1/2 3,6k 1.000 1k 1,5k ABI-CERVED OUTLOOK ON BAD LOANS TO BUSINESSES Estimates and forecasts of the rates of new bad loans owed by non-financial companies, with breakdowns DECEMBER 2015 #2 (2 a+2b) 12,5% 75,5%
2 NEW BAD LOAN RATE FALLING NOTICEABLY IN ALL SECTORS SUMMARY For industrial sector, companies and SMEs, rate is expected below pre-crisis level in 2017 The influx of bad loans, as a percentage of Italian banks total lending stock, will go down substantially over the next few months, but will remain well above pre-recession levels. This is, in brief, the scenario captured in the new Outlook on bad loans to businesses, which broadly confirms the figures presented in the April edition of the Outlook for 2015 and 2016, and introduces forecasts for 2017. Assuming a gradual improvement in the macroeconomic scenario, the rate of new bad loans is forecast to drop from a peak of 3.9% reached in June 2015 to 2.3% by the end of 2017; the latter would be 0.6 percentage points above the rate. The historical series of new bad loan rates has been reconstructed with a breakdown category and forecasts have also been generated for future rates, thanks to a joint project between the Italian Banking Association (ABI) and Cerved. Our reconstruction and forecasts indicate improvements in all company size categories starting in 2015, with more marked decreases in the new bad loan rate among businesses, while the gap between r and er companies is shrinking. It is estimated that in 2015, the new bad loan rate will decrease in all sectors of the Italian economy except for the construction sector, where a significant drop is not expected until 2016. In the industrial sector, the rate is expected to fall below the pre-crisis level in 2017 among both SMEs and companies. A noticeable improvement is also projected to take place in the service sector, where however new bad loan rates will probably remain above levels over the entire forecasting period. Even from a geographical point of view, improvements are expected across the board in 2015, with the most evident decreases in the South and North-West of Italy. New bad loans are forecast to go down further in all areas of the Boot over the next two years, and this should be accompanied by a gradual reduction in the gaps between regions, which widened significantly during the crisis years.
3 Estimates and forecasts of new bad loans, 4.1% 3.8% annual influx of bad loans expressed as a percentage of total loans to non-financial companies, broken down category all companies 1.1% 0.7% 3.3% 2.7% 3.1% 1.7% 3.1% 1.2% 0.8% and forecasts 2016 2017 Despite these encouraging prospects in terms of the influx of new bad loans, the huge pile of non-performing loans that the country s banks accumulated during the recession years is a subject of particular attention. The non-performing loan stock has continued to mount significantly over the course of 2015: according to Bank of Italy figures up to September, gross bad loans held by Italian banks are now above the 200 billion mark, which is about 10% of the total loan amount disbursed. About 143 billion of those bad loans were lent to non-financial companies. Unless measures are taken to help banks unload a significant portion of this bad loan stock, it is bound to keep on rising for at least the next few months.
4 ITALIAN BUSINESSES BAD LOANS OWED TO BANKS In 2015, the stock of gross bad loans accumulated by Italian banks rose rapidly despite an improving economic situation. According to the latest Bank of Italy data (up to September 2015), the gross bad loan stock has reached a record-high of 200 billion, more than 10% of all loans to customers. The bad loan amount is 13% higher than it was in and almost five times greater than seven years ago 1 (it was 43 billion in September ). Over 70% of those bad loans ( 143.4 billion) were loans disbursed to non-financial companies. Among these, the bad loan stock has grown 13.3% year-on-year. Gross non-performing loans of Italian banks in billion euros 200.0 bn 143.4 bn others non-financial companies Source: ABI-Cerved illustration of Bank of Italy data dec 07 dec 08 dec 09 dec 10 dec 11 dec 12 dec 13 dec 14 dec 15 The recent influx of new bad loans, although it has slowed down over the course of this year, suggests that the bad loan stock will continue growing over the next few months unless the Italian banks ability to unload non-performing loans in their portfolios, whether by selling the assets or by resolving insolvencies more quickly 2, were to improve significantly. In fact, new bad loans as a percentage of total loans to non-financial companies stopped going up in the second quarter of the year. However, the rate is still well above the historical average, still at a record-high 3.9% of the number of loans; if the calculation is based on loan amounts, then the rate was an even higher 4.4% as of June 2015 (although this is below the historical peak of 4.8% recorded at the end of ). 1. Unlike September data, the numbers reported at the end of did not include data from Cassa Depositi e Prestiti 2. This summer, the Italian Parliament passed a package of measures (in Law no. 132/2015) aiming to stimulate faster disposal of bad loans from banks accounts. Banks could unload their bad loans more rapidly if a Bad Bank is established or if the non-performing loan market were to be backed by government guarantees, something the current administration has indeed been considering recently.
