The Italian NPL market - PWC - June 2016

The Italian NPL market | 01 Macroeconomic scenario pg4 | 02 Italian real estate market pg6 | 03 Legal framework pg8 | 04 Italian banking system dynamics pg12 | 05 Italian banks overview pg14 | 06 The NPL servicing market pg18 | 07 Market recent activity and outlook pg22 | Appendix pg24

June 2016

The Italian NPL marketThe NPL volcano is ready to erupt

ForewordVolumes of transactions doubled in 2015 compared to 2014, with the amount of disposed loans reaching €19 billion at the end of last year. Q1 2016 began with €5 billion new deals in the market, both in consumer, secured and secured leasing areas.

The Government has put in place various reforms to give a clearer and leaner context for NPL market players: acting on improving procedures and shortening foreclosure timelines via legal and regulatory measures; facilitating NPL portfolio funding (GACS) and improving the tax regime.

In the meantime the investor base is confirming its interest and commitment to the Italian market, not only through portfolio investments but also via more complex structured deals involving platforms and financial institutions.

In addition, there is the new role of the recently formed Atlante fund: will it be an accelerator of deal flow or will its impact be marginal given its limited capitalisation? Will it be counterproductive by improving the situation of a few selected banks but at the cost of increasing, directly or indirectly, the NPE exposures of healthier banking institutions and increasing interlinkage?

With gross NPE stock in excess of €340 billion and pressures on banks to reduce these exposures, Italy remains one of the largest global markets for Non-Performing Assets.

There is greater government and regulatory support for, and commitment to, the sale and resolution of NPL credits versus prior market cycles to accelerate bank sector rehabilitation and improvement to the real economy. In addition, banking sector wide pressures imply a more comprehensive NPL sales cycle than prior Italian NPL market cycles.

Is the NPL volcano ready to erupt?

Fedele Pascuzzi [email protected]

Patrizia Lando [email protected]

Lucia De Vecchi [email protected]

Contents1. Macroeconomic scenario 4

2. Italian real estate market 6

3. Legal framework 8

4. Italian banking system dynamics 12

5. Italian banks overview 14

6. The NPL servicing market 18

7. Market recent activity and outlook 22

Appendix 24

4 The Italian NPL market | The NPL volcano is ready to erupt

01 Key message: As demonstrated by the main macroeconomic drivers, the Italian economy has taken a significant step towards recovery during 2015 and it is expected to continue to improve over the next two years. This is primarily driven by improvement in the European Real Estate market, lower interest rates, a stronger job market, higher GDP growth and expected benefits of structural and political reforms.

Macroeconomic scenario

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Forecasts of the major economic-financial institutions show that the Italian economy is recovering. This domestic recovery will largely offset the effects of the emerging markets’ slowdown on the Italian economy.

After a prolonged negative macroeconomic trend, GDP growth turned positive in 2015. This trend is forecast to continue and accelerate throughout 2016 and 2017. With a growth rate of 1.4% projected for 2017, Italian GDP growth will converge with the European average (Chart 1 and 2).

The public deficit is expected to continue its downward trend as a result of higher tax collection and a lower interest payments on public debt.

The Italian government, through PM Matteo Renzi, introduced the “Jobs Act” in 2014. The Act aims to improve flexibility in the job market providing an increase in new permanent contracts and services. A reduction in unemployment rate from 11.9% in 2015 to 10.5% in 2017 is anticipated.(1)

Investments in Commercial Real Estate in Europe increased by 18.0% during 2014, (total € 253 billion), driven by lower lending rates and economic recovery. While the UK remains the most significant share of investment activity at 34%, Italy continues to account for a very small share, at only 3.2% (€ 8.2 billion) of the total amount invested in 2015 (Chart 3). This share and volume of inward property investment versus that of the U.K., Germany and France is lower than would be expected given the relative sizes of the economies.

As Italy appears poised for a stronger recovery and given the late property cycle status and advanced bank sector recovery of the other markets – this could indicate more significant flows into Italian property (including via NPL investment). However, foreign investment and market activity is concentrated in the leading Italian sub-markets and prime locations.

(1) PwC analysis on Prometeia forecast

Chart 1: Main macroeconomic drivers in Italy

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

GDP (%) Inflation (%) Unemploymentrate (%)

Public deficit (%GDP)

Balance ofpayments (%

GDP)

2014 2015 2016 2017

Source: PwC analysis on European Economic Forecast 2015

Chart 2: European GDP vs Italian GDP

0.9%

1.5% 1.5% 1.5%1.6%

-0.4%

0.7%

1.2%

1.4%1.3%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2014 2015 2016 2017 2018

Uem Italia

Source: PwC analysis on Prometeia forecast December 2015

Chart 3: Real estate investment market in Europe

0

15

30

45

60

75

90

2014 2015

(€ million)

Source: PwC analysis on BNP Paribas Real Estate Report *Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia


02 Key message: After a positive performance during 2014, the real estate market continued its momentum with a 4.7% increase in NTN(2) in 2015 from 2014. Commercial and residential real estate showed an increase in volumes invested, albeit from a low level of activity. This trend is more robust in the main city markets: Rome and Milan.

Italian real estate market

NTNThe number of standardized real estate units sold (“NTN”) reached 963,902 in 2015 (Chart 4), an increase of 4.7% from 2014. The Residential sector showed the largest increase from 2014, +6.5%, reaching 444,636 NTN. As shown in Chart 4 the increase in residential NTN started in 2014 and is continuing its positive trend.

