No. 23 - Bad loan recovery rates in 2019

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by A. L. Fischetto, I. Guida, A. Rendina, G. Santini and M. Scotto di CarloDecember 2020

This note updates to 2019 the estimated bad loan recovery rates already published in the Notes on Financial Stability and Supervision, Nos. 7 and 11 of 2017, No. 13 of 2018 and No. 18 of 2019. Moreover, the note illustrates the findings of the yearly survey of NPL sales, conducted by the 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.

Reduction in the stock of bad loan positions

  • In 2019, €34 billion of bad loan positions were closed (i.e. derecognized from banks' financial statements). The amount decreased compared to what was recorded in previous years (€78 billion in 2018, €43 billion in 2017), however the ratio of the value of bad loans closed to the stock outstanding at the end of the previous year was just below the average value recorded in the last two years (35 and 36 per cent respectively). Almost all the main transactions were finalized with recourse to GACS (a state guarantee scheme to securitize bad loans), for an amount of bad loans disposed equal to €13.1 billion.
  • The reduction of closed bad loan positions affected both those sold on the market and those closed using standard recovery procedures; however, the amount of closed positions was three times higher than that of newly‑classified bad loans (€12 billion). The lower amount of closed positions reflects the contraction of bad loans outstanding on the banks' balance sheets (between 2016 and 2018, outstanding bad loans decreased from €192 billion to €98 billion), as well as the reduction in their average vintage and therefore in the amount of positions closer to being closed in accordance with the ordinary procedures.
  • The secondary market for non-performing loans other than bad loans (unlikely to pay) continued to grow: the amount of loans sold on the market was €8.5 billion (€4.3 billion in 2018).
  • For 2020, despite the outbreak of the pandemic holding back the market for a few months, the overall amount of non-performing loans sold, estimated at around 30 billion, will be higher than the targets set at the beginning of the year, benefiting from both extraordinary transactions such as the one realized by Monte dei Paschi di Siena, and the incentive introduced by the 'Cure Italy' decree, which makes it possible to convert part of the admissible DTAs into tax credits in case of sale of impaired loans.

Recovery rates of bad loans closed

  • Compared to 2018, decreases were recorded in the recovery rates of bad loan positions, both those sold on the market (from 30 to 28 per cent) and those closed using standard recovery procedures (from 46 to 44 per cent). For both types of closure the reduction is attributable to a limited number of transactions of a significant amount and to some intermediaries, excluding which the recovery rates would be in line with 2018. The overall recovery rate decreased to 31 per cent (33 per cent in 2018); the gap in recoveries between disposals and ordinary procedures remains high, equal to approximately 16 percentage points.
  • The average recovery rate for bad loans secured by collateral was 35 per cent, decreasing both for the positions sold (from 36 to 32 per cent) and for those closed using standard recovery procedures (from 52 to 48 per cent). For the unsecured positions, the average recovery rate was 21 per cent. In this case too, the reduction occurred both on bad loans sold to third parties (from 19 to 16 per cent) and, albeit to a lesser extent, on those closed using standard recovery procedures (from 36 to 35 per cent).

Disposal prices of non-performing loans

  • The price of the bad loans sold in 2019, calculated on the basis of the annual survey conducted from 2016 on a very large sample of transactions, was equal to 23 per cent of the gross book value at the time of the sale, essentially unchanged compared with 2018, despite a slight reduction in the average vintage (from 5.5 to 4.6 years) of the positions disposed. The price averaged 31 per cent (34 per cent in 2018) for bad loans secured by collateral and 12 per cent for the others (10 per cent in 2018).
  • The disposal price of non-performing loans other than bad loans increased significantly in 2019 both for the positions secured by collateral (to 58 per cent, from 49 per cent of 2018) and for the unsecured positions (to 44 per cent, from 35 per cent of 2018).

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