Italian bad loans initiative will benefit bondholders, says Hermes

Debt1An initiative by the Italian government to help reduce non-performing loans (NPLs) in the country’s banking system “should prove positive for bondholders”.

Filippo Alloatti, senior analyst at BT Pension Scheme-owned Hermes Investment Management in London, says despite some unrealistic expectations in the market, the initiative is not creating a ‘bad bank’, as seen in Ireland and Spain.

The Italian treasury in January unveiled a new initiative to minimise NPLs in the country's banking system, which will involve securitisations supported by a government guarantee.

The programme is known as Gacs (Garanzia sulla Cartolarizzazione delle Sofferenze) and each participating bank can create one or more special purpose vehicles, which will acquire NPLs and be financed through the issuance of asset-backed securities.

Alloatti says that in contrast to previous bad banks in Ireland and Spain, the Italian bad-debt problem is concentrated in loans to small and medium-size enterprises, not to households or the construction industry. The high NPLs in Italy are a function of the GDP decline since the global financial crisis, not a boom and bust in property.

Residential property is a form of collateral in the project and is being “harshly overlooked” by the market currently, says Alloatti.

“The scheme is a potential positive for bondholders, and possibly shareholders, given it is voluntary in nature. While it does not solve the bad-loan issue overnight, it does give banks time to chip away at the problem.”

Alloatti points out that Banca Monte dei Paschi di Siena is seeking to partner with an external contractor to build its Gacs platform. Intesa Sanpaolo, which is well capitalised and less in need to use Gacs, has also left the door open to the scheme. The same is true for UniCredit.

Additional focus on the Italian bank Q4 reports will centre on capital, particularly for the likes of UniCredit, as well as asset quality – especially for Monte dei Paschi, Banco Popolare, Banca Popolare di Milano and Banca Carige.

“We will also be looking for signs of [mergers and acquisitions] activity in Italy's cooperative banks, or ‘Popolari’, as this was widely tipped in 2016. Finally, as the rate environment remains extremely unsupportive, we will eagerly await the outlooks from these institutions.”

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