NPL Securitization Update

A DBRS commentary on Italian Deal

DBRS Morningstar published an update on its publicly rated Italian non-performing loan (NPL) securitisations. Following the previous commentary the rating agency have assigned public ratings to Andor SPV S.r.l. and Luzzatti POP NPLs 2023 S.r.l.

The Italian non-performing loan (NPL) market has experienced significant transformations in recent years. The latest report from Morningstar DBRS provides a comprehensive update on the performance of Italian NPL securitisations for Q1 2024, shedding light on evolving trends, recovery strategies, and performance metrics. This post highlights the key findings from the report and explores the current state of the Italian NPL market.

Italian financial institutions have successfully improved the asset quality of their balance sheets through active management of non-performing exposures (NPE). By the end of 2023, the gross NPEs on Italian banking books were EUR 52.7 billion, corresponding to an NPE ratio of 2.8%, well below the European Banking Authority (EBA) target of 5% . The introduction and subsequent amendments of the Guarantee Asset Protection Scheme (GACS) have played a crucial role in this de-risking process, contributing to the divestment of EUR 118.3 billion gross book value (GBV) .

The performance of NPL transactions has varied based on the GACS versions. GACS 1.0 transactions, issued before the pandemic, generally underperformed compared to the initial business plans, primarily due to court closures and procedural delays during the pandemic . In contrast, GACS 2.0 transactions have shown stronger performance, with average cumulative gross collection ratios (GCCR) significantly exceeding initial expectations. As of the latest collection date, GACS 2.0 transactions registered an average GCCR of 153.7%, despite a slight decline from the previous year's 165.5%.

Recovery strategies have shifted over time. While judicial recovery remains the primary method for state-sponsored securitisations (GACS), market-based securitisations have increasingly relied on discounted payment obligations (DPOs) and other amicable solutions. As of Q1 2024, enforcement recovery strategies represented approximately 53% of total gross collections, with notable contributions from loan sales and alternative recovery avenues .

Servicers have adjusted their expectations, generally reducing the total amount of expected gross recoveries. The average reduction in business plans was 10.4%, with GACS 1.0 transactions seeing the most significant revisions at 18.1% . Despite these adjustments, the net cumulative collection ratios (NCCR) have often outpaced gross collection ratios, reflecting efficient cost management and recovery processes by servicers.

Forward-looking indicators show a generally positive outlook, though challenges remain. Stage 2 loans, indicating increased credit risk, remain above pre-pandemic levels at 11.5%, compared to the EU average of 9.6% . The coverage ratios for these loans have increased as banks maintain provisions built up during the pandemic, aiming to contain further deterioration .

The Italian NPL securitisation market has demonstrated resilience and adaptability in the face of economic challenges. The performance of transactions, especially those under GACS 2.0, has been robust, benefiting from revised recovery strategies and efficient management. As the market continues to evolve, the focus will remain on sustaining recovery levels and adapting to new economic realities. The detailed performance data and insights provided by Morningstar DBRS offer valuable guidance for stakeholders navigating this complex landscape.

Entering Italian NPE Market is a newsletter and a Linkedin Group focused on News, Updates and Insights on Italian Banks, Ditressed Credit Market, Fintech and Real Estate.

Relevant Links:

https://dbrs.morningstar.com/research/432484/italian-npl-securitisations-performance-q1-2024-update

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