Italy's national resolution fund, announced last week to help work out distressed loans for four banks, is a welcome first step to deal with over €200bn in NPLs held by national lenders. But specialists note the move was forced on Rome since the four banks would otherwise have had to declare technical default in January, writes PIE Editorial Director Allan Saunderson in a blog.

The government of Prime Minister Matteo Renzi last week announced creation of the NRF to bundle under a special administration procedure the bad assets of Banca Marche, CariFerrara, Banca Etruria and CariChieti. Germany's Scope agency said the plan in effect places the banks in resolution, wipes out shareholders and junior creditors, and provides the path for an orderly exit once cleaned up and recapitalised. Considering that, since the global financial crisis, the Italian banking system has been hindered from lending to the economy by the weight of dealing with and provisioning against large blocks of NPLs, the move has been widely welcomed. Most other western European nations - Ireland, Spain and Germany in particular - have long since established procedures, mainly state supported, to free up financial systems from the aftermath of the 2008/9 financial crisis, and many voices in Italy have been frustrated by the slow progress in their nation. “Finally Godot is coming!” said Prelios Credit Servicing CEO Riccardo Serrini. “It is definitely a good first step taken by the government, the regulatory authority and the Italian banking system for pro-actively dealing with the massive amount of Italian NPLs.” Serrini sees the amount of bad loans blocking the banking system at around €200bn, while some estimates have been double that. Clarence Dixon, CBRE's London-based Global Head of Loan Services and COO, agreed: “This is a major first step in the ongoing odyssey of the Italian NPL market,” he told PIE. “We hope this will be an 'ignition' signal for the market and that this is seen as an opportunity.”

The NRF, funded by the state together with all Italian lenders, avoids tying in senior bank liabilities as part collateral for the provisions needed to make the NPLs saleable. “The NRF is to be funded by sector contributions with total resources of €3.6bn,” the Berlin-based agency said in a note. However half will recapitalise the new bridge banks and will be subsequently recovered through their sale back into the market. “Scope sees the remaining €1.8bn, which will serve to absorb previous losses as well as capitalise the bad bank, as a net sunk cost that the banking system will have to shoulder.” The impact on the two largest Italian banks by far, Intesa Sanpaolo and Unicredit, will be manageable however. Intesa has said it will take a charge or €380m against fourth quarter earnings, a sum that should have relatively little long-term impact on its overall capital ratio.

“The high nominal value provision and innovative structure seem well thought through,” said Francesca Galante, Italian co-founder of the First Growth real estate debt advisory. “On face value, the government and banking system seem to be taking pragmatic steps to tackle the problem. However, had the NRF not been created, these four banks would have been, from January 2016, technically in default with a huge negative impact on the Italian banking system. It begs the question on whether this is actually a courageous reform, with more to come, or a quick fix to avoid an immediate larger problem.”

Serrini noted that the transfer gross book value of NPLs in the four banks - €8.5bn – reflects provisions of more than 80%, more in line with market prices and well above the 55% average provisioning through the Italian system. “The loss has been taken by the shareholders Italian system. “The loss has been taken by the shareholders and the subordinated bond holders pro-rata for the single banks,” he told PIE. Added Dixon: “This allow the banks to deleverage without capital punishment.” Although the NRF cannot be considered as having the same impact as Ireland's National Asset Management Agency (NAMA) created in late 2009, or the Spanish Sareb created by the state and private lenders in 2012, “we see this as a better move than the German 'bad bank' solution.”

in late 2009, or the Spanish Sareb created by the state and private lenders in 2012, “we see this as a better move than the German 'bad bank' solution.”

Scope warned against reputational loss for banks if they extensively write down junior liabilities in the form of bonds held by private investors. “Scope generally sees significant reputational risk in banks marketing capital instruments and subordinated bonds to retail investors. In the new regulatory environment, these bonds are more likely to incur losses, even in scenarios where the bank survives as a going concern. As such, they should be marketed as investments rather than savings products.” It added: “The debate concerning senior bonds is less clear cut, especially for banks with strong fundamentals as a resolution scenario with the bail-in of senior liabilities can be considered an extremely remote scenario. However, Scope highlights the need for transparent disclosure so that investors are aware of bail-in risks, however remote the risk may be.”

“Structural reform in Italy has been under way for a few years now,” Galante said. “Over the last 12 months, more transactions have been occurring in real estate and debt, and international capital is showing increasing interest in Italian real estate... Let's be cautiously optimistic and hope that NRF is yet another step in the right direction for Italy.” pie

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