3Q18 (Cariparma as at 1H18 and BNL as at 31 December 17).


UTP outflows slightly decreased in absolute terms (€42b vs. €45b), but increased compared with the initial stock exposure (-44% vs. -46%).

94

117





127

102 91 80

83

67

Panel banks UTP Other banks UTP

Unicredit

Intesa Sanpaolo

MPSUBI

Banco BPM

BPER

Banca Carige

BP Sondrio

Credito Valtellinese

Credem

Cariparma

BNL

10%

12%

14%

16%

18%

40% 60% 80% 100% 120%

CE

T1

ra

tio

(%

)

Texas ratio (%)

9

Figure 1.14: NPEs coverage ratio – 3Q181

Figure 1.15: Bad loan coverage ratio – 3Q181

Figure 1.16: UTP coverage ratio – 3Q181


Figure 1.13 illustrates the positioning of the main Italian banking groups in terms of the Texas ratio and the CET1 ratio (phased in figures), the average of which is approximately 83% and 13% respectively. This data illustrate a general improvement compared with previous years, mainly thanks to the restructuring of

troubled banks (i.e., MPS, Veneto Banca and BancaPopolare di Vicenza), but also to higher provisioning.With regard to the same banks, average coverage ratios reached c.53% for NPEs, c.67% for bad loans and c.36% for UTP loans (see Figure 1.14, Figure 1.15 and Figure 1.16).

1 Group Consolidated Financial Reports as at 3Q18 (Cariparma as at 1H18 and BNL as at 31 December 17).

61% 58% 57% 56% 54% 54% 52% 52% 52% 51% 50%

39%

74% 73% 71% 71% 69% 69% 68% 67% 65% 64%60%

51%

46% 45%42%

39% 39%36% 36% 34% 33% 33%

25% 23%

Av

era

ge

: 6

6.8

%A

ve

rag

e:

52

.9%

Av

era

ge

: 3

5.9

%

Regulatory framework:

pressures and opportunities

2


NPEs regulatory framework

Figure 2.1: NPEs regulatory framework - Timeline

1 EC, Proposal for a regulation of the European Parliament and of the Council on amending Regulation EU No. 575/2013 as regards minimum loss coverage for NPEs – March 20182 EC, Proposal for a directive of the European Parliament and of the Council on credit servicers, credit purchasers and the recovery of collateral – 14 March 2018.3 EC, AMC blueprint – 14 March 2018.

11

ECB Guidance

(ECB)

Mar.2017

Jan.2018

Mar.2018

Oct.2018

In recent years, European supervisory authorities have made a substantial effort to address the risks related to NPEs across Member States. The attention has focused mainly on: (i) providing banks with a standardized guidance on NPEs management strategies and (ii) ensuring common minimum coverage levels across the Banking Union (i.e., a prudential backstop) (see Figure 2.1). With regard to the latter aspect, the process has involved multiple entities and is now approaching its final stage as the EC, the Council of the EU and the EU Parliament have recently reached a provisional political agreement, as described later (see Figure 2.4).

Key steps regarding NPEs management have been:

• On 20 March 2017, the ECB published Guidance to banks on non-performing loans (ECB Guidance), identifying supervisory qualitative expectations regarding strategies, governance, recognition, impairment and collateral valuation when dealing with NPEs for all EU Significant banks.

• On 11 July 2017, The Council of the EU agreed an Action plan to tackle non-performing loans in Europe, calling upon competent authorities to take appropriate measures to address NPEs in Europe.

• On 30 January 2018, with regard to Less Significant banks in Italy, the Bank of Italy (BOI) released Linee Guida per le banche Less Significant italiane in materia di gestione di crediti deteriorati(BOI Guidance), which also identified supervisory qualitative expectations when dealing with the management of NPEs at a national level.

• On 31 October 2018, the European Banking Authority (EBA) published Guidelines on management of non-performing and forborne exposures (EBA Guidance), a qualitative document similar to the guidance released by the ECB in January 2017. This guidance applies only to banks with NPEs ratios above 5%.

NPEs provisioning expectations involved the following:

• On 15 March 2018, the ECB released the Addendum to the ECB Guidance to banks on non-performing loans: supervisory expectations for prudential provisioning of non-performing exposures (ECB Addendum).

• On 14 March 2018, the EC presented a package of measures to tackle high NPEs in Europe. The package included the following:

a) A proposal to amend Regulation (EU) No 575/2013 (Capital Requirement Regulation), introducing common minimum coverage requirements (EC Proposal)1;

b) A proposal for a directive2 on credit servicers, credit purchasers and the recovery of collateral;

c) A blueprint3 focused on the setup of asset management companies (AMCs), in accordance with EU state aid rules.

With regard to point a), the EC Proposal has received the following amendments so far, as part of the regulatory dialogue:

• On 31 October 2018, the Council of the EU provided for softer calendar provisioning factors and introduced a separate treatment for loans secured by movable or immovable collaterals (Council of the EU Proposal).

• On 6 December 2018, the EU Parliament's Committee on Economic and Monetary Affairs (ECON) provided for even less strict calendar provisioning factors (ECON Proposal).

• On 18 December 2018, the EC, the Council of the EU and the EU parliament reached a provisional political agreement on capital requirements for banks’ NPEs (Trilogue Agreement). The agreement will now be submitted for final endorsement by EU ambassadors (Coreper). The Parliament and the Council of the EU will then be called on to adopt the proposed regulation at first reading.

EC package of measures to tackle high NPEs ratios

(EC)

BOI Guidance

(BOI)

ECB Addendum

(ECB)

EBA Guidance

(EBA)

Council of the EU Proposal

(Council of the EU)

Dec.2018

Trilogue Agreement

(EC, Council of the EU, EU Parliament)

ECON Proposal

(EU Parliament)

Jul.2017

Action plan to tackle non-performing loans in Europe

(Council of the EU)

ECB Addendum

The Addendum introduces quantitative expectations regarding the timing and the minimum level of provisioning. This increases the pressure on banks and encourages them to adopt rapid measures to address their NPEs strategy.

Banks are required to provide full coverage after two years for unsecured exposures and after seven years for secured exposures.

Hence, the impact depends on NPEs inflow and only affects banks that have unsecured parts of NPEs portfolios uncovered after two years or secured parts of NPEs uncovered after seven years.

A key feature is that the Addendum applies to those exposures reclassified as non-performing from 1 April 2018 and, for this reason, does not impact the legacy stock.

Furthermore, it addresses the issue of supervisory authority recognizing a difference between its expectations and the practice of a bank. This analysis will be part of the Supervisory Review and Evaluation Process (SREP) dialogue from 2021. If the reported coverage does not meet the supervisory authority's expectation, banks will have to provide an explanation for this discrepancy. Supervisory measures will be considered in the event that the explanation does not meet ECB expectations.

Finally, the Addendum, in line with ECB Guidance on NPEs, requires banks to review their collateral value regularly.

Figure 2.2 illustrates the progressive coverage expectation regarding secured and unsecured exposures. With regard to the former, coverage expectation starts at the beginning of year three. The supervisory authority considers a period of seven years since an exposure is classified as non-performing in order for the bank to realize the underlying collateral. At the end of this period, the collateral is intended to be

inefficacious and the exposure needs to be fully covered. The addendum emphasizes that it does not replace any accounting or other regulatory requirements; however, banks have to close the gap between supervisory expectations and accounting practices. The addendum needs to be considered as additional to the accounting provision to meet supervisory expectation.

Figure 2.2: NPEs calendar provisioning expectations – ECB Addendum


12

Time from classification as NPEs (years)

5 71 2 3 4 6 8 9 100

100%

40%

55%

70%

85%

100%

Unsecured Secured


EC Proposal – Regulatory dialogue

In March 2018 the EC released a package of measures to address high NPEs in Europe. In particular, the EC proposed to amend the Capital Requirement Regulation (CRR), introducing a prudential backstop. The paper requires to set aside sufficient own resources when new loans become non-performing and creates appropriate incentives to address NPEs at an early stage. If banks provide insufficient NPEs coverage levels, deductions from their own funds would apply.

At its first draft, the proposal provided by the EC differed from the ECB Addendum in the following areas:

• It allowed for more time to reach full provisioning and referred to new exposures originated after March 2018.

• It was related to all banks from Member States.

• It provided for a different treatment between exposures past due more than 90 days and NPEs deriving from other triggers (for instance, UTP loans past due less than 90 days).

The proposal also included measures to foster the development of a secondary market and facilitate collateral recovery. For instance, it proposed a new directive on credit servicers, addressing the development of a unique secondary market for NPEs through the harmonization of the conditions required to operate in each member state.

The proposal provided for common standards for authorization and supervision, requiring conduct rules across the EU. The scheme would grant credit servicers the right to operate throughout the EU, if they have obtained the authorization in a home member state. Meanwhile, third-country purchasers would be required to use authorized EU credit servicers.

Finally, it aimed at facilitating collateral recovery by introducing provisions on the voluntary use of the Accelerated Extrajudicial Collateral Enforcement (AECE) procedure. Those provisions do not apply to

consumer loans and would require a written agreement between the bank and the borrower.

Member states have to ensure that the creditor organizes an asset valuation to determine the price. If parties do not agree on the appointment of an appraiser to realize the collateral, the court is requested to make the appointment itself.

On 31 October 2018 EU ambassadors approved the Council's position on capital requirements applying to banks with NPEs on their balance sheets, which partially amended the initial EC Proposal put forward in March 2018.

In particular, the key differentiating factors are the following:

• According to the Council's position, the new rules will apply only to loans granted after the date of entry into force of the regulation, while the EC Proposal referred to NPEs deriving from loans originated after 14 March 2018.

• Loans past due for less than 90 days no longer receive a special treatment compared to loans past due more than 90 days.

• With regard to secured loans, full coverage requirements would apply depending on the collateral being identified as movable (after seven years) or immovable (after nine years).

• With regard to unsecured loans, full coverage is required in three years instead of two.

On 6 December 2018, the ECON amended the EC Proposal. In particular, it maintained the same calendar provisioning time horizon proposed by the Council of the EU, but provided for less strict factors.

On 18 December 2018, the EC, the Council of the EU and the EU Parliament finally reached an agreement on the prudential backstop, finding a middle ground between previous proposals put forward by the Council of the EU and the ECON (see Figure 2.3).

Figure 2.3: NPEs calendar provisioning – Trilogue Agreement

13

5 71 2 3 4 6 8 9

35%

100%

25%

35%

55%

80%

70%

80%85%

UnsecuredSecured by movable

collateralSecured by immovable

collateral

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100% 100%

Time from classification as NPEs (years)

Figure 2.4: NPEs calendar provisioning – Trilogue Agreement vs ECB Addendum

14

Unsecured Secured

0% 0%

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Collateral

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Trilogue Agreement1

(Scheduling still under discussion)ECB2

Addendum

* To be applied as of the first day of the year.

Figure 2.4 provides a direct comparison between the latest minimum common coverage factors required to banks by the Trilogue (as part of the ongoing process to amend the CRR) and by the ECB.