Chart 5 demonstrates that the North of Italy (52% share ) is the largest and strongest regional sub-market. In addition, of the residential real estate units sold, the biggest increase from 2014 was also in northern Italy (+8.0%).

Investments in CREIn 2015, Real estate investment volumes reached € 8.2 billion, an increase of 55% from 2014. Foreign capital remains the largest portion of the transactions volume of Italian investments at 74% (€ 6.1 billion), up € 2.1 billion from 2014. The Office market segment kept its upward trend during 2015, accounting for 37% of total investments (€ 3.0 billion). The Retail sector registered a decrease in volumes from 2014 level (-47%) due to lack of product supply, stabilizing at € 1.4 billion in 2015. The Industrial and Logistics segment represented the least significant market sector by volume (€ 305 million) (Chart 6). The hotel segment is experiencing an increasing level of interest from international investors. The quality of supply is the main limit to a strong market recovery.

(2) NTN is the number of standardized real estate units sold, taking into account the share of the property transferred.

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(3) The sector “Other” includes hospitals, clinics, barracks, telephone exchanges and fire stations (4) Appurtenances comprehend properties such as basements, garages or parking spots.

Chart 4: Trend NTN residential real estate (2004-2015)

-

200

400

600

800

1,000(/K)

Source: PwC analysis on OMI quarterly note

Chart 5: Residential NTN by geographical areas 2015

North52%

Centre21%

South27%


Chart 6: 2015 Investments in CRE Italian market by sector

Office, 37%

Retail, 17%

Industrial & Logistics, 4%

Hotels, 10%

11%

Mixed-used properties, 21%

Total capital8.2 bn

Foreign6.1 bn

Domestic1.8 bn

Other (3)

0.2 bn

Other,

Source: PwC analysis on BNP Paribas Real Estate Report *Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia


Table 1: 2014-2015 Italian NTN comparison by sector

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Tot 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Tot 2015

Residential 98,446 107,647 94,888 116,543 417,524 95,455 116,523 105,105 127,553 444,636

Office 2,134 2,182 1,897 2,805 9,018 1,997 2,101 1,913 2,831 8,842

Retail 6,242 6,092 5,428 7,991 25,753 5,918 6,725 5,826 7,765 26,234

Industrial 2,131 2,444 2,015 2,992 9,582 1,979 2,250 2,059 2,954 9,242

Appurtenances(4) 77,456 84,117 73,543 95,502 330,618 74,621 89,238 80,164 100,825 344,848

Others 29,348 31,772 29,236 37,997 128,353 28,411 33,322 30,179 38,188 130,100

Total 215,757 234,254 207,007 263,830 920,848 208,381 250,159 225,246 280,116 963,902


03 Key message: Over the last year the Government has implemented several measures aimed at acting on improving procedures and shortening foreclosure timelines via legal and regulatory measures; facilitating NPL portfolio funding (GACS) and improving the tax regime.

Legal framework Foreclosure and insolvency law reforms

Guarantee Scheme (GACS) – A government sponsored solution to facilitate the financing of NPL purchases.

As per the recent Law n. 49/2016, the new Guarantee Scheme for Securitisation of NPLs (Garanzia Cartolarizzazione Sofferenze or “GACS”) is aimed at increasing liquidity in the market by facilitating leverage on portfolio sales. This tool is part of a wider set of initiatives and reforms the Government is continuing to implement.

GACS is a provision for a government guarantee on senior notes issued by an Italian SPV. The notes are backed by NPLs assets that are serviced by external servicers, which are independent from the originating bank.

The intervention of the Italian Government is limited to the coverage of the interest and capital payment obligation on the senior tranches of notes. The guarantee can be called on the amount outstanding on the senior notes at their legal final maturity date. Payment will be made between 4 and 9 months from the time the representative of noteholders issues a request for payment.

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Chart 7: Recent legal reforms

A set of criteria governs the eligibility for the senior notes to receive the guarantee. Among these:

– The senior notes need to be rated investment grade and the rating is not revocable.

– The bank has to sell at least 51% of the junior tranche.

– It must obtain deconsolidation and de-recognition of the assets sold.

– The bank cannot be affiliated with the servicer.

– The waterfall allows for the repayment of the principal on the senior to be subordinated only to the payment of interest on the mezzanine (if issued), but not the junior notes.

– The premium for the guarantee is a senior cost in the waterfall and, to assure the aid-free nature of the scheme, is at a market-rate: based on the average price of a basket of single name CDS covering investment grade rated Italian companies, for the same duration of the notes.

Reform to the legal and insolvency process for resolution of NPLs The recent Law n. 132/2015 has addressed many legal issues related to credit recovery, legal and technical solutions, but in particular:

9 Extended the use and filing of digital documentation to reduce administrative burdens, improving the timing and simplifying recovery procedures.

9 Modified the auction process by allowing the possibility to offer a discounted auction price (up to 25% discount) from the initial price set by the judge.

9 Introduced the pre-bankruptcy composition plan allowing the possibility of competitive auctions and permitting the reduction in the number of financial creditors representing up to 25% of the total exposure.

Law n. 49/2016, provides for the application of a minimal fixed (€200) register tax for assets bought in the framework of a foreclosure or insolvency procedure (against 9% of sale price as was previously applied).

