DEBTOR IDENTIKIT. Second half 2015 REAL ESTATE IMPACT ON NPL SERVICING

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1 DEBTOR IDENTIKIT Second half 2015 REAL ESTATE IMPACT ON NPL SERVICING 1

2 ABOUT US AZ Holding, is an independent Full Credit Servicer, which operates in NPL management in all asset class (Secured-Unsecured/ Individual-SMEs-Corporate) by coordinating collection channels and maximizing info providing activities. Clients are major national financial institutions, international funds, utility companies and servicers. We are also active in the antifraud insurance market, intelligence market, security and inheritance protection. The Group has growth among investigative information to evolve into more specialized processes to credit protection, credit management and solutions for credit recovery. AZ Holding launched, as first in Italy, the philosophy: one client, one servicer. It is now available the opportunity for customers to have an integrated management of entire NPL portfolios in various asset classes aiming to an excellent performance, thanks to the combined use of technologies and strategies applied in all collection channels, by using the most important resource and core historical business of AZ Group: infoproviding. Founded in 1974 by Antonino Remaino, the Group is organized into specialized business units spread among offices in Milan, Rome and Naples. On 7 May 2014, we joined the group of outstanding Italian companies selected by the Italian Stock Exchange to form part of the Elite system. 2

3 EXECUTIVE SUMMARY The presence of real estate assets increases amicable collection by 55% Almost half of debtor properties are encumbered, therefore on small-mid size tickets the best collection approach is out-of-court The real estate market is moving towards a positive cycle in terms of prices and transactions 3

4 INTRODUCTION The objective of this special edition of the Debtor Identikit is to answer the question: What relationship is there between property ownership and unsecured debt collection? Real estate market scenario and future trend «During the first quarter 2016 the real estate market showed further improvement. The percentage of real estate agents who sold at least one property has grown, thanks to the favorable conditions on the demand side. The number of agents who reported a decrease in prices was lower in Q1 and on the basis of the analysis it should continue to contract throughout Q2. Agents have confirmed optimism regarding the short term evolution of their own local market and the national trend over the course of the next two years» Banca d Italia «Sondaggio congiunturale sul mercato delle abitazioni in Italia» 20 May

5 ANALYSIS SAMPLE Clusters Property presence Sex Age Employment Salary # of properties Encumberances Data related to 2H

6 «UNSECURED» INSOLVENT DEBTORS: HOW MANY OWN REAL ESTATE? UNSECURED INSOLVENT DEBTORS ASSETS With real estate 32,2% 3 out of 4 Italian families own the properties they live in, one of the highest percentage in Europe (EU Eurostat) Over half of real estate owners are not currently repaying a mortgage on the property in which they live (EU Eurostat) However on insolvent debtors on unsecured loans we find exactly the opposite: 1 out of 3 insolvent debtors owns real estate Impacts on servicing Without real estate 67,8% The majority of insolvent debtors did not have access to mortgage credit and were limited to other forms of lower risk financing it is clear that specific competence is required to collect on these loans Nonetheless, on unsecured loan we find that 1 out of 3 debtors owns property which can be assessed to determine legal action strategy 6

7 «UNSECURED» INSOLVENT DEBTORS: AGE GROUPS OF PROPERTY OWNERS AGE GROUPS OF PROPERTY OWNERS 2,2% 30,1% 67,7% under 30 30/50 over 50 Almost 70% of the sample is over 50 years old, the age group with the most personal assets The analysis shows that owners under 30 are only 2% of the sample, confirming the ongoing difficulty this age group has in accessing the real estate market and dispose of personal assets Impacts on servicing The over 50 age group is also the group with highest personal income and employment, therefore debtors are more adverse towards remaining in a state of insolvency for fear of personal asset losses Segmenting by age allows for better diversification of collection strategies: the over 50 age group is more worried about losing personal property and negatively impacting inheritance 7

8 «UNSECURED» INSOLVENT DEBTORS: EMPLOYMENT OF PROPERTY OWNERS 100,00% 90,00% 80,00% 70,00% 60,00% 50,00% 40,00% 30,00% 20,00% 10,00% 0,00% 40,5% 38,0% 19,0% 2,5% Employee Retiree Unemployed Self employed / Owner Employees and retirees make up 78% of the property owners This statistic reflects the greater ease of access to property finance for this category Impacts on servicing The collection process on employees and retirees is more effective than other categories thanks to a greater presence of guarantees and the possibility of third-party garnishments 8