It is worth noting that, while the schedule proposed by the ECB already applies to NPEs classified as such after 1 April 2018, the calendar proposed by EU Lawmakers will be applied to NPEs deriving from loans originated after the date of entry into force of the amended CRR, which is expected to take place within the first semester of 2019.

1 Council of the EU, Proposal for a regulation of the European Parliament and of the Council on amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures - Confirmation of the final compromise text with a view to agreement– January 2019.

2 ECB, Addendum to the ECB Guidance to banks on non-performing loans: supervisory expectations for prudential provisioning – March 2018.


Trilogue Agreement vs. ECB Addendum – Qualitative comparison on calendar provisioning

• Secondary market development and increased volumes in loan portfolio sales

• Faster cleanup of banks' balance sheets

• Development of a pan-European servicing market with common rules

Opportunities

• Challenging expectations on loan provisioning and potential stress on capital adequacy

• Potential downward pressure on loan portfolio prices due to increased supply

• Potential negative effects on loans (especially unsecured) granted to households and SMEs

Pressures

Proposal for a regulation of the European Parliament and of the Council on amendingRegulation (EU) No 575/2013 as regards

minimum loss coverage for NPEs

Addendum to the ECB Guidance to banks on non-performing loans: supervisory

expectations for prudential provisioning

Status

• It is still a legislative proposal, subject to endorsement by EU ambassadors andadoption by the EU Council and the EU Parliament.

• If adopted, the amended CRR will represent a binding rule.

• This is not a set of binding rules, although ECB expects banks to comply with it. Differences between bank practices and prudential expectations will be discussed at least annually as part of the SREP supervisory dialogue (from early 2021 onward).

Applies to• As part of EU legislation, the proposal applies

to all European banks (both significant and less significant) subject to CRD and CRR.

• The Addendum (such as the NPEs guidance) applies only to significant banks.

Refers to

• New exposures originated after the date of entry into force of the Regulation. If the terms of an exposure are modified by the institution in such a way as to increase the institution’s exposure to the obligor, the exposure shall be treated as a newly originated exposure.

• New NPEs classified as such from 1 of April 2018 onwards, but already originated in the past. Exposures classified as non-performing and cured before 1 of April 2018 that are reclassified as non-performing after 1 of April 2018 are considered to be new NPEs.

Type of rule

• Institutions shall apply specific coverage factors, based on exposure vintage and collateralization, to determine the NPEsused to calculate the amount of minimum coverage levels.

• Uniform calendar both for loans past due more than 90 days and other NPEs

• In case of purchased exposures, the calendar should start from the date on which the NPE has originally been classified as non-performing

• Institutions have to determine the amount of insufficient coverage for NPEs to be directly deducted from (Pillar 1) CET1 capital.

• The Addendum identifies fully secured exposures, unsecured exposures and partially secured exposures. The latter should be split into two elements: the secured portion and the unsecured portion. For fully and partially secured exposures,banks have to review the collateral value regularly, in line with the NPEs guidance.

• There is no distinction between UTP and past due exposures.

• Differences from prudential expectations are reflected in the SREP (Pillar 2) decision.

Full coverage

• There will be full provisioning within three years for unsecured exposures, seven yearsfor exposures secured by movable collaterals and nine years for exposures secured by immovable collaterals.

• There will be full provisioning within two years for unsecured exposures, and within seven years for secured exposures (progressively, starting from the third year).

15


In January 2018, BOI released a guidelines that Italy's LSIs are expected to implement in managing their NPEs.

The guidelines outlines a comprehensive package of measures, processes and rules of conduct that less significant banks should include in NPEs management, in line with the guidance published by the ECB and the EBA.

According to the guidelines, LSIs are expected to:

• Adopt a formalized strategy for optimizing NPEs management by maximizing the current values of recoveries.

• Integrate the strategy with an NPEs governance and operational framework, by involving the board of directors in defining and monitoring the management of NPEs (in addition, banks are requested to adopt provisions and safeguards aimed at managing NPEs promptly and appropriately, by avoiding conflicts of interest).

• Maximize efficiency for forbearance measures, swiftly identifying the best solution for each exposure.

• Formalize criteria for implementing the relevant supervisory provisions on loan classification (to this end, banks are requested to identify a list of indicators to classify loans at default).

Guidance on management of NPEs for less significant institutions (LSIs)

• Formalize credit valuation policies, including those on write-offs, and the definition of criteria for impairments.

• Define and formalize procedures that guarantee accurate valuation of RE assets, by using independent experts to assess the value of RE collateral.

• Implement and maintain an adequate database to manage NPEs data and verify NPEs status.

The short-term plan for banks may include:

• Reviewing the target operating model.

• Identifying the best mix of strategies by combining different actions to maximize the current values of recoveries (e.g., dedicated internal division, servicer, portfolio disposal, securitization and creation of a bad company).

• Providing the supervisor with a report on the NPEs reduction plan.

In order to assess the suitability of the various strategies, the guidelines indicate that it is crucial to consider the indirect costs of keeping NPEs in banks’ portfolios, by implementing a process of monitoring the NPEs’ management-related costs.

16

In July 2018, the ECB released a note announcing further steps in its supervisory approach to addressing the stock of NPEs in the euro area.

It anticipates the following interventions:

• Bank-specific supervisory expectations will be set for the provisioning of NPEs.

• The aim is to achieve the same coverage of NPL stock and flow over the medium term.

ECB announces further steps in supervisory approach to stock of NPLs

• Bank-specific expectations are guided by individual banks’ current NPEs ratio and main financial features in a consistent way across comparable banks.

Under this approach, the ECB will further engage with each bank to define its supervisory expectations.


IFRS 9 implementation has been a real game changer mainly thanks to the first time adoption which allowed banks to increased coverage with a phased impacts on capital.

Following the issuance of the Basel Committee on Banking Supervision (BCBS) standard on 29 March 2017, the relevant European institutions have indeed finalized the transitional arrangements for the regulatory treatment of accounting provisions within the EU. This is to address the implementation of IFRS 9 Financial Instruments and other expected credit loss (ECL) frameworks.

The process was fast-tracked to help mitigate the impact of IFRS 9 standards on EU banks’ capital and ability to lend.1 Following this, the transitional arrangements were incorporated into European legislation on 27 December 2017, via publication in the Official Journal of the European Union (OJEU).The transitional arrangements are applicable from 1 January 2018 via the CRR Article 473(a).

The BCBS recognizes that the IFRS 9 ECL model will likely lead to higher provisions, noting that there may be a capital shock and firms may need to rebuild their capital resources.

Additionally, the BCBS notes that there has been no conclusion on the permanent interaction between ECL accounting and the prudential regime – necessitating transitional arrangements.

During 2017, the European Council, European Parliament and EC have worked to finalize the interim approach within the EU, and have incorporated the transitional arrangements into European legislation from 1 January 2018.

1 EC, Banking Reform EU: EU reaches agreement on first key measures – 25 October 2017.

IFRS 9 first time adoption

Focus on transitional arrangements

The BCBS standard provides jurisdictions with the option to choose whether to apply a transitional arrangement for the regulatory capital impact of moving to an ECL model over a period of no more than five years. If elected, the design of the approach is the jurisdiction’s responsibility, subject to a number of rules, including the calculation method – either a static or a dynamic approach.

These are defined as follows:

• A static approach: calculating the transitional adjustment just once, at the effective date of the transition to ECL accounting.

• A dynamic approach: recalculating the transitional adjustment periodically to reflect the evolution of a firm’s ECL provisions within the transition period.

The final regulation provides for a five-year transitional period from 1 January 2018 (or an entity’s relevant day one).

While there is no full neutralization in year one, it progressively decreases to zero over five years, starting at 95% and finishing at 25%, as shown in Figure 2.5.

While it is a dynamic approach, with periodic recalculations, some high-level assumptions have been made to reduce the operational complexity in creating a modified-dynamic approach.

This means that on day one, the IFRS 9 provision is compared with the International Accounting Standards (IAS) 39 provision as at the previous reporting period end. The delta is then added back over the transitional period, subject to the percentage factors of 95%, 85%, 70%, 50% and 25%.

On subsequent reporting period end dates, the stock of IFRS 9 stage 1 and stage 2 provisions can be compared with the stock of IFRS 9 stage 1 and stage 2 provisions as at day one.

A firm can then choose for the difference to be added back, again subject to the percentage threshold. Crucially, this allows for the reduction in the volatility of regulatory capital experienced in subsequent years. This approach makes the assumption that all stage 1 and stage 2 provisions are new provisions under IFRS 9.

While this may not be a true reflection of the ECL stock, it permits a firm to compare figures under one accounting framework, and not have to recalculate the IAS 39 position at each reporting period end.

This reduces the operational complexity compared with a truly dynamic approach, as originally proposed.

The phase-in proposed by the regulator is applicable not only for loans and receivables impaired under a hold to collect scenario but also for loans and receivables under alternative workout strategies as disposal, unless portfolios are pre-identified.

The regulation requires a firm to inform its competent authority of its decision to use the arrangements by 1 February 2018. Note that a firm is allowed (but not required) to apply the transitional rule. Additionally, if a firm does not initially opt in to the transitional arrangements, it can elect to reverse this decision during the five-year period (with the permission of its competent authority).

Finally, there is a requirement for full disclosure of the fully loaded and transitional amounts for own funds, capital ratios and leverage ratios in Pillar 3 reports.

To govern this, the EBA issued the final guidelines on uniform disclosures under Article 473a of Regulation (EU) No 575/2013 with regard to the transitional period for mitigating the impact of the introduction of IFRS 9 on own funds on 12 January 2018.

The guidelines are applicable both for firms that elect to use the transitional arrangements and those that decide not to make use of them to ensure market transparency.

Figure 2.5: Transitional period factors

Add back

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2018 2019 2020 2021 2022 2023

17


3Update on the

Italian real estate market

19

Base on our preliminary figures about commercial real estate investment market, 2018 recorded c.€8.5b of direct investments in Italy. Such result represents a reduction of c.25% compared to the previous year.

In particular, the investment volumes recorded in 3Q18 are 9% lower than those recorded in 3Q17. Additionally, investment volumes registered in 2Q18 (€1.65b) have a negative trend when compared with the same period of 2017 (€4.5b).

The investment volume observed in our Country in the last financial year is the result of, to some extent, opposite forces; among other it is our view that the main factors that have contributed to such results are: (i) lack of core products in main markets and, in any case, investment demand higher compared to the available product in core location suitable for investment purposes; (ii) investment focus concentrated in main and core markets (i.e. Milan and in some extend Rome), but investors still reluctant to consider secondary locations, with the exclusion of investment in the logistic and retail sub sectors; (iii) some concerns related to the political tension with the EU, the still uncertain economic growth and outlook of the Country and a potential less favorable interest rate condition.

In any case, although these external factors, Italy demonstrates a good attractiveness for international

investors which are reviewing their investment plans but still remain focus on the Country.

Among the key transactions related to the commercial real estate market and completed in 2018, it is worth to be mentioned the sale of Valdichiana Outlet Village in Tuscany for €137.7m, Centro Sicilia Shopping Center in Catania (Sicily) for €140.0m and the acquisition by ENPAM of two Grade A office properties in Rome from BNL, via a dedicated real estate investment fund.