Law Decree n. 59/2016 provides for measures on foreclosure, insolvency proceedings and guarantees aimed at reducing the length of judicial procedures and simplifying the auction process. Among these:

9 A new security interest over movable assets (“pegno mobiliare non possessorio”) similar to the “floating charge”.

9 The possibility for banks and other authorized financial institutions to agree to the transfer of title over defined Real Estate asset(s) in case of default (“patto marciano”).

9 The digital registry of foreclosure and insolvency proceedings.

9 The provisional execution of an injunction order for a claim not challenged by the borrower and no opposition to enforcement procedures allowed if the asset disposal process has already been started.

9 Some amendments to bankruptcy law allowing creditors’ meetings and hearings to be held using electronic tools.

Most players believe the measures put in place are valid and beneficial. However, it will take some time for the full effect of such measures to be observed and to be factored into the valuation model of the investors and finally, to translate into higher selling prices.

August 2015

Law

132/2015

May 2016

Law Decree

59/2016

April 2016

Law

49/2016


Key message: Starting from January 2015, the Government implemented a set of legal and regulatory reforms of the banking sector aimed at making the system more efficient and facilitating the consolidation process.

Reforms of Cooperative banksIn January 2015 the Italian Government started the implementation of several reforms focused on the cooperative banks segment (“Banche Popolari”) aimed at making the banking system more efficient and facilitating the consolidation process.

In March 2015, the Government approved Law n. 33/2015 in urgent measures for banking system and investments, which transformed the 10 largest cooperative banks into a joint stock company.

In February 2016, the Government approved the reform of the smaller cooperative banks (so called “BCC”), with a net equity lower than €200 million. This BCC reform foresees the set up of a parent company with a minimum equity of €1 billion, with the majority of equity owned by the cooperative banks. The banks will either have to adhere to or be transformed into joint stock companies. The parent company will have a supervision and coordination role over the BCC, thus granting more stability and oversight to the system. This should strengthen the Italian cooperative banking system and improve their capital market funding and governance profile.

Art. 106 Single Register Financial IntermediaryThe Decree n. 53/2015 concludes the reform of the non-banking financial intermediaries which began in 2010. The reform was designed to consolidate all non-banking financial intermediaries that provide financing of any form to the public, to converge their regulation under Article 106 TUB and ensure a supervisory regime by the Bank of Italy (Single Register Financial Intermediary).

In order to be eligible under Article 106 of the Banking Act, all the financial intermediaries interested had to submit a request for approval of such designation to the Bank of Italy. The 106 eligibility requirements are pervasive and similar to the ones needed to obtain a banking license in terms of governance, prudential requirements, control systems, and financial reporting.

The NPLs servicing market includes financial intermediaries under Article 106 (and thus supervised by the Bank of Italy). It also includes the collection agencies regulated under Article 115 of the Public Security Act, which are not supervised by Bank of Italy but simply need to obtain a license from the Central Police Station with lower level of supervision and qualifying requirements.

The largest part of the collection agencies are aggregated under Unirec, a private association, which performs a supervision activity on the associated agencies (i.e. verification of the existence of shareholders and managers integrity requirements, compliance with code of conduct, etc.).

Article 106 TUB intermediaries can exercise financing activities as well as collection of disposed receivables and payment services relating to the securitization, while Article 115 TULPS intermediaries can only conduct credit recovery.

Securitisation structures often provide for delegation of credit recovery activities from 106 financial intermediaries to 115 entities. However, the 106 servicer keeps full responsibility for any activity outsourced to Article 115 servicers.

Legal framework Regulatory reforms

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04 Key message: The combination of regulatory changes at European and Italian level is signaling a requirement for a deep restructuring of the Italian banking sector. However, real implementation and more than surface level change is necessary to reach the more efficient and profitable banking sector that is required to deliver sector stability and meaningful credit growth to the real economy.

Italian banking system dynamics

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The Italian banking system is going through a deep reorganization as a result of several factors originating from both European regulatory changes, local specific events and consumer and technological changes impacting the broader global banking sector.

Since the implementation of the Single Supervisory Mechanism (“SSM”) some Italian banks have been under pressure from the ECB for strengthening their equity base and reducing NPL exposures. This, combined with the sectorial and business model issues that all banks in all national markets are facing today (technology disruption, changing consumer preferences, the banking business model), represents an even more serious challenge for Italian banks, which rely heavily on traditional retail business, already overburdened by high fixed costs (e.g. branches, personnel, etc.), significant cost income ratio as well as a shrinking interest margin.

In this framework, the availability of significant amounts of liquidity from international financial players represents a potential opportunity for addressing some of the issues of the Italian banking system. In particular sourcing equity capital and imposing more transparency and market discipline.

Among the recent events:

• The Government rescued four local troubled banks (Banca Marche, Cariferrara, Banca Etruria and Carichieti) by transferring their €8.5 billion of NPE to a single vehicle (called REV), and placing them on the market for sale. The sales process for these new banks is ongoing and both local banks and international investors have expressed their interest. The NPEs within REV will also be disposed over the near term. The value at which such loans were transferred from the originating banks was equal to 17.6% of GBV (25% on secured and 8% on unsecured).

• After some months of discussions, the merger plan between two of the big cooperative banks, Banco Popolare and Banca Popolare di Milano has been approved by the two boards and the deal is expected to be completed before year end.

After the merger the new entity will be the third largest bank in the Italian market. As part of the plan Banco Popolare will strengthen its equity with a €1 billion capital increase and will implement over the next 3-4 years a resolution plan for addressing its NPL exposures.

