No. 27 - Bad loan recovery rates in 2020

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by A. L. Fischetto, I. Guida, A. Rendina. G. Santini and M. Scotto di CarloNovember 2021

This note updates to 2020 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, No. 18 of 2019 and No. 23 of 2020. Moreover, the note illustrates the results of the yearly survey on NPL sales, conducted by Bank of Italy starting from 2016.

The analysis reached the following main conclusions.

The stock reduction of bad loan positions

  • In 2020, €25 billion of bad loan positions were closed (i.e. derecognized from the banks financial statements). This amount, lower than those recorded in the previous years (€34 billion in 2019, €78 billion in 2018 and €43 billion in 2017), is about 3 times higher than that of newly-classified bad loans (€8 billion) and, as a percentage of bad loans outstanding at the end of the previous year, is higher than the figure for 2019 (38 against 35 per cent).
  • The reduction affected both bad loans sold on the market (from €27 to €20 billion) and those closed using standard recovery procedures (from €7 to €5 billion) and reflects the contraction in the stock of these loans on banks' balance sheets (from €192 to €65 billion between 2016 and 2019) as well as the reduction in their average vintage (and therefore in the amount of positions nearer to closing using the standard procedures).
  • The GACS assisted all the main transactions (€12.6 billion realized by 29 banks, some through multioriginator transactions).
  • The amount of loans classified as unlikely to pay sold on the market was €6.7 billion (€8.5 billion in 2019 and €4.3 billion in 2018).
  • The recovery activity of intermediaries was affected by the closure of the courts following the restrictive measures taken to face the pandemic, with greater effects on the procedures in their initial phase. This resulted in more recourse to out-of-court initiatives. It is not currently possible to know whether this setback will result in a postponement of the flows or even in a reduction in recovery rates.

Recovery rates of bad loans closed

  • Compared with 2019, the overall recovery rate increased to 36 per cent, against 31 per cent in 2019 (the recovery rate moved from 28 to 33 per cent for the positions sold on the market and from 44 to 45 per cent for those closed using standard recovery procedures). The gap in recoveries between disposals and ordinary procedures fell to 12 percentage points, compared with the 16 percentage points of the past two years.
  • The average recovery rate for bad loans secured by collateral increased to 40 per cent (35 per cent in 2019), mainly on the positions sold (from 32 to 38 per cent). For unsecured positions, the average recovery rate was 26 per cent; in this case too, the increase occurred both on bad loans sold to third parties (from 16 to 23 per cent) and, albeit to a lesser extent, on those closed using standard recovery procedures (from 35 to 38 per cent).

Disposal prices of non-performing loans

  • The price of the bad loans sold in 2020, calculated on the basis of the annual survey conducted since 2016 on a very large sample of transactions, was equal to 24 per cent of the gross book value at the time of the sale, essentially unchanged compared with 2019, against a stable average vintage of the positions sold. The price averaged 35 per cent (31 per cent in 2019) for bad loans secured by collateral and 10 per cent (12 per cent in 2019) for the others.
  • The disposal price of non-performing loans other than bad loans was equal to 41 per cent, down by 12 percentage points compared with that achieved in 2019 - which had benefited from a significant transaction with high prices - but in line with the price obtained in 2018.

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