Investments in the hospitality sector amounted to more than €500m, creating a solid market for the investors active in the sector.

In terms of capital source breakdown, excluding 2016, from 2013, foreign investors accounted for more than 60% of the total investment volume (3Q18: 75%), which demonstrates the high attractiveness of the Italian RE market for international investors.

In terms of returns and processes, we observed a yield compression for prime assets pushed by competitive acquisition processes. The retail sector grew up to c.39% respect to the past year (27.0% in 2017) while the weight of traded volumes in the office sector dropped substantially due to lack of available quality buildings in prime locations.

This is also predicted in the 2019 forecasts.

The Italian NPE market: from darkness to daylight

Investment market overview

Figure 3.1: RE investment volumes in Italy 2007–18 (€m)1

1 Source: RCA Analytics.

Transaction

• Figure 3.1 shows the trend of direct investments in the Italian RE market in the period between 2007 and 2018.

• Results show a growing trend of capital flow that started in 2012 and was then confirmed in the following years, with a 2012–17 positive CAGR of about 31%. In 2017, the total volume of investments reached a value of approximately €11b, the highest since 2007.

• The comparison between investment volumes of the last three years and the 11-year average from 2007 to 2017 shows an increasing trend of investments well above the average (to be exceeded in 2018 too).

• During 3Q18, the office sector recorded a sharp drop of approximately 42% compared to 3Q17.

• In 2018, the total investment volumes reached a value €8.5b with a marked increase in the retail sector.

*2018: Preliminary figures based on internal statistics on Commercial Real Estate Investment Market, not yet consolidated.

7,700

4,600 4,200 4,500 4,000

2,800 3,700

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

The RE asset class that over the last three years recorded the highest interest in both Italy and Europe was office, which, on the contrary, in 3Q18, reported an important reduction, which was overtaken by investments in retail asset class. In Italy, CAA acquired a Telecom Italia property portfolio, and DeA Capital and Enpam purchased the Edison office in Milan and completed a sale and leaseback transaction of an Edison RE asset portfolio.

Figure 3.2: Breakdown of investments per asset class (€m)

• When comparing investments in Europe with those in Italy, it must be noted that in Europe in 2017, c.13% of market share was related to the residential asset class. Investment opportunities in Italy will arise regarding this asset class, according to new investors’ strategies.

• In 2017, the office investment share accounted for c.39% in Europe vs. c.62% in Italy.


Figure 3.3: Investments per asset use in Italy in 3Q181

Figure 3.4: Investments per asset use in Europe in 3Q181


20

Direct investment and sectors breakdown

*2018 data pertains to 3Q18

-

1,000

2,000

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4,000

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6,000

2014 2015 2016 2017 2018*

Retail Office Industrial and logistics Hotel Development Mixed Other Residential

Retail39%

Office33%

Hotel9%

Industrial and logistics

9%

Others10%

Office29%

Industrial and logistics

28%

Retail17%

Residential13%

Hotel9%

Development1%

Others3%

The top 10 investors in both 2017 and the first three quarters of 2018, and their investments volume in Italy and Europe, are shown in the tables below.

The data refers to asset acquisitions and the share dealing that occurred throughout the period. It is worth mentioning that, in 2017, the top two investors were domestic (see Figure 3.5) while, during the first three quarters of 2018, they were international.

The type of investors appears heterogeneous for the first 10 positions in both 2017 and 2018. This reflects a wide interest from a wide variety of investors with

21

Figure 3.5: Top 10 investors per volume in Italy in 20171


Figure 3.7: Top 10 investors per volume in Europe in 3Q181


Company Country Investor type Total (€m)

DeA Capital RE SGR Italy Equity fund 1,026

Kryalos AM Italy Investment manager 843

Crédit Agricole France Bank 743

York Capital US Equity fund 717

CIC China Sovereign wealth fund 663

EDF France Corporate 617

Feidos Italy Investment manager 550

CBRE Global Investors US Investment manager 321

Amundi France Investment manager 298

ENPAM Italy Pension fund 266


Vonovia SE Germany RE operating company 7,100

Blackstone US Equity fund 5,084

Cerberus US Equity fund 4,060

DekaBank Germany Bank 3,174

CBRE Global Investors US Investment manager 2,850

BNP Paribas France Bank 2,367

Hines US Investment manager 2,323

Aroundtown Germany Investment manager 2,263

Union Investment Germany Open fund 2,193

Invesco US Investment manager 2,120

Main investors in Italy and in Europe

Figure 3.6: Top 10 investors per volume in Italy in 1Q18, 2Q18 and 3Q181


Kryalos AM Italy Investment manager 519

BNP Paribas France Bank 358

Amundi France Investment manager 210

CBRE Global Investors US Investment manager 204

Savills IM UK Investment manager 198

Partners Group Switzerland Investment manager 195

Swiss Life AM Switzerland Investment manager 184

IGD Siiq Italy RE operating company 181

AXA Group France Insurance 161

GWM Group Luxembourg Investment manager 159

Unibail-Rodamco-Westfield France RE investment trust 150

Coima SGR Italy Investment manager 148

differentiated rationale and drivers for investment.

Vonovia SE is the most active investor across Europe, having they acquired large RE portfolios in a plurality of nations.

Vonovia SE made its way to the top of the list (see Figure 3.7) through the acquisition of a huge amount of residential properties mostly located in northern Europe (about €68b).

Blackstone, on the other hand, returned in the upper part of the list mostly investing in industrial properties (€1.8b).

49%

14%

12%

7%

7%

11%

Lombardy Lazio Sicily

Tuscany Apulia Others

Over the last four years, Lombardy has been the region with the greatest capital inflows (although the relative portion is lowering). In 2014, it attracted c.68% of total investments; in 2015, 2016 and 2017, its portion decreased to c.51%, c.36% and c.14% respectively. This was driven by the fact that, in 2017, numerous portfolios with properties spread all over Italy were sold. It must be noted that, in 2018, there was an inversion of the trend, with the Lombardy portion increasing to c.49% of the total.

Lazio is the second-highest performing region in terms of capital inflows. In 2014, it attracted c.17% of domestic capital flows. This increased to c.21% in 2015 and c.24% in 2016, then decreased to c.15% in 2017. Similar to Lombardy, in the first three quarters of 2018, invested capital flows in Lazio increased to c.14%.

Figure 3.9 shows the investment breakdown by Italian city.

22

Figure 3.8: Breakdown of Italian investment by region1

Comparing 2017 and 2018, the two most attractive cities appear to be Milan and Rome. During the first three quarters of 2018, two main transactions were also registered in the area of Misterbianco (Catania) and Vignate (Milan), the first related to the sale of Centro Sicilia Shopping Centre and the second to Acquario Vignate Shopping Centre.

Milan was the city with the highest volumes traded at both regional and national levels. Investments accounted for c.47% of the total domestic inflows in 2015, c.32% in 2016, c.29% in 2017 and c.48% in 3Q18.

After Milan, Rome recorded the highest volumes traded in its region (Lazio). The investments amounted to c.21% of the total inflows in 2015, c.20% in 2016, c.15% in 2017 and c.9% in 3Q18.


Figure 3.9: Breakdown of Italian Investment by city1


Breakdown of Italian Investment by region and city

29%

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55%

Milan Rome Bologna Florence Others

2017 1Q18, 2Q18 and 3Q18

1Q18, 2Q18 and 3Q182017

15%

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65%

Lazio Lombardy Piedmont

Emilia-Romagna Veneto Others

48%

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31%

Milan Rome Palermo Catania Others

23

The residential market, after a long and crippling crisis that started in 2008, seems to be on the road to recovery, even if in 2017 and 2018 growth rates were not so high compared to the market expectations.

In 2016, the number of residential units sold, also known as NNT* (as recorded by Agenzia delle Entrate, the Italian tax authority), reached around 530,000 units (+18.9% vs. the previous year).

In 2017, there were 543,000 residential transactions, recording a growth of about 3% compared to 2016. While the number of transactions registered in 2017 is considerably lower than the top level recorded in Italy during 2004 (about 900,000), it is the third year in a row of constant growth.

2017 figures are aligned to the long-term average recorded in Italy since 1958 but are still far from the peak based on the linear trend line over the same historical period.

Based on our preliminary estimates, we expect level of residential transactions to express c.5% growth compared to 2017.

A focus on some of the most important cities shows different trends compared to the national average.

Owing to its size, Rome has reaffirmed its relevance in terms of overall number of residential transactions (31,000 NNT). Furthermore, it seems to be a more resilient market.

Milan's performance was in line with the national average between 2000 and 2012, but has kept improving since 2013 (c.+8% compared with the previous year's NNT).

2017 also registered positive increases in NNTs in Turin and Naples, with a growth of 4.9% and 7.4% respectively compared with the previous year, but still below the figure for 2000 and 50.0% lower than the peak of the market recorded in 2003.

Residential RE market trend

Figure 3.10: Residential transactions evolution in Italy1 : 1958–2017

1 EY analysis on Agenzia delle Entrate, Scenari Immobiliari and Nomisma data.

The overall health of the economy generally affects the RE values and property demand. This is measured by indicators such as manufacturing activity, price of goods and labor market, even if GDP is the most frequent parameter assumed as reference. The reason for this relationship is relatively straightforward: over the time, GDP growth should lead to improving occupier demand and, in turn, higher rents and capital values, which drive property returns. The historical comparison of residential transactions’ trend and GDP variation in Italy shows a certain correlation. The GDP growth expected in the period 2018–20, based on BOI forecast, could be a positive catalyst for near future growth.

Figure 3.11: Residential transactions and GDP correlation

*NNT: normalized number of transactions.

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24


Rome

The historical series of NNT for residential properties in Rome in the period 2015–17, presents an average of 27,914 transactions, with a growth trend over the last three years (2017 vs. 2015: +13.8%).

In 2017, the change in the NNT in Rome (equal to +3.0%) was lower than the variation recorded by the provincial data (+3.1%), the variation recorded by the regional data (+3.2%) and the variation recorded by the national data (+4.9%).

2,944

12,890

8,516

3,8282,953

0

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Up to 50sqm

50–85 sqm

85–115 sqm

115–145 sqm

Over 145sqm

NNT 2017 – Distribution of transactionsby size in Rome

Figure 3.12: Residential transactions in Italy – a comparison among main cities1

The graph on the left shows the number of transactions by property size in the city of Rome in 2017. It is noted that 41.4% of the units sold are of small to medium size (50–85 sqm), followed by the units of average size (85–115 sqm) with about 27.4% of transactions. The number of transactions of the medium-large size (115–145 sqm) was also very important (12.3%).

Milan

The historical series of the NNT of properties for the use of residential of Milan in the period 2015–17 presents an average of 18,921 transactions, with a net growth in the last three years (2017 vs. 2015: +31.4%).

In 2017, the change in the number of transactions in Milan (equal to +8.1%) was higher than the variation recorded by the provincial data (+6.6%), the variation recorded by the regional data (+5.5%) and the variation recorded by the national data (+4.9%).