• Banca Carige’s new board rejected an offer from Apollo fund for the acquisition of the entire NPL portfolio at 17.6% of GBV and a share capital injection of €600million to provide liquidity to the bank. However, the Apollo offer and structure itself could be a template for other transactions as a means to facilitate larger scale bank resolution and foreign capital investment.

• MPS, in combination with its ongoing NPL deleveraging activity, is considering possible strategic options to create value from its NPL servicing platform. The rationale would be to form a partnership with a highly specialized player which could generate an upfront economic and financial benefit, combined with a long term value creation linked to the enhancement of the credit collection performances.

• Following its recent failure to gain admission to the Italian Stock Exchange, Quaestio Capital Management has underwritten €1.5 billion of share capital via the Atlante Fund which now holds 99.33% of Banca Popolare di Vicenza’s capital.

• Like Banca Popolare di Vicenza, Veneto Banca is experiencing similar challenges in recapitalization and rehabilitation due to severe losses, largely as a result of the provisioning on their NPL exposures. The ECB has given the Bank until 30th June to complete its capital increase. Veneto Banca is also considering merger, not only the IPO. In that context, one possible solution for the bank may be Atlante.

Atlante is a fund formed for the purpose of purchasing shares in banks which remain unsold to the market, purchasing NPL portfolios or subordinated notes issued by NPL securitisation. The fund has €4.25 billion of equity contributed by 67 institutions, with no investor holding more than a 20% stake. It has a 5 year term with the possibility of extension to 8 years. Its return objective is approximately 6%.

This scheme, which gained the blessing of ECB, is a tool to provide short term moderate cost capital and support the sale of NPL portfolios at higher prices, helping stabilizing the system. Its return objective enables it to acquire NPLs at a higher price than other market participants, enabling banks to reduce their immediate loss on sale. Expectations are for an increase in sale price of 4% of GBV in comparison to a market sale to traditional NPL investors. Combined with the GACS it could assist in the resolution of a significant amount of NPLs.

The limit to the effectiveness of Atlante to make a material impact on the NPLs disposals will largely be its size (equity resource). Its return objective is lower than the return demanded by the majority of existing international investors, so it is likely to be capitalized only by existing Italian market participants.

Given its size, however, we do not believe that that the fund will substantially limit market opportunities for distress investors at market returns.

One potential concern expressed by some market analysts is that it may weaken those institutions investing in the Atlante fund, who in turn are increasing their interlinkage with weaker institutions and their indirect NPE exposures. This raises the probability of earning a lower return on the equity invested versus other market investment opportunities, including new lending.


05 Key message: Gross non performing exposures in Italy have shown continuous growth over the period 2008-2015, with volumes at the end of 2015 equal to four times those of 2008. Therefore, since the onset of the credit crisis, while other national markets have largely resolved their NPL problems and rehabilitated their banking sectors, the NPL problem has continued to deteriorate in Italy.

Italian banks overviewIn December 2015, gross Non Performing Exposures (NPE) reached €341 billion, four times higher than 2008 (CAGR 2008 – YE-2015 +22.2%) but substantially stable versus H1-2015. About 58.0% of the total amount of NPE, equal to €200 billion, is related to NPLs.

Compared to 2008, the ratio of NPE to gross loans is five times higher (4.9% in 2008, 22.0% in 2015). However, in YE-2015 the ratio demonstrated a growth rate lower than the year before (3.2% in 2014, 1.0% in 2015).

Similarly, net NPLs showed a considerable increase in the period 2008 – 2015, going from €24 billion to more than €89 billion, an average CAGR of 20.6%.

Looking at the stock composition:

– Approximately half of total gross NPLs is represented by loans collateralised by real estate.

– The amount of net NPL is largely covered by real estate collateral.

– Almost 80% of the loans are towards SME and Corporates, thus confirming that the rise in the NPL stock is strictly connected to the economic and financial crisis that hit the Italian economy in 2008.

Chart 8: Breakdown of gross NPL as of YE-2015

47%53%

Secured

Unsecured

79%

19%

2%

Corporate

Retail

Other

Source: PwC analysis data of Bollettino Statistico di Banca d’Italia and ABI Monthly Outlook

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Source: PwC analysis data of Bollettino Statistico di Banca d’Italia and ABI Monthly Outlook

Chart 9: Gross NPL trend YE-2015

42

5978

107125

156

184200

33

57

66

74

91

109

131127

9

16

12

13

21

18

1214

2.5%

3.5%4.6%

6.3%7.5%

9.8%

11.8%

12.9%

4.9%

7.8%

9.3%

11.3%

14.3%

17.8%

21.0%22.0%

5.0%

10.0%

20.0%

25.0%

2008 2009 2010 2011 2012 2013 2014 2015

Gross NPL (€bn)

Unlikely to pay (€bn)

Gross NPL / Loans to customers (%)

Gross NPE / Loans to customers (%)Past due (€bn)

Source: PwC analysis data of ABI Monthly Outlook

Chart 10: Net NPL trend YE-2015

24

3947

60 62

8084

89

1.4%

2.3%

2.8%

3.5%3.8%

5.0%

5.4%5.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2008 2009 2010 2011 2012 2013 2014 2015

Net NPL (€ bn) Net NPL / Loans to customers (%)


Source: Financial Statements as of YE-2015, YE-2014, YE-2013.

