No. 18 - Bad loan recovery rates in 2018

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by A.L. Fischetto, I. Guida, A. Rendina, G. Santini and M. Scotto di CarloDecember 2019

This note updates to 2018 the estimated bad loan recovery rates already published for the period 2006-2017. Moreover, the note illustrates the results of the yearly survey on NPL sales, conducted by Bank of Italy starting from 2016. The data, together with some detailed breakdowns that are commented on but not reproduced in this text, are available in digital format.

The analysis reached the following main conclusions:

  • In 2018 the overall amount of bad loan positions derecognized from the banks financial statements (hereinafter referred to as 'closed') rose further, reaching €78 billion (€43 billion in 2017, €17 billion in 2016). The increase is entirely attributable to sales on the market, which rose from 33 to 67 billion, while the bad loan positions that were closed using standard recovery procedures remained substantially stable at around €11 billion. Overall, the value of closed positions was higher than that of newly-classified bad loans (€19 billion), partly as a result of the reduction of the latter.
  • Increases were recorded in the recovery rates of bad loan positions both for those sold on the market (from 26 to 30 per cent) and for those closed using standard recovery procedures (from 44 to 46 per cent); the gap in the recovery rates obtained through standard procedures and sales remained high. Despite the significant increase in the share of sales on the market (86 per cent of the total, compared with 76 per cent in 2017), the average recovery rate rose to 33 per cent (30 per cent in 2017).
  • The average recovery rate for bad loans secured by collateral was 38 per cent, increasing for the positions that were sold (from 33 to 35 per cent) while falling for positions that were closed using standard recovery procedures (from 55 to 52 per cent).
  • For the unsecured positions, the average recovery rate was 22 per cent. This rate rose for bad loans either sold to third parties (from 18 to 19 per cent) or closed using standard recovery procedures (from 31 to 36 per cent).
  • The speed of disposal of bad loans grew significantly. The ratio of the value of bad loans closed each year to the stock outstanding at the start of the period, which in 2013 had reached a low of 6 per cent, rose to 50 per cent in 2018 (23 per cent in 2017).
  • The price of the bad loans sold in 2018, calculated on the basis of the annual survey conducted from 2016 on a very large sample of transactions, increased to 23 per cent of the gross book value at the time of the sale (17 per cent in 2017). The price averaged 34 per cent for bad loans secured by collateral and 10 per cent for the others. It is worth recalling that part of the difference between the recovery rates and sale prices stems from the fact that recovery rates (which are higher) take account of the cash flows ('partial' recoveries) collected in the period prior to the closure of the position. Overall, the indications arising from this survey are in line with the results obtained through the Central Credit Register data, as described above.

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