The graph on the left shows the number of transactions by property size in the city of Milan in 2017. It is noted that 43.4% of the units sold are of small to medium size (50–85 sqm), followed by the units of average size (85–115 sqm) with about 21.3% of transactions. The number of transactions of the small size (up to 50 sqm) was also very important (19.6%).

1 EY analysis on Agenzia delle Entrate, Scenari Immobiliari and Nomisma data.

4,417

10,285

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NNT 2017 – Distribution of transactionsby size in Milan

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Rome – residential transactions Italia index Rome index

Rome

Milan

Milan – residential transactions Italia index Milan index

5NPEs

transactions

4

2017 and 2018 have been record years for the Italian NPEs transaction market, with announced portfolio sales reaching approximately €54b (+73% compared to 2016) and €78b (+43% compared to 2017) in terms of GBV respectively (see Figure 4.2). Those figures have made Italy one of the most attractive markets across Europe.

The last months of 2018 have been particularly active: Banco BPM finalized the disposal of €7.8b NPEs, MPS announced the disposal of €3.5b NPEs and Società Gestione Crediti Delta (Sgcd) signed a binding agreement with Cerberus for the sale of an unsecured bad loans portfolio with a GBV of c.€2.2b. Other deals, including transactions finalized by UniCredit, UBI, others sellers and multi-originator securitizations carried out by groups of small local banks, also contributed to a busy year-end for the Italian NPEs market.

In terms of portfolio composition, the mixed category accounted for the vast majority of trades and registered a sharp increase compared with previous years, when unsecured portfolio used to play a dominant role. The main catalysts behind this wave of disposals have been have been jumbo deals and GACS-backed securitizations (see page 31).

In this context, in May 2018, MPS, after securitizing a jumbo bad loans portfolio with a GBV of c.€24b back in December 2017, managed to obtain the GACS scheme on the senior notes.

In April 2018, Intesa Sanpaolo reached an agreement with the Swedish group Intrum for the securitization of

a €10.8b NPEs portfolio (with CarVal Investors as the co-investor) and the creation of a joint venture in the credit collection business. This landmark transaction represented a significant milestone in the bank's announced deleveraging process.

Banco BPM followed a similar strategy in December 2018. The bank announced a jumbo deal envisaging the creation of a servicing platform in partnership with Credito Fondiario and the simultaneous securitization of a bad loans portfolio amounting to c.€7.8b, with the US fund Elliot International buying the junior and mezzanine tranches.

Previously, UniCredit's Project FINO has been the first "jumbo" deal in the Italian market and the transaction, announced back in December 2016, experienced a big step in mid-2017 thanks to three securitizations (carried out through the vehicles FINO 1 Securitization, FINO 2 Securitization and ONIF) and the recourse to the GACS scheme. The deal reached completion in early-2018.

Regulatory pressure from European authorities has also encouraged NPEs portfolio disposals over recent months and impacted banks’ future NPEs management plans, with most of the largest Italian banks targeting a gross NPEs ratio below 10% by 2021 (see Figure 4.1).

Overall, Italian banks have also constantly improved their strategies and enhanced the quality of their data in order to meet the required readiness to approach portfolio disposals on the market and achieve higher prices.

Portfolio sales


26

Figure 4.1: Italian banks − gross NPEs ratios (3Q18 actual vs. target)1

1Targets refer to 2019 (UCG), 2020 (BBPM, UBI, Carige, Creval), 2021 (MPS, BPER, ISP). Source: latest company data.

0%

5%

10%

15%

20%

25%

30%

Carige MPS BPER BBPM UBI ISP Creval UCG

Gross NPE ratio 3Q18A Gross NPE ratio target

2017 and 2018 have also been years in which new asset classes and portfolio niches started to hit the market in a more structured and innovative way.

The sale in 2017 of the €2.2b portfolio belonging to the three good banks (i.e., Nuova Banca Marche, Nuova Banca Etruria and Nuova Cassa di Risparmio di Chieti) rescued by UBI Banca to the Italian Recovery Fund was one of the first securitizations to include leasing contracts (and the pertaining assets) and was

composed of UTP loans for approximately 50% of the GBV. Leasing contracts have historically been a complex asset class, given the lack of proper regulation. In order to partially tackle this issue, in June 2017, an important amendment to the Law 130/1999 on securitizations allowed SPVs to acquire and manage (if not directly, through a separate vehicle) leased assets, thus avoiding them remaining on the seller's balance sheet.

Figure 4.2: Main disclosed NPEs transactions in the Italian market (1Q17–4Q18)1


27

1 This table summarizes the main publicly disclosed transactions and is not intended to be an exhaustive list of completed NPEs transactions.

Date Project Name Seller Buyer GBV (€m) Type of portfolio

1Q19 Confidential Banca Valsabbina Guber Banca & Barclays 150 Mixed secured (30%)/unsecured

4Q18 Morgana MPS Bain Capital Credit 900 Leasing

4Q18 Confidential Undisclosed Illimity Bank 150 Mainly unsecured (85%) corporate

4Q18 Confidential Undisclosed Illimity Bank 25 Secured corporate

4Q18 Merlino (cluster small) MPS Ifis NPL 1,160 Unsecured small ticket

4Q18 Merlino (cluster mid) MPS Credito Fondiario & Fire 704 Unsecured

4Q18 Merlino (cluster large) MPS Balbec Capital 336 Unsecured

4Q18 Alfa 2 MPS Undisclosed 400 UTP

4Q18 Confidential Banca del Fucino SGA 211 Bad loans

4Q18 Confidential Banca del Fucino SGA 103 UTP/Past due

4Q18 Confidential BCC multi-originator (Iccrea) Undisclosed 2,000 Mixed secured (58%)/unsecured

4Q18 Confidential BPER MBCredit Solutions 200 Mainly unsecured

4Q18 Confidential UniCredit MBCredit Solutions 100 Unsecured

4Q18 Confidential Undisclosed MBCredit Solutions 300 Unsecured

4Q18 Confidential UniCredit Leasing Guber Banca 170 Unsecured leasing

4Q18 Confidential Undisclosed Axactor 145 Unsecured consumer finance

4Q18 Riviera Banca Carige Undisclosed 964 Mixed secured (48%)/unsecured

4Q18 Confidential UBI Undisclosed 416 Unsecured

4Q18 ACE Banco BPM Elliot & Credito Fondiario 7,800 Undisclosed

4Q18 Confidential Undisclosed Axactor 70 Unsecured consumer finance

4Q18 Confidential UniCredit Fortress 675 Secured SMEs

4Q18 Confidential UniCredit J-Invest 384 Unsecured SMEs

4Q18 Confidential UniCredit Illimity Bank 206 Unsecured corporate

4Q18 Confidential BP di Puglia e Basilicata Illimity Bank 347 Mainly unsecured corporate

4Q18 Confidential Undisclosed Banca Ifis 371 Unsecured consumer finance

4Q18 Confidential Credem Banca Ifis 83 Mainly unsecured

4Q18 Confidential Banca Sant'Angelo Fire 13 Unsecured

4Q18 Confidential BPER Undisclosed 1,900 Mixed secured (73%)/unsecured

4Q18 Arcade Gruppo Delta Cerberus 2,183 Unsecured

4Q18 Confidential Cooperative banks multi-originator Undisclosed 1,578 Mixed secured (73%)/unsecured

4Q18 Confidential BCC Patavina Hoist Finance 150 Undisclosed

4Q18 Isabella Banca Carige Bain Capital Credit 366 UTP

4Q18 Confidential Volksbank AnaCap 141 Mainly secured RE

4Q18 Confidential Banca di Pisa e Fornacette AnaCap 84 Mainly secured RE

3Q18 Confidential Istituto Finanziario del Mezzogiorno Illimity Bank 263 Mixed secured (30%)/unsecured

3Q18 Confidential CR Volterra Illimity Bank 155 Secured corporate

3Q18 Confidential Undisclosed Banca Ifis 25 Unsecured consumer finance

3Q18 Confidential Deutsche Bank Banca Ifis 155 Undisclosed

3Q18 Torino UniCredit Banca Ifis 1,090 Mainly unsecured SME

3Q18 Confidential Banca Intermobiliare Attestor Capital 601 Secured corporate (bad loans/UTP)

The first transaction completed under this revised scheme was announced by Hypo Alpe Adria Bank, which sold a performing leasing portfolio with a GBV of €480m to Goldman Sachs. However, even after this recent update, the regulatory framework in this field still appear incomplete, with market players facing issues mainly related to the effective transfer and management of underlying assets. Bain Capital Credit has been one of the most active international investors with regard to leasing transactions: first, with the

acquisition of HARIT (subsequently renamed Aquileia Capital Services), the servicing platform specializing in leasing and repossessed assets; then with the acquisition of a non-performing leasing and mortgage loans portfolio with a GBV of approximately €0.7b from Hypo Group Alpe Adria (named Project Terzo) and, ultimately, with the acquisition of a €0.9b leasing bad loans portfolio (named Project Morgana) from MPS in late 2018.

28



Figure 4.2: Main disclosed NPEs transactions in the Italian market (1Q17–4Q18) (Continued)1


3Q18 Confidential CRC Bayview MBCredit Solutions 425 Unsecured

3Q18 Confidential Balbec Capital MBCredit Solutions 217 Unsecured corporate leasing

3Q18 Confidential ViVi Banca MBCredit Solutions 12 Unsecured

3Q18 Confidential Consel (Banca Sella) MBCredit Solutions 11 Unsecured consumer finance

3Q18 Confidential Banca Agricola Popolare di Ragusa Undisclosed 349 Mixed secured (82%)/unsecured

3Q18 Confidential Banca Cambiano 1884 Undisclosed 94 Mainly secured corporate

3Q18 Confidential Findomestic Kruk Group 302 Unsecured

3Q18 Confidential CA Cariparma PIMCO 700 Secured (87%) RE

3Q18 Confidential Banca Carige Undisclosed 100 UTP

3Q18 Confidential MPS SC Lowy & Taconic Capital 140 Secured UTP shipping

3Q18 Confidential UBI Undisclosed 2,749 Mixed secured (47%)/unsecured

3Q18 Confidential Volksbank Undisclosed 37 Mixed secured/unsecured

3Q18 Maggese CR Asti & Biverbanca Undisclosed 697 Mainly secured

3Q18 Confidential Emil Banca Undisclosed 145 Mixed secured/unsecured

3Q18 Confidential UniCredit Banca Ifis 537 Mixed secured/unsecured

3Q18 Confidential Confidential Banca Ifis 25 Unsecured consumer finance

3Q18 Confidential Carrefour Banca Banca Ifis 17 Unsecured consumer finance

3Q18 Confidential Confidential Banca Ifis 12 Unsecured

3Q18 Confidential BCC multi-originator (CCB) Barclays, Varde, Guber 1,397 Mixed secured (39%)/unsecured

3Q18 Confidential BCC multi-originator (Iccrea) Undisclosed 1,000 Mixed secured (72%)/unsecured

3Q18 Confidential Undisclosed Axactor Italy 140 Unsecured

3Q18 Valery Cariparma Bain Capital Credit 450 Secured RE UTPs

3Q18 2Worlds Banco Desio Confidential 1,000 Mixed secured/unsecured

3Q18 4Mori Sardegna Banco di Sardegna (BPER) Confidential 900 Mixed secured (53%)/unsecured