Chart 11: Net NPL, net NPL/equity ratio and net NPL to loans ratio YE 2015

20.75

14.97

9.73

6.46

4.29 2.97 2.96 1.49

0.79 0.26

42.0%

31.3%

101.4%

80.1%

43.0%

59.2% 52.4%

32.2%

16.0% 3.1% 4.4% 4.3%

8.7% 8.2%5.1% 6.8% 4.4% 4.4%

2.9%0.7%

Net NPL (€bn) Net NPL / Equity Ratio (%) Net NPL ratio (%)

Chart 11 provides a snapshot of the net NPLs of the Top Italian banks, including the ratio of net NPLs to equity and to total loans.

All illustrate a high level of NPLs to equity ratio as compared to larger international peers.

Chart 12 depicts the Top 10 Italian banks in terms of NPE ratio and coverage: the average of which is 18.4% and 43.4% respectively. However, a material variance among the banks exists, with the two extremes represented by Mediobanca (5.9%) and

MPS (34.8%) in terms of gross NPE ratio and by Unicredit (51.1%) and UBI (27.8%) in terms of coverage ratio. We note that the coverage ratio is not directly comparable as it is influenced by several factors which vary among the different banks (such as level of

collateralisation of the loans, vintage of the portfolio, tax policies on write off etc.).

Chart 12: Top 10 Italian banks – NPE peer analysis as of YE-2015

UCG

ISP

MPS

UBIBPopolare

BPER

Cariparma

BPM

BNL

Mediobanca

0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Average= 18.4%

NP

E C

over

age

Rat

io (%

)

Gross NPE Ratio (%)

Average = 43.4%

Source: Financial Statements as of YE-2015

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Chart 13 provides a snapshot of the NPL ratio and coverage, which once again provides a fairly diversified picture with similar trends compared to

those described above. Average NPL ratio stands at 10.4%, while the NPL coverage ratio is equal to 55.6%.

Chart 13: Top 10 Italian banks – NPL peer analysis as of YE-2015

UCG

ISP

MPS

UBI BPopolare

BNL BPERMediobanca Cariparma

BPM

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

0% 5% 10% 15% 20%

Average = 55.6%

Average= 10.4%

NP

L C

over

age

Rat

io (%

)

Gross NPL Ratio (%)

Source: Financial Statements as of YE-2015

• The year-end snapshot indicates that compared to2014, with the exception of MPS, there are no material

movements in the gross NPL ratio for the top 10 banks. The average stands at 10.4% versus 9.7%, but there are

large variances between individual banks.

Source: Financial Statements as of YE-2015, YE-2014.

Chart 14: Top 10 Italian banks – NPL movements (YE-2015 vs YE-2014)

UCG

ISP

MPS

UBI

BPopolare

BNL

BPERMediobanca Cariparma

30%

35%

40%

45%

50%

55%

60%

65%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

NP

L C

over

age

Rat

io (%

)

Average= 55.6%

Average= 10.4%

Gross NPL Ratio (%)

YE-2015

YE-2014

BPM


The NPL servicing market

06 Key message: we foresee significant activity for the credit servicing industry in the next several years, benefitting from NPLs portfolio sales and the envisaged reopening of the NPLs securitisations, as well as the continued outsourcing of loan servicing by banks.

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Table 2: Main NPL non-captive special servicers

CompanyTotal AUM

(€m) 3 1.12.15

S pecial S erv icing AUM (€m)

Master S erv icing AUM (€m)

Total AUM (€m)

3 1.12.14

# Employees

3 1.12.15

# Debt Coll. Ag encies 3 1.12.15

# External Lawyers

3 1.12.2015

Revenues 3 1.12.15

(€m)Rating Fitch Rating S &P

Bank of I taly S urveillance

Dobank 45,088 45,088 - n.a. 618 109 681 90.0 RSS1- and CSS1- Strong Banking GroupItalfondiario 43,106 40,951 2,155 39,700 597 1 400 56.4 RSS1- and CSS1- Strong Albo Unico ex art. 106 TUBCerved 12,499 12,499 - 10,000 639 137 330 75.0 RSS1- and CSS1- n.a. Art. 115 TULPSPrelios 9,450 2,816 6,634 8,700 59 450 < 400 9.5 RSS2/CSS2 Above Average Albo Unico ex art. 106 TUBCaf 6,980 6,975 5 5,500 169 27 46 17.8 n.a. Above Average Art. 115 TULPSGuber 7,198 7,198 - 4,700 132 13 250 28.4 RSS2+, CSS2+, ABSS2 n.a. Art. 106 TUBFBS 5,198 5,198 - 4,300 116 25 1,523 20.2 ABRSS2/RSS2+/CSS2+ Above Average Art. 107 TUBFonspa 4,689 1,231 3,459 n.a. 82 - - 16.0 RPS3+/CPS3+ Average Banking GroupPrimus Capital 3,110 3,110 - n.a. 15 2 30 5.0 n.a. n.a. Art. 106 TUBCreditech 2,414 2,414 - n.a. 206 360 86 15.1 n.a. n.a. Albo Unico ex art. 106 TUBParr Credit 1,880 1,880 - n.a. 1,033 - - 18.2 n.a. n.a. Art. 115 TULPSOfficine CST 1,299 1,299 - n.a. 106 - 261 7.1 n.a. n.a. Art. 115 TULPSFire 5,103 4,116 987 1,500 210 15 172 40.2 n.a. n.a. Art. 115 TULPSAT NPLs 2,000 2,000 - 1,500 50 25 4 4.7 n.a. n.a. Art. 106 TUB

Since the financial crisis, the Italian credit servicing segment has experienced solid growth, both due to higher consumer credit volumes and an ever increasing number of financial institutions outsourcing their NPLs to dedicated servicing and collection entities.