9 «UNSECURED» INSOLVENT DEBTORS: INCOME RANGE 100,00% 90,00% 80,00% 70,00% 60,00% 50,00% 44,3% of insolvent debtors who own property have an income below 1000 per month We expect this figure to rise as the property market conditions improve and also thanks to two new entry points: rent to buy and real estate leasing contracts* Both schemes will allow access to home ownership to those without immediate financial availability 40,00% 30,00% 20,00% 10,00% 0,00% 44,3% 55,7% Impacts on servicing Having access to information on debtor salary allows for better and more sustainable repayment plan definition and management, maximizing returns for banks and investors UNDER OVER * Source: Consiglio Nazionale del Notariato 9

10 «UNSECURED» INSOLVENT DEBTORS: NUMBER OF PROPERTIES The analysis sample shows that the majority are single-home owners 9,2% It s likely that this is due also to lighter taxation on first homes of primary residence 29,4% Impacts on servicing When collecting on debtors with only one property, amicable solutions are preferable in that, for the most part, the possibility of loss of primary residence is sufficient motivation for the debtor to enter into a repayment plan 61,4% Equal to 1 Between 2 and 3 More than 3 10

11 «UNSECURED» INSOLVENT DEBTORS: REAL ESTATE ENCUMBERANCES 0,6 0,5 0,4 55,6% 44,4% The sample shows that the majority of properties are encumbered and the vast majority of encumbrances are judicial. This percentage is systematic of the cluster of insolvent debtors under analysis 0,3 0,2 0,1 27,7 72,3 Judicial encumbrance Voluntary encumbrance Impacts on servicing Considering the high volume of judicial encumbrances, an amicable, out-of-court approach is preferable when working out this debtor segment 0 Non encumbered Encumbered 11

12 «UNSECURED» INSOLVENT DEBTORS: PERCENTAGE COLLECTED ON ENTRUSTED AMOUNT Collected/Entrust ed COLLECTED/ENTRUSTED 3,98 % 6,19 % The sample shows a significant percentage difference in collected amounts between those who own and those who don t own property Owning real estate is therefore a key element on which to build tailored collection strategies, which applied to this sample delivered a collection improvement of 55% Property NO Property YES 12

13 «UNSECURED» INSOLVENT DEBTORS: COLLECTED AMOUNT BY TICKET SIZE 10,00% 9,00% Property YES Property NO The sample shows the trend of percentage of collected amount according to entrusted ticket size 8,00% 7,00% 6,00% The chart shows that even on smaller tickets (under 15,000 ), registered property at the cadastre has a positive influence on the collection process 5,00% 4,00% 3,00% 2,00% The cumulative trend shows that cadastre-registered property can be used as leverage accross all tickets but has strong potential for collection even on tickets above 75,000 1,00% 0,00% over

14 CONCLUSIONS Based on the sample analyzed, collecting on debtors who own the home in which they live yielded a 6% return versus a 3,98% collected amount on those with no property, thanks to sensitivity to the risk of losing one s home even in the amicable collection phase Almost half of the properties identified in our clusters were encumbered and the vast majority of these were of judicial nature. Therefore, legal action on these positions should be considered with discretion before proceeding In 2015 the number of real estate transactions finally started to move towards positive figures, therefore prices are likely to follow, along with liquidity in the market. The hope is for a 2016/2017 period of more favorable conditions for workout processes on secured positions as well. 14

15 SOURCES Agenzie delle Entrate «Rapporto Immobiliare 2016» May 2016 AZ Holding «Osservatorio statistico debitori» March 2016 Banca D Italia «Supplementi al Bollettino Statistico - Indicatori Monetari e Finanziari» 9 February 2016 Banca D Italia «Sondaggio congiunturale sul mercato delle abitazioni in Italia» 20 May 2016 Consiglio Nazionale del Notariato miscellaneous publications ISTAT miscellaneous publications 15

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