3Q18 Confidential UniCredit MBCredit Solutions 204 Unsecured consumer finance

3Q18 Exodus Banco BPM CRC 5,100 Mixed secured (74%)/unsecured

3Q18 Aragorn Credito Valtellinese Confidential 1,600 Mainly secured

3Q18 Confidential Sicilcassa GMA 1,500 Undisclosed

3Q18 Confidential Alba Leasing Bain Capital Credit 103 Secured RE (bad loans/UTPs)

2Q18 Confidential FBS Banca Ifis 1,280 Mixed secured/unsecured

2Q18 Gimli 2 Credito Valtellinese Credito Fondiario 222 Secured UTPs (25% leasing)

2Q18 Savoy Intesa Sanpaolo Intrum Justitia 10,800 Mixed secured/unsecured

2Q18 Gimli 1 Credito Valtellinese Algebris 245 Secured UTPs

1Q18 Confidential Veneto Banca & BP Vicenza in LCA SGA 18,000 Mixed secured/unsecured

1Q18 Confidential Banca Ifis Not specified 40 Unsecured consumer finance

1Q18 Confidential Not specified Banca Ifis 35 Unsecured consumer finance

1Q18 Confidential BCC Multi-originator Best Capital Italy 128 Unsecured retail/SME

1Q18 Confidential BP Bari ViViBanca 82 Unsecured consumer finance

4Q17 Sun Banco BPM Hoist Finance 877 Unsecured corporate

4Q17 Sun Banco BPM J Invest 907 Unsecured corporate

4Q17 Valentine MPS Atlante II 24,071 Mixed secured/unsecured

4Q17 Saturnia BNL Confidential 1,000 Unsecured retail

4Q17 Confidential UniCredit MBCredit Solutions 250 Unsecured leasing

4Q17 Leda Cariparma Axactor Italy 93 Unsecured consumer finance

4Q17 Confidential Not specified Banca Ifis 251 Mixed unsecured

4Q17 Confidential Intesa Sanpaolo Banca Ifis 85 Unsecured leasing

4Q17 Sword Banca Carige Credito Fondiario 1,200 Mixed secured (70%)/unsecured

4Q17 Confidential Credito Valtellinese Hoist Finance 24 UTP secured residential RE

4Q17 Confidential BP Bari Davidson Kempner 320 Mixed secured (56%)/unsecured

4Q17 Buonconsiglio BCC Multi-originator (CCB) Seer Capital 570 Mixed secured/unsecured


29


Figure 4.2: Main disclosed NPEs transactions in the Italian market (1Q17–4Q18) (Continued)1


4Q17 Confidential BCC Multi-originator (CCB) Locam (Seer Capital) 315 Mixed secured/unsecured

4Q17 Hemera Intesa Sanpaolo Bain Capital Credit 150 Secured RE (leasing)

4Q17 Confidential Not specified Axactor Italy 80 Secured consumer/SME, leasing

4Q17 Confidential Not specified Banca Ifis 143 Unsecured retail

4Q17 Confidential Not specified Banca Ifis 55 Mixed secured (55%)/unsecured

4Q17 Spritz Lone Star Funds Intrum 370 Mixed secured/unsecured

4Q17 Firenze UniCredit MBCredit Solutions 450 Unsecured SMEs

4Q17 Firenze UniCredit Cerberus 265 Secured SMEs

4Q17 Rossini REV Gestione Crediti Cerberus 760 Secured



4Q17 Sherazade Intesa Sanpaolo MBCredit Solutions 600 Unsecured consumer finance

3Q17 Confidential Palamon Capital Best Capital Italy 170 Unsecured consumer finance

3Q17 Terzo Hypo Alpe Adria Bank Bain Capital Credit 672 Mixed secured/unsecured

3Q17 Confidential CR Cesena, CR Rimini, CR S. Miniato Atlante II 2,740 Mixed bad loans and UTPs

3Q17 Confidential Credit Agricole, Banco Desio B2 Kapital 175 Mixed secured/unsecured

3Q17 Fellini CR Cesena, CR Rimini, CR S. Miniato Algebris 286 UTPs

3Q17 Confidential Not specified Banca Ifis 192 Mixed secured (71%)/unsecured

3Q17 Confidential Not specified Banca Ifis 1,500 Mixed secured/unsecured

3Q17 Vasari REV Gestione Crediti Locam (Seer Capital) 295 Small ticket

3Q17 Arona Commerzbank Fortress 234 Secured


3Q17 Confidential Not specified LCM Partners 1,000 Unsecured

3Q17 Confidential Banca Ifis LCM Partners 98 Re-performing consumer finance

3Q17 Confidential Credito Valtellinese Waterfall Asset Management 1,405 Mixed secured (74%)/unsecured

3Q17 Brisca Banca Carige Davidson Kempner 938 Mixed secured (77%)/unsecured

3Q17 Confidential Banca Mediocredito FVG Bain Capital Credit 385 Secured RE

2Q17 Confidential Consel (Banca Sella) Banca IFIS 17 Unsecured consumer finance

2Q17 Confidential CR Ferrara Atlante II 343 Mixed secured (48%)/unsecured

2Q17 Confidential Findomestic Banca Ifis 321 Unsecured consumer finance

2Q17 Confidential Deutsche Bank Kruk Group 132 Unsecured consumer finance

2Q17 Confidential UniCredit MBCredit Solutions 450 Unsecured consumer finance

2Q17 Rainbow Banco BPM Algebris 693 Secured RE

2Q17 BTC Intesa Sanpaolo CRC & Bayview 2,000 Mixed secured/unsecured

2Q17 Confidential Banca Sella B2 Holding 126 Mixed secured/unsecured

2Q17 Confidential Not specified Axactor Italy 22 Unsecured

2Q17 Confidential Barclays Banca Ifis 190 Mixed performing/non-performing

2Q17 Confidential UniCredit MBCredit Solutions 500 Unsecured leasing


1Q17 Confidential Santander Banca Ifis 160 Unsecured

1Q17 Confidential Deutsche Bank Banca Ifis 413 Mixed secured/unsecured

1Q17 Confidential Credito Valtellinese Not specified 50 Secured (UTPs and bad loans)

1Q17 Confidential Intesa Sanpaolo Provis Credito Fondiario 280 Leasing

1Q17 Dante Barclays AnaCap 177 Mixed performing/non-performing

1Q17 Confidential Banca Marche, BP Etruria, CR Chieti Atlante II 2,200 Mixed bad loans/UTPs (50%)

1Q17 Confidential Banco BPM Hoist Finance (Marte SPV) 641 Unsecured

1Q17 Confidential BNL Banca Ifis 1,000 Unsecured corporate (65%)/retail

(35%)

1Q17 Confidential Banca Ifis Kruk Group 750 Unsecured

30

With regard to the unsecured space, the majority of deals in Italy traditionally involved retail and consumer loans. However, market activity has now shifted also toward corporate and SME portfolios, which are typically more complex from a legal standpoint, as they involve multiple counterparties. In this context, Banco BPM finalized Project Sun in December 2017. The bank reached an agreement for the sale of two corporate unsecured bad loan portfolios with an aggregate GBV of almost €1.8b, which, at the time, represented the largest unsecured deal ever completed in the Italian market.

Over the last months, similar transactions have been launched by multiple Italian banks.

Looking backward, the key catalyst behind the initial wave of disposals has been the deep restructuring of the Italian banking system that took place over the course of 2017. The resolution involved 10 Italian banking institutions and provided, among other things, for the shift of an aggregate mass of almost €47b of NPEs as a necessary condition for the success of the transactions:

• May 2017 – Nuova Banca Marche, Nuova Banca dell'Etruria e del Lazio and Nuova Cassa di Risparmio di Chieti (the good banks) finalized the sale of a €2.2b NPEs portfolio to Atlante II (recently renamed the Italian Recovery Fund and controlled by Quaestio Capital Management).

• June 2017 – Nuova Cassa di Risparmio di Ferrara sold its €343m NPEs portfolio to the Italian Recovery Fund.

• July 2017 – Veneto Banca and Banca Popolare di Vicenza were wound down with the transfer of the performing business to Intesa Sanpaolo. The agreement for the future transfer of the €16.8b (€18b as at April 2018) NPEs portfolio to Società per la Gestione di Attività (SGA), was only formalized by the Italian Ministry of Finance in February 2018.

• September 2017 – Cassa di Risparmio di Rimini, Cassa di Risparmio di San Miniato and Cassa di Risparmio di Cesena sold a €2.7b NPEs portfolio tothe Italian Recovery Fund and another €286m portfolio to Algebris.

• December 2017 − MPS finalized the securitization of a €24.1b NPEs portfolio thanks to the intervention of the Italian Recovery Fund, who agreed to acquire both the junior and the mezzanine tranches.

The Italian Recovery Fund played a crucial role in ensuring the viability of these resolution processes, the completion of which would not have been achieved without the agreement on the NPEs burden. Overall, it has been involved in NPEs transactions totalling a GBV in excess of €30b, with a net investment of approximately €2.5b2 (see Figure 4.3).

As of today the restructuring of the Italian banking sector have created significant opportunity for the overall servicing industry and for the development of large specialized players.

Figure 4.3: Italian recovery fund, net NPEs investments1

Monte dei Paschi di Siena

NB Marche, NB Etruria, NCRChieti

CR Rimini, CR Cesena, CRSan Miniato

NCR Ferrara

€2.5b

1 Including: i) €513m invested in the junior or mezzanine tranche of the €2.2b securitization done by the three good banks; ii) approximately €65m (19% of the portfolio GBV) invested in the NPEs portfolio sold by CR Ferrara; iii) €500m invested in the mezzanine tranche of the €2.7b securitization done by CR Rimini, CR Cesena and CR San Miniato; iv) €805m and €565m invested respectively in the 95% of the mezzanine and junior tranches of the €24.1b securitization done by MPS.

2 Quaestio Capital SGR, Official Press Release – 10 January 2018.


The Government-backed GACS scheme was introduced in February 2016 by the Italian Ministry of Finance (MEF) with the aim of re-launching the subdued NPEs securitization market in Italy. The state guarantee aims at protecting buyers of the senior notes, basically lowering their risk to that of a government bond, and contributes to lowering the financing costs faced by the special purpose vehicle (SPV).

After a slow start (with just one GACS-backed transaction completed in 2016 by Banca Popolare di Bari), over the course of 2017, the scheme witnessed a sudden high adoption on a growing number of NPEs securitizations. For this reason, its availability for Italian banks (initially expiring by mid-2017) has been extended twice: once by one year and, in September 2018, by another six months, to March 2019.

One of the main reasons for the delay between the initial scheme launch and its implementation in the market is the timeframe required for the senior tranche to receive investment-grade rating, which is mandatory under the GACS scheme. A deep analysis of the loan data tape and the portfolio business plan is key for the rating agencies, and the whole process could take up to nine months. In addition, good data quality is crucial in a GACS-backed transaction, as it allows the issuer to achieve a higher senior portion and maximize the benefit of a lower cost of funding (see Figure 4.4).