This market development has been accompanied by a high level of competition among credit servicers, which has led to pressure on fees. Moreover, clients often require a customised service for their operations and demand both flexibility and the ability to communicate and manage data consistently with the client bank’s needs.

The credit servicing industry currently represents a large opportunity and should see meaningful growth over the next several years.

Another source of business for structured independent servicers is the envisaged reopening of NPL securitisation market.

In the case of GACS, the presence of a servicer which is independent from the originating bank is a pre-requisite for obtaining the State guarantee. All Atlante sponsored NPL transactions will likely seek to use the GACS for funding. Therefore, third party servicing platforms will benefit from both private

market NPLs transactions and the Atlante fund sponsored and GACS guaranteed NPLs transactions.

International players, understanding the prospects for this profitable trend and looking for new opportunities to exploit, have already broadened their focus to include a credit servicing business and a number are interested in acquiring platforms.

Note: The AuM volumes above comprise all the asset under management, including the loans for which the servicer has only a master servicer activity and does not act as special servicer. However, the majority of the volume consists of loans under special servicing, except for Prelios and Fonspa which have a predominant component of volume under master servicing (70% and 94% respectively).

Primus Capital’s business model is mainly based on the outsourcing and monitoring of external debt collection agents and lawyers.

Chart 15: Main servicers’ revenues and AUM as of YE-2015

Revenues includes “Revenues from Servicing Activities” (A.1) and “Other Revenues” (A.5) Source: PwC analysis on data provided by Servicers

Source: PwC analysis on data provided by Servicers

45,0

88

43,1

06

12,4

99

9,45

0

6,98

0

7,19

8

5,19

8

4,68

9

3,11

0

2,41

4

1,88

0

1,29

9

5,10

3

2,00

0

90.0

56.4

75.0

9.5

17.8

28.4

20.2

16.0

5.0

15.1

18.2

7.1

40.2

4.7

€m

Total AUM (€m) Revenues (€m)

Dob

ank

Italfo

ndia

rio

Cer

ved

Pre

lios

Caf

Gub

er

FBS

Fons

pa

Prim

u C

apita

l

Cre

dite

ch

Par

r C

redi

t

Offi

cine

CS

T

Fire

AT

NP

Ls


Chart 16: Borrowers geographical breakdown (mix in %)

ItalfondiarioDobank Cerved C.M.

Prelios CreditServicing

CAF Guber FBS Fonspa PrimusCapital

Creditech Parr Credit Officine CST Fire AT NPL'sSpA

North Centre South - Islands n.a.

46% 35% 30% 32%

62%

31%7%

34% 34% 35% 44%31% 29%

19%21% 27% 36%

22%

42%

2%

45%

18%29% 19%

19% 30%

35%

45%

28%

28% 44% 43% 32%16%

27%

4%

86%

21%

48%36% 37% 50% 41%

Chart 17: Type of loans managed by GBV (mix in %)

ItalfondiarioDobank

n.a. n.a.

Cerved C.M.




Secured Unsecured

45%

28%

28%

34% 53%34%

13%22%

45%

66% 47%66% 87%

78% 55%

48%

52%

0.1%

99.9%

6%

94%

13%

87%

5%

96%

28%

72%

Chart 18: Type of loan resolution – Secured (mix in %)

Chart 19: Type of loan resolution – Unsecured (mix in %)

ItalfondiarioDobank

n.a.

Cerved C.M.




Judicial Extrajudicial Loan Sale Other

26%6%

36%

5% 5% 11%n.a.

2%

34%12%

30%

69%

93%

31%90%

95%

77% 95% 100%100%

66%88%

65%

5%33%

5% 12% 3% 5%

Source: PwC analysis on data provided by Servicers as of YE-2015

ItalfondiarioDobank

n.a. n.a. n.a.

Cerved C.M.




45%

28%

28%

8% 8%

68%45%

88%

27%

70%83%

18%50%

84%

46%

25%

35%

12%

61%

25%

100%

17%

82%30%

8%

46%

8%20% 12% 5%

20%

Judicial Extrajudicial Loan Sale Other

21PwC


07Key message: Transaction volumes in 2015 surged to c. €19 billion GBV, a significant increase versus the volumes in previous years due to an intense activity on both primary and secondary deals. Despite this, the market is still very focused on consumer and retail unsecured credits, with some SME and secured transactions occurring. As a result of the combination of many different factors discussed herein, volumes are expected to increase meaningfully, with Q1 2016 registering €5 billion new deals.

Market recent activity and outlook

In 2015, volumes of disposals have more than doubled compared to 2014, with the amount of disposed loans increasing to approximately €19 billion. In Q1 2016 the market registered 8 new deals amounting €5 billion.

The most active banking groups in the disposal of portfolios during 2015 was Unicredit, with sales of approximately €4.7 billion, MPS with sales of €3 billion, and Banco Popolare with sales of €1.2 billion.

Several deals involving portfolios and/or platforms are on the market (the four cooperative bad banks, Interbanca by GE, HARIT by the Austrian Heta Asset Resolution, Sigla-Si collection). All are attracting the interest of both local and international players.

