The lockdown imposed by the Covid-19 triggered a new crisis for Italian businesses similar to that of 2009, when the financial crisis turned into an economic downturn: 2020 actually closed with a 11.4% drop of industrial production compared to the previous year (ISTAT data). This downturn extended to all the main industries and it is the worst ever recorded for consumer goods.
Which could be the effects on the banking system? The industry is preparing for a new wave of non-performing loans (NPLs). Moratoria and State aids have allowed the industry to cope, but now it risks having to face the fact that an increasing number of families and businesses are struggling to repay the loans granted to them.
In this context, a significant role will surely be played by the additional investments within the Next Generation EU plan; provided that resources will actually be destined to structural reforms (public administration, justice system, education system, inclusive growth for young people and women), then an economic recovery can be expected, able to increase loan collection rates with positive consequences for banks.
It is in any case crucial to introduce measures sustaining individual banks, since a high level of NPLs can represent an issue due to budgetary, profitability and capital constraints (if the 2009 crisis and the collapse of Lehman Brothers have taught us anything).
Advanced debt restructuring skills will be needed, with the adoption of a different approach depending on the type of impaired loan, whether it is an UTP - Unlikely to Pay (i.e. probable default, overdue debt, but still recoverable) or an NPL - Non-Performing Loan (i.e. bad loans, receivables from insolvent entities and only partially recoverable).
Which are the strategies for UTPs? UTPs are more difficult for banks to evaluate compared to NPLs, since they are mainly receivables from big and medium enterprises and thus more complex than receivables originating from real estate assets. The management of UTPs implies high (industrial and financial) skills, but they have a high recoverability rate, if a prompt intervention is implemented, through a process including new financing and a restructuring plan (sometimes also with the involvement of external investors).
The key to the recovery will be exactly this: turning a threat, i.e. an UTP degrading further to become an NPL, into an opportunity, i.e. turning the UTP back into a recoverable receivable with positive effects on the banks’ financial statements. In this case, a coordination between the various stakeholders will be crucial: the banks which will be investing issuing new finance and the distressed businesses which will need to submit suitable restructuring plans to obtain such finance.
A key role will be played by financial advisors, able to align the interest of the various stakeholders and to provide their distinctive expertise in extraordinary operations. On the one hand, financial advisors will have to assist businesses with the preparation of leaner business models with an improved cost structure, seizing the opportunity to introduce digital innovation, while on the other hand they will have to assist banks with industrial valuations and with devising interventions of third-party institutions or investors to turn businesses around. To this end, the response of public institutions is important.
To this end, a specific fund for businesses called “Fondo salvaguardia imprese” has been set up, i.e. a vehicle managed by Invitalia (the Italian agency for inward investment and economic development) with a budget of approx. Euro 300 million, aimed at acquiring minority shareholdings in the risk capital of distressed companies which propose a credible restructuring plan (also through the transfer of the undertaking) to guarantee the going concern and safeguard employment.
Which are the strategies for NPLs, instead? These are bad loans, in a state of insolvency and only partially recoverable, which therefore require a different approach, aimed at their management in order to avoid that they affect the banks’ financial statements with profitability risks and subsequent possible defaults (the 2009 crisis taught us that the economy as a whole depends on the banks’ health).
In this case, the proposed solution to help the industry is the creation of an Asset Management Company (AMC) or a European Bad Bank, a public institution to which NPLS would be transferred for reasonable values (in order not to heavily affect the financial statements of transferring banks), and which would deal with getting rid of NPLs over time.
In order to prevent criticism to this mechanism, it could also be provided for that instead of transferring all bad debts without time limits, only NPLs resulting from contractual relationships entered into between the banks and their client starting from 31 January 2020 - i.e. the date of declaration of the state of emergency due to the Covid crisis - could be transferred to the AMC or Bad Bank.
The Bad Bank - which represents an effective tool, functional to the banking system, also limiting costs for the community - would essentially allow to prevent the effects of the economic downturn originated by the pandemic impacting the single banks and, in turn, citizens (which would suffer an inevitable credit crunch).
In conclusion, we can assume that the resilience of the Italian system in the next few years will mainly depend on how the challenge posed by the recovery plan (or, better, by its implementation) and future NPLs will be managed. It will be necessary to turn the threat of debit into an opportunity and in order to do so, a proactive management will be crucial, with the involvement of public institutions and financial advisors, which will have to be the link between distressed businesses and banks.