The GACS scheme has supported securitized debt sales and, as a result, has broadened the spectrum of potential investors in the Italian NPEs market. It has also attracted those who were not interested in a straight portfolio acquisition due to the low visibility on the recovery process (which typically needs some type of local presence).

1 Moody's, Scope Ratings, DBRS, official press releases, EY analysis.

In this context, Davidson Kempner Capital Management paved the way with its investment in the junior and mezzanine notes of the €480m securitization carried out by Banca Popolare di Bari back in 2016.

Subsequently, other US funds invested in the junior and mezzanine notes of this type of securitization, such as King Street Capital Management in UniCredit'sProject FINO and Waterfall Asset Management in Creval's Project Elrond.

Other investors, such as pension funds and insurers, will most likely be the acquirers of the state-guaranteed senior tranches. In fact, banks had initially retained these from the deals completed but are now starting to put them on the market to transfer the underlying risk.

Recently, MPS, Banco BPM, Creval, BPER, Banco Desio, UBI Banca, Iccrea Banca, Banca Carige and other local banks announced the securitization of huge amounts of bad loans; some of them are still finalizing the application procedures for the definitive GACS scheme entitlement. Multi-originator securitizations are also taking place more frequently, as groups of smaller cooperative and mutual banks utilize this tool to reach amounts high enough to access the secondary market and obtain the state guarantee. Specifically, LuzzattiS.p.A. recently announced the securitization of c.€1.6b (to the vehicle POP NPLs 2018) on the part of 17 cooperative banks.

Other banks have also declared their willingness to include GACS-backed securitization transactions in their 2019 disposal programs.

In light of this trend, the MEF mentioned the possibility of introducing a new measure related to the GACS scheme, which could potentially involve an extensionbeyond March 2019.

Figure 4.4: Italian GACS-backed NPEs securitization transactions – SPV tranching structures1

31

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33

Outlook and pipeline

As of early 2019, the pipeline appears rich, also thanks to extension of the GACS scheme (see Figure 4.6). Future challenge facing Italian banks relates to UTP loans, whose stock reached €83b as at September 2018 (almost 40% of total gross NPEs), and increasing regulatory pressures to decrease the overall stock of NPEs.

After a first market phase in which almost all financial players have been focused on bad loans (Italian sofferenze), the interest is now starting to widen toward other types of NPEs, with approximately €3b portfolios including UTP positions traded over the course of 2018. In fact, this asset class could offer new investment opportunities and international investors or turnaround funds may be interested in committing fresh capital in the underlying businesses of a firm to contribute to its restructuring and become shareholders, thus participating in potential future upsides. This feature has led, in some cases, to prices above 40% of the GBV. From a seller's perspective, UTP require a more proactive management as they present higher heterogeneity. Some clusters may be closer to bad loans, while others might be cured back to performing after a restructuring period. The setup of credit funds targeting UTP exclusively is also being tested by private equity operators in the Italian market and the key feature lies in the industrial approach adopted by this type of investor.

Secondary market re-trades (meaning investors' divestments after the initial purchase from originating

banks) are also taking place with higher frequency in Italy.

Usually, instead of trading the whole portfolio, investors identify certain sub-clusters which require specific servicing capabilities and sell them to other specialized operators. This procedure allows for a proper risk/return allocation, as investors are more flexible than banks in clustering portfolios. In addition, secondary market re-trades typically involve portfolios featuring higher data quality thanks to previous due diligence activities carried out on the same portfolios. For instance, as part of the deal involving the sale of CAF to Intrum, Lone Star Funds sold a mixed NPEs portfolio with a GBV of €370m comprising loans to retail and SME clients. The fund had previously acquired the portfolio from Tercas in 2015. In September 2018, MB Credit Solutions acquired two portfolios for an aggregate nominal value of €642m from CRC, Bayview and Balbec Capital. Illimity Bank acquired a €263m portfolio from Istituto Finanziariodel Mezzogiorno.

Several other secondary market deals are currently ongoing in Italy, signaling the country’s path toward a more mature market.

On the downside, after the development of a functional market over the last years, renewed international macroeconomic headwinds and sovereign volatility could potentially have an impactful effect on NPEs portfolio valuations.

Figure 4.6: Rumored and ongoing NPEs portfolio disposals1

1 Il Sole 24 Ore, Milano Finanza, Debtwire, BeBeez and other publicly available information.

Seller Project Name GACS Indicative GBV (€m)

Credit Agricole Poppy No 6,000

UniCredit Sandokan "bis" No 3,000

CRC & Bayview Beyond the clouds No 2,000

Banca Carige N/A No 1,800

REV - Gestione Crediti N/A Yes 1,500

Intesa Sanpaolo Rep No >1,000

Banca Carige N/A No 1,000

Cariparma N/A Yes 1,000

Cooperative banks multi-originator N/A Yes 1,000

Unipol N/A No 400

Intesa Sanpaolo Luce No 250

Intesa Sanpaolo Levante No 250

CheBanca Charlot No 140

Banco Desio N/A No 100


5Evolution of the servicing

market

5

In a context where the proactive management of NPEs has been both at the center of banks' strategic agenda and under the regulatory spotlight for years, the role of credit servicers has gained importance and, consequently, the competitive scenario has evolved.

Traditionally, most of the servicers were identified as small-medium sized unpaid loan collectors. However, as the magnitude of impaired assets reached record levels in Italy, the scale of interested players progressively expanded beyond national borders. Investors started to implement several changes to business models, adapting to the new needs of the distressed assets environment and modifying their positioning along the entire credit management process.

In this context, the regulator played an important role in the reorganization of servicing licenses carried out as part of the reform of Title V of the TUB (the Italian Banking Law), which started in 2010. Legislative Decree no. 141 provided, among other things, for the consolidation of all non-banking financial intermediaries under a new single register (Article 106 of the TUB, also referred to as Albo Unico) supervised by the BOI. The reform was finally implemented in 2015: financial intermediaries listed under the old Articles 106 and 107 of the TUB were required to submit a request to enroll in the new Article 106 Single Register by May 2016.

The redefinition of the scope and the content of regulatory restrictions (see Figure 5.1) had an impact on credit servicers. Some (typically the largest) were configured as financial intermediaries and, consequently, had to implement new strategic and operational choices to comply with the new framework.

The current competitive scenario is quite peculiar: the special servicing market, which relates to players managing both bad loans and other NPEs, is still fragmented and populated by several small firms. However, in terms of assets under management (AuM), the market appears highly concentrated.

Other few players are specialized master servicers of loans securitizations. They are responsible for the overall transaction's compliance with Italian Securitization Law No.130/99. Master servicers are typically banks or financial intermediaries belonging to the Albo Unico 106. Typical securitization structures often include the signing of sub-servicing agreements, providing for the delegation of collection activities from master servicers to debt collection agencies ex. Article 115 of the Italian Testo unico delle leggi di pubblica sicurezza (TULPS).

Activity Ex Art. 106 TUB Ex Art. 115 T.U.L.P.S.

Grant financing O

Master servicing O

Special servicing

Credit purchase 1

Credit collection (on behalf of third parties)

Only if licensed under article 115 T.U.L.P.S.

Credit collection (related to owned credits)

Change contractual terms of purchased credits O

Competitive scenario

1 According to DM 53/2015 (Art. 2, comma 2, letter b) ex Art. 115 TULPS, credit collectors can purchase loans under specific conditions: i) financial leverage cannot exceed their equity; ii) they cannot modify contractual terms of the financing; iii) receivables must be purchased only for recovery purposes.

35

Figure 5.1: Servicers' authorized activities


36

1 Mergermarket, public information and official press releases.

M&A trendsOver the course of 2017 and 2018, the Italian servicing market has been extremely dynamic in terms of M&A. Multiple transactions were announced involving both domestic and international investors who decided to enter or consolidate their positions in the country.

As reported in Figure 5.2, with a total deal value of approximately €750m, the major trend so far has been related to the carve-out of banks' internal non-core units. The latest transactions in this respect are the following:

• Intesa Sanpaolo with the Swedish group Intrum AB. The deal envisages (i) the securitization of a bad loans portfolio with a GBV of c.€10.8b and (ii) the creation of a new joint venture servicer that will aggregate all the Italian servicing activities of Intrumwith the bank's NPE collection platform and will have approximately €40b of AuM. (see Figure 5.3 for more details on the deal structure).

• Banco BPM with Credito Fondiario SpA and the US-based fund Elliot International LP. The deal envisages (i) the securitization of a bad loans portfolio with a GBV of c.€7.8b (possibly under the GACS scheme), with the US fund subscribing the

junior and mezzanine notes and (ii) the creation of a servicing platform in which Credito Fondiario will held a 70% stake, with the bank keeping the remaining 30% interest.

Previously, in May 2018, MPS completed the sale of its collection platform Juliet to Quaestio Cerved Credit Management S.p.A., the SPV created by QuaestioHolding and Cerved Group, for a consideration of €52.5m plus an earn-out clause of c.€33.8m.

The deal, already agreed during 3Q17, includes a multiyear servicing agreement on the majority of MPS’s new NPE or bad loans inflows over the next 10 years.

Some months before, Cerved Group, through its controlled entity Cerved Credit Management, consolidated its position in the market with the acquisition of the servicing platform of Banca Popolaredi Bari, along with servicing agreements on most of the bank’s future NPEs.

In December 2017, Credito Fondiario acquired Banca Carige's servicing platform, which had total AuM in excess of €1.2b.

Year Target Seller Buyer StakePortfolio under management

Deal valueServicing agreements

2018 Banco BPM servicingplatform ("ACE")

Banco BPM

Credito Fondiario

70% €7.8b of bad loans €143m Portfolio sold and a 10-year agreement for the servicing of 80% of Banco BPM future bad loans

2018 Joint Venture Servicer ("Intrum Italy")

IntesaSanpaolo

Intrum 51% €40b of bad loans inflows generated over the next 10 years (and disposal of €10.8b of bad loans)

€500m Exclusive servicing agreement on Intesa Sanpaolo Group's bad loans over the next 10 years

2017 Banca Carige servicing platform ("Gerica")

BancaCarige

CreditoFondiario

100% €1.2b portfolio (70% secured)

€31m 10-year servicing agreement on BancaCarige’s NPEs

2017 Banca Popolare di Bari servicing platform ("Credit Management S.r.l.")

BancaPopolaredi Bari

CervedCM

100% €1.1b of bad loans €18.0m (+€3.0m earn-out clause)

75% of future bad loans and 55% of future UTP loans originated by BP di Bari

2017 MPS servicing platform ("Juliet")

MPS Quaestioand CervedCM

100% Initial value of €4.5b plus €17.6b arising from securitizations

€52.6m (+€33.8m earn-out clause)

Servicing agreement on at least 80% of the bank's new bad loans inflows generated over the next 10 years

Figure 5.2: Servicing platform disposals announced in Italy1


1 Intrum, Long-Term Strategic Partnership with Intesa Sanpaolo in Italy – April 2018.

37

Figure 5.3: Intesa Sanpaolo – Intrum: illustrative deal structure1

Focus on Intesa Sanpaolo – Intrum Deal

Intrum Italy

IntesaSanpaolo

49%51%

Intrum

INTRUM Italy

Gextra CAFIntesa NPE Recoveries

1

NPE securitization structure

Poolof banks

JV Co.(Intrum 80% and CarVal

20%)

IntesaSanpaolo

NPE(NBV

c.€3.1b)

Juniornotes

Assets Liabilities

60%

40%

2

Long-term strategic partnership

SPV

Seniornotes

Mezzanine notes

The deal between Intrum and Intesa Sanpaolo envisages two distinct transactions:

1. The merger of Intesa Sanpaolo's NPE recovery operations and Intrum‘s Italian operations into a single entity named Intrum Italy (or "JV servicer"). Note that Cross Factor S.p.A. and the holding company Lindorff Italia S.r.l. are excluded from the transaction perimeter. Intrum will consolidate the JV servicer in its financial report

2. Intesa Sanpaolo will securitize approximately €10.8b of NPEs to an SPV for an indicative price of 29% (or €3.1b). The senior notes (accounting for c.60% of the price) will be financed by a pool of banks, while the mezzanine and junior notes (40% of the price) will be subscribed by Intesa Sanpaolo (49%) and a partnership between Intrum and CarVal (51%), in which Intrum will have a 80% stake (equivalent to c.41% of the SPV). Intesa Sanpaolo, while retaining almost 20% of the notes, will be able to reach full derecognition of the entire portfolio.