The investors base grew, with new players in the market (Hoist Finance, PVE) and in addition, some incumbents strengthening their presence in the market (mainly Fortress, Deutsche Bank, and Cerberus). Banca Ifis has continued to be extremely active both buy side and sell side on secondary deals.

Looking ahead we see clear signs of an improvement in the conditions for enhancing NPL deal volumes. A key component is the clearer and more favorable legal and regulatory framework: after the long await for the systemic bad bank there is now a scheme in place for facilitating the financing of NPL securitisation deals (GACS).

23PwC

(5). The sum of transactions reported include the public and not public transactions

Chart 20(5): NPL transactions in the Italian market (€ bn)

Source: PwC market analysis

This, together with the reform activity on foreclosure and insolvency procedures, the commitment of several banks to the ECB to reduce their NPE exposures suggests an explosive mix. We expect that the activity will be sustained and our prediction of at least €30 billion GBV of transactions for 2016 is realistic, possibly conservative. Furthermore, the percentage of secured portfolio disposal will be significantly higher than 2015. The deleverage process will occur over the next 3-4 years, but the NPL volcano is now truly ready to erupt.

Table 3 - NPL public transactions in the Italian market in 2015 and Q1-2016 (€ mln)

Year Seller Volume Type of Portfolio Buyer2016 Q1 Banca Carim 35

Secured Confidential2016 Q1 Confidential 223 Consumer CS UNION2016 Q1 Deutsche Bank Spa 240 Consumer Banca IFIS2016 Q1 Confidential 208 Consumer Banca IFIS2016 Q1 Confidential 1.000 Consumer Banca IFIS2016 Q1 Multiple sellers BCC 300 Mixed Secured/Unsecured Bayview Fund Management2016 Q1 RBS & GE 2.500 Mixed Secured/Unsecured Anacap & Confidential 2016 Q1 CreVal 314 Mixed Secured/Unsecured Credito Fondiario2015 Q4 Confidential 100 Unsecured Retail Confidential2015 Q4 Confidential 100 Secured Confidential2015 Q4 Confidential 1.400 Consumer Banca IFIS2015 Q4 Deutsche Bank Mutui 172 Secured Algebris2015 Q4 MPS 1.700 Unsecured Deutsche Bank2015 Q4 Multiple sellers BCC 121 Mixed Secured/Unsecured Balbec2015 Q4 Consel SpA (Banca Sella Group) 230 Consumer Banca IFIS2015 Q4 Banca Etruria 302 Mixed Secured/Unsecured Credito Fondiario2015 Q4 Banca IFIS 477 Consumer Confidential2015 Q4 Banca IFIS 503 Consumer Italo Sicav Fund2015 Q4 Banca IFIS 397 Consumer Confidential2015 Q4 Banca Popolare - Volksbank 60 Unsecured Banca IFIS2015 Q4 Confidential 365 Consumer Banca IFIS2015 Q4 Morgan Stanley / Prelios 157 Secured PVE Capital2015 Q4 Unicredit 250 Mixed Secured/Unsecured Cerberus2015 Q4 Confidential 240 Utility Confidential2015 Q3 Confidential 160 CRE Confidential2015 Q3 Confidential 400 Consumer Banca IFIS2015 Q3 Confidential 430 Multiple single name Confidential2015 Q3 Banco Popolare 950 Unsecured Hoist Finance2015 Q3 Confidential 22 Unsecured Confidential2015 Q3 Unicredit 1.200 Mainly Unsecured Anacap2015 Q3 Multiple sellers BCC 320 Mixed Secured/Unsecured CRC2015 Q2 Seer Capital Management 400 Consumer Banca IFIS2015 Q2 Unicredit 625 Unsecured PRA2015 Q2 UniCredit 205 Leasing - Repossessed Assets Cerberus2015 Q2 Banco Popolare 210 Unsecured Hoist Finance2015 Q2 MPS Consum.it 1.300 Consumer Banca IFIS (50%) Cerberus (50%)2015 Q2 Confidential 200 Consumer Confidential2015 Q2 Banca Sella 33 Consumer Banca IFIS2015 Q2 Archon 2.000 Mixed Secured/Unsecured Confidential2015 Q2 Confidential 200 Consumer Banca IFIS2015 Q2 Santander Consumer Bank 234 Consumer Banca IFIS2015 Q1 National Asset Management Agency 182 CRE Invel Real Estate Partners2015 Q1 Sofigeco 408 Secured PVE Capital2015 Q1 Findomestic 400 Consumer Banca IFIS2015 Q1 Unicredit 2.400 Platform & Mixed Sec/Unsec Fortress & Prelios

1.6 4.3 3.1

6.5

1.7

3.6

0.2

1.3

2.1 0.2 1.8

3.0

3.1

2.6

0.8

0.040.6

0.6

3.6

2012

4Total: 5 58 19

2013 2014 2015 Q1-2016

Consumer Unsecured

Mainly Unsecured Mixed Secured/Unsecured

Secured Other

Source: PwC market analysis


Appendix – Top 10 banks peer analysis

Gross NPL volume (€bn)