5 New bad loan rates among non-financial company borrowers annual influx of bad loans expressed as a percentage of total loans 4.4 3.9 by number of loans by loan amount 1.6 1.1 Source: ABI-Cerved illustration of Bank of Italy data q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1 2001 2002 2003 2004 2005 2006 2007 2015 Official Bank of Italy data provide details of new bad loan rates by geographical area, by sector of business and by the amount borrowed, but do not show statistics broken down by company size category. ABI and Cerved have estimated these figures based on individual credit risk scores that Cerved has calculated for Italian companies (see the text box on the next page for details). Our estimates, presented for the first time in the last edition of this Outlook, have now been updated with forecasts to 2017. The ABI-Cerved models project that the new bad loan rate will be 3.6% at the end of 2015, two-tenths of a percent lower than last year. The breakdown category shows that the r the business, the lower the default risk on average. However, improvements are foreseen in all size categories from to 2015. The biggest decrease is seen among businesses, from 4.1% at the end of to 3.8% at the end of 2015, while the rate is expected to go down by 0.2 percentage points in the other size categories. The gap between businesses and companies, while getting a tenth of a point narrower this year, is still noticeable and much wider than prior to the economic crisis: in, there was a 1.1 percentage point gap in new bad loan rates between -businesses and companies, whereas the projected 2015 gap is 2.1 points. Estimated new bad loans, annual influx of bad loans expressed as a percentage of total loans to non-financial companies, broken down by company size category all companies 1.1% 0.7% 4.1% 3.3% 2.7% 3.8% 3.1% 1.7%
6 THE ABI-CERVED PROJECT TO ESTIMATE DEFAULT RATES BY BUSINESS SIZE Cerved and the Italian Banking Association (ABI) have started a joint project to estimate and forecast default rates by business size category, in order to help broaden the set of information available to analysts and operators in the field. The project s goal is to estimate new bad loan rates, dating back to 1990, for each macro-sector of the economy, each broad geographical area of the country, and each business size category, resulting in 64 data clusters; the subsequent goal is to analyse the resulting rate trends, in order to develop forecasts and simulations. Default rate estimates are obtained by using Cerved s CeBi-Score4 as a concise indicator of a business s financial risk, then transforming these scores into individual risk indicators or expected individual default rates (EIDR) and re-proportioning these EIDRs based on the historical data series published by the Bank of Italy. Equipped with an indicator on an individual company level that enables, on average, systemwide default rate dynamics to be replicated, we then have a potent way of estimating default rates for each business size cluster. Through such proportioning, the historical series of default rates since 1990 has been reconstructed for the 64 clusters covered in the project. For the purpose of this research project, Cerved and ABI have classified non-financial companies into four size categories, using the same criteria specified by the European Commission: CATEGORISATION OF ITALIAN BUSINESSES BY SIZE Micro-business Small business Mid-sized business Large business Employees < 10 < 50 < 250 250 and and and or Revenue 2mn 10mn 50mn > 50mn or or or and Assets 2mnl 10mn 43mn > 43mn The default rates obtained feed into a risk assessment model for business loans, where the degree of detail is a function of the intersection between levels of detail by sector, geographical area and size.
