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From NPLs to Unlikely to Pay? Recent Trends and Credit Implications in the Italian Nonperforming Exposures Market

In this commentary, DBRS Morningstar analyses recent trends and credit implications related to Italian unlikely-to-pay (UTP) securitisation transactions.

Summary highlights include:
-- Latest available data on nonperforming loans (NPLs) and the effect of the derisking activity carried out by the Italian banks. Data shows that, in the last few years, the derisking activity of the Italian banking system was able to achieve its main purpose of drastically reducing the NPLs ratio and, from December 2020, the UTP volume exceeding that of NPLs.
-- The regulatory constraints of the banks’ direct, active management of UTPs and the role played by securitisation in the efficient management of such positions.
-- Latest developments in the legal structures regarding the securitisation of UTPs and relevant credit implications as well as the recent trends of using alternative investments funds (AIF) structures rather than securitisations.

“Although the Italian UTP market cannot be considered as developed as the NPL market, Italian banks will be facing a new challenge in the coming years: the development of clear and efficient procedures for managing their UTP stocks. Considering the regulatory constraints, in our view, securitisation and AIF structures could play an important role and, therefore, banks could continue developing specialised platforms with such purpose. Furthermore, proactive management of UTP stocks could lead to a decrease in Italian banks' NPL ratios since a preventive intervention could result in the preservation of a borrower's economic conditions and the avoidance of default”, stated Lorenzo Simonte, Assistant Vice President of European NPLs at DBRS Morningstar.