By David Campion, Head of Servicing (Italy)
‘The biggest surprise was that there was actually little surprise over the last 18 months.’
This year’s Global NPL conference took place in early October, where SmithNovak welcomed over 500 delegates from 250 companies and 25 countries around the world.
BCMGlobal’s David Campion joined the ‘focus on Italy’ panel alongside other local industry experts – including advisers, banks and other servicers.
If you missed the panel, here are some of the highlights.
What’s new in the NPL arena?
We are still living in strange times – but does that make it harder to predict economic levels in Italy? According to the experts, the biggest surprise was that there was actually little surprise over the last 18 months.
The Italian market expected a larger impact on non-performing loans (NPL) due to COVID-19. It predicted the freezing of new deals and a wave of new flows and transactions.
But the numbers show no real change between 2019 and 2020. A similar volume of transactions took place, reaching nearly 40bn. The secondary market also saw a similar outcome to the year before with just short of 9bn of transactions.
Servicer panellists envisage a robust growth of new flows, which will mostly impact UTPs moving into 2022.
New lending is likely to replace mortarium lending next year which poses important challenges for the market.
How are banks changing their approach?
One of the banking panellists discussed lessons learnt over the last 18 months.
The first lesson has been around decision-making and timing in the UTP space. Decisions made today make a bigger long-term difference than ever before. Banks must make the right decisions at the right time to bring customers to liquidation.
The second has been to strengthen workstreams before this deterioration. Banks need to anticipate this event and start managing the process proactively beforehand.
The third has been to know their limits and to understand tools that can be used internally and in the market. Banks are starting to see that there’s no ‘one size fits all’ model and must respond to investors who now see a variety of opportunities coming from the COVID NPL flow.
Essentially, banks are starting to see securitisations and loan sales as an ongoing, BAU activity not one merely as a response to a crisis and high NPL volumes.
How has the market changed for investors? The introduction of niche investments and servicing
Years ago, the Italian market focused on NPL portfolios. There was a gap in understanding around credit, hindering economies of scale that could reduce marginal costs of servicing activity.
The market then evolved to focus on volumes while also understanding specific asset classes. This involved creating teams that could manage niche markets – such as energy.
Incentives were then introduced to the market which enticed more small players.
Servicing teams created new partnerships with investors where they could buy and restructure credit in this specific field, focusing on the equity side of investments.
This created opportunities for growth as these niche portfolios now create high levels of value across different asset classes.
Are banks becoming more sophisticated? How are they advised?
An adviser on the panel described the most common pillar for banks in their management of NPLs: to leverage data and advanced analytics.
Traditional information isn’t sufficient to properly understand client behaviour; banks need to find ways to source more data that is available in huge volumes when analysing clients’ movements such as their credit card statements and more.
But it’s not just enough to have data. Banks must know how to use it. They must define the right target valuable and identify clients’ most discriminant features. For example, a client’s propensity to pay can be found across the stability of their salary and expenses.
Banks should also use advanced tools to look ahead, not just relying on past information. This can be achieved using existing and micro-sector scenarios for solid projections.
How is BCMGlobal preparing to assist investors in Italy and where are the opportunities for investors?
The servicing market used to focus mainly on debt management and judicial outcomes, but less on standalone collateral real estate strategies. Clients and investors now want more multi-dimensional support from their servicers.
BCMGlobal has prepared for this by learning how to extract value from portfolio collateral, fine-tuning real estate strategies and using REOCOs for value-add opportunities. It offers end-to-end advice from the credit bid and complex development through to selling the asset on the open market.
Co-investments (between servicer and investor) are also increasing in popularity. Investors want their servicer to be fully aligned with them throughout the process and outcome, so we have established a dedicated a team that focuses on scouting opportunities.
BCMGlobal is seeing huge opportunities in UTPs as banks need unique solutions to respond to increasing UTP volumes, such as the use of Credit Funds (e.g. ‘Back-to-Bonis’).
There is also much opportunity in the secondary market as former purchasers of Jumbo deals and non-performing GACS will seek to optimise and accelerate returns through sub portfolio sales.
The panel agreed that their industry need to follow the market and its clients by using the right technology.
We can expect small-ticket UTPs to become more active and dynamic, which will require more automation for cost-efficiency.
The market should support clients by understanding deep data and deploying the best technology it can.