The competitive scenario for servicing has also expanded beyond banks' perimeters. Indeed, over the last couple of years, international investors (typically investment funds active in the distressed assets market that had previously started buying NPE portfolios across Europe) have been very active in the acquisition of servicing firms.

The rationale behind their strategy might include:

• Enhancing portfolio marginality – funds are aimed at increasing the marginality both on their proprietary portfolios and on future investments, lowering external costs.

• Expanding volumes – the NPE third-party servicing market has recently grown significantly.

• Boosting investment capacity – most servicers have deep market knowledge and a sound reputation but limited investment capacities to leverage their business fully.

Sellers have welcomed investors’ interest for two main reasons:

• Funding needs – external capital injections would sustain the business growth, pushing results and margins up, with consequent higher returns for shareholders.

• Attractive market environment – high EV/EBITDA multiples were observed in recent transactions (ranging from 7x to 10x on average).


38

Year Target Buyer Stake Description

2018 GeneraleGestione Crediti

Link Financial Group

100% • Link Financial Group, a European leader in the debt collectionindustry, acquired, through its subsidiary company Link Finanziaria, the whole stake in Generale Gestione Crediti, a debt collection firm founded more than 20 years ago.

2018 Maran Group HoistFinance

100% • Hoist Finance has entered into an agreement to lease and subsequently acquire the business going concern of the Italian debt collection companies Maran S.p.A. and R&S S.r.l. (Maran Group) in a multistep process, in the context of their composition with creditors pursuant to Italian insolvency law.

2018 Officine CST Cerberus 57% • Cerberus Capital Management reached an agreement for the acquisition of 57% of Officine CST S.p.A., a leader in the management of public administration (PA) receivables with c.€16b under management and 150 resources.

2018 FBS Banca Ifis 90% • Banca Ifis, the listed Italy-based bank, has reached an agreement for the acquisition of 90% of FBS S.p.A., one of the main Italian NPE servicers, and its proprietary portfolio (with a GBV of c.€1.3b) for a total consideration of €58.5m. FBS is particularly active in the secured RE and corporate loans fields.

2018 Agecredit Kruk 51% • KRUK Group, specializing in credit collection and NPE portfolio acquisitions listed on the Warsaw Stock Exchange, has acquired a 51% stake in Agecredit S.r.l., a servicer operating in the Italian market, for an undisclosed consideration.

2018 Phoenix AssetManagement

PIMCO, AnaCap

60% • PIMCO (through Oxalis Holding) and AnaCap Financial Partners (through Prime Credit 3) have reached an agreement for the acquisition of a 60% stake in Phoenix Asset Management, the Italy-based NPE and UTP special servicer.

2018 Parr Credit Arrow 100% • Arrow Global Group Plc has acquired Parr Credit S.r.l., an Italy-based servicer of NPEs headquartered in Rome, for a cash consideration of €20m.

2018 Europa Investimenti

Arrow 100% • Arrow Global Group Plc has agreed to acquire Europa InvestimentiS.p.A, an Italy-based professional investor in corporate crisis, from Consival S.r.l. and Camargo S.r.l. for a consideration of €62m, plus an earn-out clause of €19m.

2018 PwC Mass Credit Collection department

Intrum 100% • Through Gextra, Intrum Group acquired from PwC the Massive Credit Collection (MCC) division, which provides legal and paralegal services related to credit collection on behalf of both Italian and foreign customers.

2017 Prelios Davidson Kempner

100% • The US-based hedge fund Davidson Kempner Capital Management, through Burlington Loan Management, has agreed to acquire a 45% stake in the Italian RE and asset management firm Prelios (which controls Prelios Credit Servicing) for €64m. Subsequent to the closing of the transaction, the acquirer launched a mandatory tender offer and acquired all the remaining shares of the target. As the final step, DK arranged the delisting of the company.

2017 Sigla Credit Alchemy Partners

100% • Alchemy Partners, the UK-based PE fund, acquired the Italian consumer finance player Sigla Credit and its debt collection agency Si Collection for an undisclosed consideration from DeA Capital and Palamon Capital Partners.

2017 CAF Intrum 100% • Through Lindorff Italia, Intrum Group, the European leading provider of credit management services, acquired CAF, an Italy-based independent NPE servicer controlled by Lone Star Funds, for a total consideration of €200m. The acquisition includes an NPE portfolio with a GBV of c.€370m.

Figure 5.4: Evolution of the competitive market for loan servicing in Italy1

1 Official press releases, Mergermarket and public information.


39

1 Official press releases, Mergermarket and public information.

Figure 5.4: Evolution of the competitive market for loan servicing in Italy (Continued)1

Year Target Buyer Stake Description

2017 Gextra Intrum 100% • Intrum has agreed to acquire Gextra, an Italian firm specializing in the recovery of small ticket loans with AuM of approximately €600m as at YE 2016, from Italfondiario (doBank).

2017 Guber VardePartners

33% • The US-based Varde Partners acquired a 33% stake in Guber, an Italy-based firm engaged in providing credit management, debt assignment, due diligence and RE management services, for a consideration of €47m.

2017 Assicom Tecnoinvestimenti

32.5% • Tecnoinvestimenti acquired the remaining 32.5% stake in Assicom, an Italy-based company engaged in providing credit management services, for an undisclosed consideration.

2017 Sistemia KKR N/A • KKR has agreed to acquire an undisclosed majority stake in Sistemia, an Italy-based debt servicer with AuM in excess of €4.6b as at YE 2016.

2017 Harit Bain Capital

100% • Bain Capital Credit, the US-based hedge fund manager, has agreed to acquire Heta Asset Resolution Italia S.r.l., the Italy-based wind-down company and a financial intermediary, for an undisclosedconsideration.


40

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5Appendices:

UTPs and non-performing

leasing

6

Loans disposal(whole or partial disposal

securitization)

► Full transfer (aiming at derecognition)

► Partial transfer of credit (objective is risk sharing with new investors)

► Securitization (to attract a broader base of investors)

Recap and new financing(internal strategy)

► Search for an industrial partner to restore momentum to the debtor's business (long-term approach)

► Search for a financial partner to inject new resources or cash into the strategic plan of restructuring and re-launch (medium- or long-term approach)

Platform setup

► Option to establish a platform with or without derecognition

► Definition of cash flows or ad hoc returns in case of two or more transferring banks

Proactivemanagement

Forbearance

Forbearance measures(internal strategy)

► Moratoriums (interests and capital); amortization rescheduling; new financing

► Restructuring plans under Article 67, 3 Italian bankruptcy law (IBL); debt restructuring agreement under Article 182-bis IBL

► Composition with creditors under Art 160/161 IBL; going concern agreements with creditors under Art 186-bis IBL

► Restructuring agreements with financial intermediaries and in moratorium under Art 182-septies IBL

Liquidation procedures(internal strategy)

► A voluntary liquidation of collateral by the debtor

► Judicial procedures aiming at asset sale, securing the debtor exposure after a preliminary estimate of the liquidation value and the expected timing

The recent increase in the number of transactions involving UTP exposures in the Italian distressed market has encouraged banks to pay higher attention to this asset class.

Thanks to a variety of different categories of borrowers with heterogeneous debt positions, it is clear that the implementation of a one-size-fits-all strategy is impossible. Strategic options should be identified through a solid due diligence process, primarily aiming at choosing between a gone or going concern approach.

If a going concern approach is deemed feasible, borrowers' operating cash flow will enable the

repayment of the financial debt to all creditors. Thus, different strategies such as recap and new financing or forbearance measures can be considered.

Alternatively, a gone concern scenario provokes the freeze of a debtor’s cash flow. In this case, the bank could dispose of the UTP portfolio or push the debtor into a liquidation procedure.

Another scenario could involve banks setting up a platform, transferring all pertinent credits and personnel dedicated to working out procedures.

42

Alternative options for effective management of unlikely-to-pay loans


43

UTP: a different approach to enhance portfolio value

Due to the variety of different categories of borrowers and debt positions, UTP exposures need to be approached differently from non-performing loans, with a tailored one-to-one approach.

UTP exposures can be divided in three macro-classes with different applicable workout strategies: i) pure RE, ii) unsecured and iii) SMEs active in a variety of industries/sectors.

In light of the above, banks should carry out a segmentation of their UTP portfolio based on the following drivers: i) reference macro-class; ii) size; iii) sector and iv) asset quality.

This would enable the banks to better define the recovery strategy of each single exposure and identify:

• Large files to be treated through a single name strategy;

• Medium files to be clustered in buckets or selected portfolios based on drivers described above; and

• Small files to be managed through portfolio sales or setup of platforms.

Dispose and recap: where banks meet distressed and turnaround funds

Recent market transactions recorded in 2017—18 show an increasing appetite from foreign distressed and turnaround funds on Italian single name exposures.

Investment focus is concentrated on companies with the following characteristics:

• Strong brand;

• High-quality products, recognized on the market;

• Significant expertise on specific market segments;

• Distressed situation due to contingent and non-persistent liquidity shortfall;

• Creditors willing to dispose or to share their risk;

• Assets available to guarantee new financing and backing a worse case scenario.

Traditional restructuring agreements are gradually evolving to complex distressed M&A transactions in which: (i) lenders sell their exposure to the buyer with a discount on GBV of the exposure and (ii) the buyer refinances or capitalizes the target, injecting new financing or converting debt into equity with the objective of re-launching the business and defining a strategic exit plan for either the short-term horizon (speculative approach) or on the medium- to long-term horizon (industrial approach).

Such transactions enable all stakeholders to enhance the value of their investment and preserve the going concern of the business, and are usually set up under the protection of the procedures provided by the IBL (restructuring plan under Article 67 of the IBL, debt restructuring agreement under Article 182-bis of the IBL or composition with creditors under Article 160 of the IBL).