49.0

34.6

21.6

5.9 8.9

5.8 5.5 0.7 2.2 2.5

53.9

38.2

24.3

6.6 10.5

7.1 6.5 0.6 2.6 3.1

53.2

39.2

26.6

7.0 10.5 8.1 7.1

0.6 1.9 3.3

-

10.0

20.0

30.0

40.0

50.0

60.0

UCG ISP MPS UBI BPopolare BNL BPER Mediobanca Cariparma BPM

YE-2013 YE-2014 YE-2015

25PwC

Net NPL volume (€bn)

NPL coverage ratio (%)

Gross NPL ratio (%)

Net NPL ratio (%)


18.7

13.0

8.9

3.4 5.5

2.4 2.5 0.3 1.0 1.1

20.4

14.2

8.4

4.0 6.0

2.7 2.8 0.3 1.1 1.3

20.8

15.0

9.7

4.3 6.5

3.0 3.0 0.3 0.8 1.5

-

5.0

10.0

15.0

20.0

25.0


61.8 62.5 58.8

41.6 37.9

59.1 55.7 57.8 56.3 55.5

62.2 62.8 65.3

38.8 43.0

62.0 56.5 58.0 56.5 55.9

61.0 61.8 63.4

38.6 38.3

63.3 58.2 59.0 58.2

54.6

- 10.0 20.0 30.0 40.0 50.0 60.0 70.0


8.9 9.3

14.7

6.4

9.7 8.4

10.9

1.6

5.6 7.2

10.4 10.3

17.0

7.3

12.0 10.4

13.3

1.7

6.7 8.8

10.3 10.3

19.8

7.9

12.3 12.0 14.5

1.7

6.5 8.9

-

5.0

10.0

15.0

20.0

25.0


3.7 3.8

6.8

3.9

6.4

3.7

5.3

0.7

2.7 3.4

4.3 4.2

7.1

4.7

7.5

4.4

6.4

0.7

3.1

4.2 4.4 4.3

8.7

5.1

8.2

4.9

6.8

0.7

2.9

4.4

-

2.0

4.0

6.0

8.0

10.0


YE-2013 YE-2014 YE-2015

YE-2013 YE-2014 YE-2015

YE-2013 YE-2014 YE-2015

YE-2013 YE-2014 YE-2015


Gross NPE volume (€bn)

Net NPE volume (€bn)

NPE coverage ratio (%)

Gross NPE ratio (%)


85.5

57.6

36.1

12.7 19.2

11.0 10.3

1.8 3.9 5.3

87.2

63.0

45.3

13.1

21.8

12.3 11.0

2.4 5.0 5.9

82.9

63.4

46.9

13.5 20.8

12.9 11.4

2.2 3.7 6.0

- 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

100.0


41.1

31.1

21.0

9.3

14.1

6.2 6.4

1.0 2.3 3.4

42.6

33.6

23.1

9.5

14.3

6.4 6.5

1.2 3.0 3.6

40.5

33.3

24.2

9.7

14.1

6.3 6.4

1.1 2.2 3.6

- 5.0

10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0


51.7

46.0 41.8

26.5 26.9

43.6

37.3

44.0 40.1

36.0

51.1 46.7

48.9

27.3

34.2

48.1

40.7

49.1

38.6 38.7

51.1 47.5 48.5

27.8 31.9

51.5

44.2

51.6

40.5 39.7

-

10.0

20.0

30.0

40.0

50.0

60.0


15.6 15.4

24.5

13.7

21.0

15.9

20.3

4.4

10.2

15.0 16.9 17.0

31.7

14.6

24.8

18.0

22.6

6.3

12.6

17.0 16.0 16.6

34.8

15.2

24.3

19.2

23.3

5.9

12.6

16.4

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


YE-2013 YE-2014 YE-2015

YE-2013 YE-2014 YE-2015

YE-2013 YE-2014 YE-2015

YE-2013 YE-2014 YE-2015

27PwC

Net NPE ratio (%)

Yearly loan loss provision/net interest margin (%)

Net NPL/equity (%)

Cost of risk* (%)


8.2 9.0

16.0

10.5

16.3

9.7

13.9

2.5

6.4

10.2 9.1

9.9

19.3

11.1

18.0

10.3

14.9

3.3

8.2

11.2

8.5 9.5

21.7

11.5

18.0

10.4

14.5

3.0

7.9

10.6

-

5.0

10.0

15.0

20.0

25.0


114.3

68.9

129.4

53.9

101.0

54.3 60.6 57.6 52.9 68.0

34.6 41.8

366.5

51.1

223.3

59.5 62.9 53.7 41.5 51.2 35.0 29.8

89.3

49.2 56.4 49.7 57.5 37.0 33.1 41.2

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0


40.1 29.1

144.5

33.2

67.6

42.4

61.0

3.9

21.0 31.2

41.3 31.9

141.6

41.1

74.4

48.6

69.9

3.4

23.9 29.6

42.0 31.3

101.4

43.0

80.1

52.4 59.2

3.1 16.0

32.2

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0


2.5

1.8 1.9

1.0

1.8

1.3 1.5

0.7

1.3 1.6

0.8 1.1

5.5

1.0

4.0

1.5 1.7

0.8 1.0

1.2 0.8 0.7

1.5

0.9 1.0 1.2 1.4

0.6 1.1 0.9

-

1.0

2.0

3.0

4.0

5.0

6.0


YE-2013 YE-2014 YE-2015

YE-2013 YE-2014 YE-2015

YE-2013 YE-2014 YE-2015

YE-2013 YE-2014 YE-2015

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Economy & Finance

The Italian NPL market - PWC - June 2016