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The deep roots of Italy s bad-debt problems
Mar 30th 2017 | MILAN
MARIO (not his real name) from the pretty Italian city of Vicenza opened an
account at a local bank in 1992. It afforded him an overdraft of the equivalent
of 10,000. He needed it to pay the bills of his wholesale textiles company.
Over the years his firm s cash problems worsened. In 2013, after Mario had
exceeded his overdraft limit by 7,000 ($9,300), the bank gave him an unsecured
loan of 50,000.
The first repayment was due in January 2014, yet by June Mario had filed for
voluntary bankruptcy. The bank now owed 70,300 presented itself to the court
as a creditor. It entered into an arrangement, but in December sold the loan
for 5% of its book value to Banca IFIS, an Italian lender building a portfolio
of soured debts. Banca IFIS employed an external debt collector and by the
following April, Mario had repaid 17,000. Having made a tidy profit on its
investment, Banca IFIS told the bankruptcy court the debt had been cleared.
It seems puzzling that Mario was granted a loan after being overdrawn for so
long. Andrea Clamer, head of Banca IFIS s bad-loans division, says such
mysteries are central to understanding Italy s bad-loan mountain. Questionable
lending practices, inefficient courts and a long recession all conspired to
create 331bn-worth of deteriorated loans, including 197bn of non-performing
loans (NPLs), by June of last year (see chart). At 21.4% of Italy s total gross
loans, that was over four times the ratio in 2008 and triple the EU average.
ABI, the Italian banks association, reckons that 80% of the growth of NPLs can
be attributed to the civil-justice system (by far the biggest single factor),
sluggish economic growth (the next biggest) and taxation. On average a
bankruptcy takes 7.4 years. Only one-quarter of cases are resolved in less than
two years. Some last more than two decades.
Bad loans have quadrupled in value since 2008, notes Andrea Mignanelli of
Cerved, a data provider. But no bank has quadrupled their staff to manage them.
Lenders have been loth to sell their loans. Many have them in their books at
around 40% of their face value, whereas investors are prepared to pay around
half that. Banks capital ratios are already thin; disposals would stretch them
further.
Government efforts to boost the market have flopped. GACS, a state-guarantee
scheme for NPL-backed securities, has been used just once since its launch in
February 2016. Atlante, a private bank-rescue fund set up at the government s
behest partly to kick-start a bad-debt market, has not raised as much capital
as hoped. More happily, last year was the first since 2008 in which Italy s
total NPL exposure fell. ABI expects the share of existing loans turning bad to
keep falling over the next two years. Last year the stock of bad loans
stabilised; in 2017 more are likely to be sold.
Under pressure from the European Central Bank to clean up their balance-sheets,
banks are being forced to come up with detailed plans. In February UniCredit,
Italy s biggest bank, agreed a deal with Fortress and Pimco, two funds, to
offload 17.7bn-worth of bad loans. Intesa Sanpaolo, the second-biggest, this
month committed to reducing its stock of deteriorated credit by 15bn over
three years. Monte dei Paschi di Siena, where a government rescue is under way,
is due to unveil a new plan for its 27.8bn-worth of NPLs.
Unsecured loans, like Mario s, account for roughly half the total stock. Much
of the rest is secured by property, the value of which crashed in the crisis.
In 2014 Algebris, an asset manager, opened an office in Italy to specialise in
property-backed bad loans. It has invested most of the 437m it raised for its
first fund, and with property prices recovering a little, is now raising a
second fund, of around 1bn.
Some accuse the European authorities of having been too severe on Italian
banks, which, given more time, might command better prices for their bad loans.
On March 20th the ECB appeared to take note. Guidelines to banks again stressed
the need to deal with duff loans, but accepted that it could take time.
Meanwhile, bad-debt specialists can point to some successes. Credito
Valtellinese, a midsized bank, sold its 40-person NPL-management division to
Cerved in 2015. The next year collections on bad loans increased by 92%, thanks
to a doubling in staff numbers, better IT systems and performance-related pay.
Hardly rocket science, but more than Mario s local bank could have achieved.
This article appeared in the Finance and economics section of the print edition
under the headline "Cleaning up"