The intervention of a new investor is to be considered an opportunity for banks to achieve derecognition of the assets and avoid involvement in the whole restructuring process, often implying an high cost related to the need of new financing to be granted.

However, banks are only keen to enter into such transaction in the following instances:

• If, for derecognition, the sale price is equal to or higher than the net book value of the receivable.

• If, for non-derecognition, the restructuring process enables the bank to avoid a loss on the exposure

• Derecognition of non-core exposures or partial risk sharing.

• Sale price generally higher than price obtainable, including the asset in a portfolio sale.

• No need to support the debtor injecting new financing.

• No need to be involved in the whole restructuring process and in the analysis of the documentation prepared for the procedure (i.e., restructuring plan, independent appraisal, etc.).

Opportunity for the lenders

• Investment under the protection of procedures provided by the IBL and on a debt-free basis.

• Possibility to negotiate with management from a stronger position.

• Possibility to preserve the going concern of the business injecting super-priority financing.

• High-yield investment.

Opportunity for new investors

• Preservation of the going concern of the business.

• Identification of a new partner to support the re-launch of the business.

• New financing.

• No need to access to more invasive bankruptcy procedures.

Opportunity for the debtor

Deal origination

Non-binding offers

Duediligence

Bindingoffers

Deal negotiation

CRO, value potential

ExitRestructuring

processBank

deleverage

Typical distressed M&A process on single names:


Leasing contracts deserve a dedicated analysis in light of the specific and unique features of this asset class.

2017 is the fourth year in a row where the leasing segment has shown a good growth, with origination volumes increasing from €16b in 2013 to €26.6b in 2017.

Also in light of the positive trend and the growing importance of the leasing asset class within the Italian funding market, in 2017, the regulator issued a dedicated set of rules (i.e., Law 124/2017).

In terms of credit quality, as of June 2018, there has been a 6.1% reduction of total impaired leasing exposures vs. December 2017.1

The total gross NPE ratio (i.e., the ratio of total gross impaired leasing to the stock of gross leasing disbursed) was 24.3% as at 30 June 2018, -1.1% vs. December 2017 and -2.2% vs. June 2017.

When considering the provisions recorded during 1H18, the net NPE ratio (the ratio of net impaired leasing to the stock of net leasing) was 14.6% at June 2018, -1.6% vs Dec 2017.

In terms of underlying asset, as of Jun 2018, 80% of the overall NPE leasing amount was related to RE leasing. RE leasing NPEs reached €17b or 19.4% of the total leasing gross book value (including bad loans, UTP, past due and performing).

The average coverage of impaired leasing exposures related to bad loans, UTP and past due was 47.4% as at June 2018, while the coverage ratio on only bad loans exposures was 55.2% (without any regard to underlying asset).

The analysis of impaired leasing by type of underlying asset indicates how the aeronautical and railway sectors (37.1% NPE ratio) and the RE sector (30.1% NPE ratio) have been heavily impacted in terms of deterioration of credit quality (see Figure 6.1).

A deeper look at the composition of impaired leasing based on the underlying asset type shows that bad loans are the predominant component of all products, with the exception of the energy sector, where UTPs dominate with 62% of total impaired leasing (see Figure 6.2).

Figure 6.1: NPE ratio – breakdown by industry1

Figure 6.2: Impaired leasing – breakdown by underlying asset1

Figure 6.3: Leasing – breakdown by risk class (€b)1

44

1 Assilea – 30 June 2018 and EY analysis.

3%11%

2%

80%

4% Automotive - Industrial andcommercial vehicles

Equipment

Aeronautical and railway

Real Estate

Energy

Figure 6.4: NPE – breakdown by industry1

Snapshot on non-performing leasing assets

58%70% 73% 69%

37%

37%28% 27% 30%

62%

5% 2% 0% 1% 2%

Automotive –industrial and commercial

vehicles

Equipment Aeronauticaland railway

Real estate Energy

Bad loans UTP Past due

66.8 0.46.6

14.5

Performing Past due UTP Bad loans Total

88.3

Automotive - industrial and commercial vehicles

Real estate

7.2%

9.4%

23.1%

22.4%

18.5%

20.1%

13.1%

4.2%

4.4%

1.9%

14.6%

13.6%

22.0%

34.3%

32.8%

27.1%

30.1%

37.1%

14.1%

10.1%

6.7%

24.3%

Energy

Under development

Real estate > €5m

Real estate €2.5m <= €5m

Real estate <= €2.5m

Total real estate


Equipment

Industrial and commercial vehicles

Automotive

Total

NPE gross ratio NPE net ratio


80%85% 84%

49%

72%

55%

41%

51% 52%

27%

40%

32%30%26%

17%21%

36%

23%

Automotive –industrial

and commercial

vehicles

Equipment Aeronauticaland railway

Real estate Energy Total


RE leasing bad loans amounted to €11.8b as at June 2018 and represented 13.4% of total leasing contracts. They are mainly composed of exposures with a ticket value lower than €2.5m, which represent approximately 45% of the total stock of RE leasing bad loans (see Figure 6.5).

With regard to the average level of provisioning for impaired leasing exposures, it should be noted that, as at 30 June 2018, the overall average coverage ratio was 47.4%. The higher provisions are related to aeronautical and railway (74.9%) and equipment (73.8%), while the lower provisions relate to RE (see Figure 6.6).

Figure 6.5: Bad loans – focus on RE (€b)1

Figure 6.6: Coverage ratio – breakdown by industry 1

Provisioning ratios on impaired leasing are substantially stable or decreasing in the automotive, equipment, RE and energy segments, and increasing in the aeronautical and RE under development industries. The coverage levels relating to the various products and to the different classes of risk highlight some interesting trends. While the overall coverage ratio relating to bad loans is approximately 55.2%, the distribution of provisions between the various business segments is very heterogeneous, moving from a coverage ratio of 84.6% on equipment leasing contracts down to 49.0% on RE leasing.The coverage ratio of UTP is, on average, 31.6%, with the aeronautical and railway sectors showing the highest value (52.4%), followed by equipment (51.1%). RE UTP exposures maintain lower levels of coverage, with an average of 27.1% (see Figure 6.7 and Figure 6.8).An in-depth analysis of the stock of RE leasing contracts shows that around 30.1% (€17.1b) of the total is related to impaired loans. It should also be noted that the coverage levels of bad loans RE leasing tend to increase as the contract value increases (from 45.1% in the case of RE leasing with a ticket value lower than €2.5m to 52.5% for RE leasing with a ticket value higher than €5m). The weight of UTP related to RE leasing contracts over total RE leasing stock is 8.9% (€5.1b) (see Figure 6.9). UTP RE leasing has a coverage ratio that varies from an average of 24.4% on the contracts with a GBV lower than €2.5m to an average of 28.8% on contracts with a GBV exceeding €5.0m.

Figure 6.7: Coverage ratio – breakdown by industry and risk class1

Figure 6.8: Coverage ratio – focus on RE1

45

Figure 6.9: Credit quality of RE leasing contracts1

5.3

11.8

2.2

3.9 0.4

Real estate<= €2.5m


Real estate > €5m

To bedeveloped

Total

45%48%

52%

69%

49%

24% 24%29%

49%

27%

20%23% 24%

6%

21%

Real estate < €2.5m


Real estate > €5m

To be developed Total


39.7

11.8

5.1

0.3

Exposure (€b)

Performing Bad loans

UTP Past due

69.9%

20.8%

8.9%

0.4%

Exposure – %

Performing Bad loans

UTP Past due

1 Assilea – 30 June 2018 and EY analysis.

51.7%

63.5%

43.4%

41.4%

39.5%

74.9%

73.8%

59.4%

73.0%

47.4%

Energy

Under development

Real estate > €5m


Real estate <= €2.5m


Equipment

Industrial and commercial vehicles

Automotive

Total


Regulatory updates

From a regulatory point of view, there is clearly an increased focus on financial leasing by the regulator, supported by the introduction of new legislation (Law 124/2017).

Main changes include:

• The definition of the economic non-fulfillment

• The introduction of a complex sale procedure

• The use of public market surveys developed by specialized agents or an independent expert

The long-awaited regulatory intervention clearly defines, through the reference to Article 106 TUB, leasing as a financial activity reserved for banks or authorized financial intermediaries enrolled on a special register held by the BOI. This clarification finally shed light on the interpretative doubts inherent in the financial or translational cause of the contract, with the consequent inapplicability of the legislation relating to sale subject to ownership (vendita con riserva di proprietà).

Another aspect worthy of attention is the provision contained in Article 1, paragraph 136: in the case of failure to exercise a purchase option, the user must

46

return the asset to the lessor; and, so as paragraph 138 reiterates, this time in the case of termination of the contract due to non-fulfillment, the lessor is entitled to have the asset back.

With regard to NPE leasing, Article 1, paragraph 137 of the new law specifically defines a serious breach following failure to comply with contractual pecuniary obligations: constitutes a serious breach of the lessee a failure to pay at least six monthly installments or two quarterly even non-consecutive installments or an equivalent amount for RE leasing, or four monthly installments, including non-consecutive ones or an equivalent amount for other financial leasing contracts.

In general, the new law is intended to define the fundamental rights of the lessor and, by effect, limit the lessee’s conduct to prevent dilatory effects in credit recovery. Moreover, the law structures the procedure aimed at realizing the value of the asset to protect the lessee and their own rights when defining the amount claimed by leasing companies or banks.

The recovery of impaired credit, in particular with regard to RE leasing, cannot in fact ignore the correct remarketing of assets.


BOI: Bank of Italy

CET1: common equity tier 1

CRD: capital requirements directives

CRR: capital requirements regulation

ECB: European Central Bank

EBA: European Banking Authority

FYs: fiscal years

GACS: garanzia cartolarizzazione sofferenze

GBV: gross book value

GDP: gross domestic product

HICP: harmonized index of consumer prices

IBL: Italian banking law

MEF: Ministero dell'Economia e delle Finanze

NPEs: non-performing exposure (i.e., the sum of bad loans, UTP loans and past due loans)

NPL: non-performing loan (or bad loans)

Re.O.Co.: real estate owned company

RWA: risk weighted assets

Securitization Law: Law No. 130 of 30 April 1999

SME: small and medium enterprises

SPV: special purpose vehicle

SREP: supervisory review and evaluation process

TULPS: testo unico delle leggi di pubblica sicurezza

UTP: unlikely-to-pay

Abbreviations and acronyms

47


Notes

48


49

Loans Portfolio Solutions Tax and Legal

EY Italy contacts

Erberto Viazzo

Partner

Transaction Advisory Services

Direct Tel: + 39 3481911479Email: [email protected]

Luca Cosentino

Partner

Transaction Advisory Services


Giancarlo Tardio

Partner

Tax

Direct Tel: +39 3356793658Email: [email protected]

Umberto Mauro

Partner

Legal


Marco Daviddi

Partner

Transaction Real Estate


Real Estate

Marco Zalamena

Partner

Hospitality Services


Non-performing Exposures & Restructuring

Katia Mariotti

Partner

NPEs & Restructuring


Stefano Vittucci

Partner

NPEs & Restructuring



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The Italian NPEs market...belonging to Società Gestione Crediti Delta (Sgcd). Over the last years,...

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