7 SECTOR TRENDS The prolonged economic crisis that has plagued Italy has had negative repercussions right across the board, but the extent of the impact has varied in different areas of the economy. In terms of bad loans, Bank of Italy figures indicate that gaps have widened significantly in recent years, and estimates suggest this trend is not slowing in 2015. New bad loan rates by macro-sector 5.9% 5.9% annual influx of bad loans expressed as a percentage of total loans to companies in each sector services construction industry agriculture 3.5% 3.3% 3.4% 3.0% 2.4% New bad loan rates in the industrial sector, 3.8% 3.5% annual influx of bad loans expressed as a percentage of the total, broken down by company size category total industrial 2.2% 1.2% 0.8% 2.8% 2.3% 1.7% 2.0% In 2015, a year on year comparison indicates that new bad loans are expected to come down considerably in the industrial sector (from 3.4% to 3%), to fall by two tenths of a percentage point in the tertiary sector (from 3.5% to 3.3%) and by one tenth in the agricultural sector (from to 2.4%). The deterioration in the construction industry is forecast to come to a halt in 2015, but the rate should remain at the record levels recorded last year (5.9%). In all areas the rate of new bad loans is forecast to remain well above pre-crisis levels, with the gap between sectors featuring greater or lesser risk profiles expanding from 3 tenths of a percentage point to 3.5 tenths. In industry, the rate of new bad loans to businesses, which had already come down in (from 4.1% in to 3.8%), is forecast to fall further in 2015, to 3.5%. For companies, the rate remained stable at the record level of 2.8% in and : it is expected to drop by three tenths of a percentage point in 2015. For mid-sized companies the slight improvement in (from 2.4% in to 2.3%) is expected to consolidate in 2015,
8 New bad loan rates in the construction sector, annual influx of bad loans expressed as a percentage of the total, broken down by company size category 6.9% 6.6% 6.8% 6.4% 6.3% 6.2% 5.7% 5.8% total construction New bad loan rates in the service sector annual influx of bad loans expressed as a percentage of the total, broken down by company size category total services 1.2% 1.0% 0.7% 3.7% 3.5% 2.9% 2.7% 2.4% 2.2% with the rate of new bad loans forecast to close the year at 2%. For industrial companies, which suffered a less notable increase in bad loans during the crisis, the rate of new bad loans is forecast at for 2015, 0.6 percentage points above the level. Estimates for the rate of new bad loans in the construction industry represent the exception to the general rule that greater risk is associated with er companies. Indeed, the crisis swelled new bad loan rates for companies of all sizes, but the impact was worse for r companies, with the result that the rate of new bad loans was higher for mid-sized and companies than for companies and businesses. Estimates suggest a marked improvement for companies in 2015 (from 6.9% in to 6.4%), while the rate should improve by 1-2 tenths of a percentage point for SMEs (from 6.8% to 6.6% for mid-sized companies and from 6.3% to 6.2% for companies). The situation for businesses continues to deteriorate, with the rate of new bad loans forecast to reach 5.8% (from 5.7% in ). In the services sector, the rate of new bad loans is set to fall from 3.5% in to 3.3% in 2015, still more than double the level recorded in. A reduction of two tenths of a percentage point is expected across the board, with new bad loan rates set to come to 3.5% in 2015 for businesses, 2.7% for companies, 2.2% for mid-sized companies and for companies.
9 GEOGRAPHICAL TRENDS The extended crisis has exacerbated differences in the rate of new bad loans between different geographical areas: in, the gap between the riskiest area (Southern Italy) and the least risky (North-East) was 0.8 percentage points; by this gap had increased threefold. 2015 estimates indicate that the gap should come down again: the situation is improving across the country, with the positive trends affecting the South (from 5.6% to 5.1%) and the North-West (from 3.4% to 3.1%), whereas the rate is forecast to drop by just one tenth of a percentage point in the Centre (from 4.1% to 4%) and the North-East (from 2.9% to 2.8%). In all areas the rate of new bad loans will still be more than double the level recorded in. New bad loan rates by geographical area annual influx of bad loans expressed as a percentage of total loans to companies in each area 5.1% 5.6% 4.1% 4.0% 3.4% 3.1% South & Islands Centre North-East North-West 2.2% 2.9% 2.8% Statistics for businesses reflect the geographical trends described for all companies: 2015 is expected to witness an improvement in all areas, with the biggest gains in the South (-0.4 percentage points) and the North-West (-0.2 percentage points), compared to -0.1 percentage points in the Centre and the North-East SMEs based in Southern Italy were hit hardest by the crisis: for companies the rate of new bad loans went from 2.1% in to a peak of 5.3% in (from to 4.9% for mid-sized companies), but is forecast to come down significantly in 2015 Micro-businesses: new bad loan rates by geographical area annual influx of bad loans expressed as a percentage of total loans to companies in each area South & Islands Centre North-East North-West 2.3% 5.2% 5.6% 4.2% 4.1% 3.6% 3.4% 3.2% 3.1%
10 to 4.9% (4.4% for mid-sized companies). The rate of new bad loans to companies in 2015 is set to come down faster in the North-West (-0.3 percentage points) than in the Centre and North-East (-0.1 points). For SMEs the levels of risk in the South (4.9% for companies, 4.4% for mid-sized) and the Centre (3.7% and 3.4%) remain much higher than the estimated figures for the North West (2.6% and 2%) and the North-East (2.3% and ). Despite the trend reversal expected in 2015, the North/South divide remains significant among companies. In the South, the rate of new bad loans for companies was 3.8% in, a higher rate than for businesses in the North and companies in the Centre. The rate is forecast to improve significantly in 2015, to 3.3%. Based on estimates, companies in the North-West are set to overtake those in the North East to offer the lowest risk profile: indeed, the rate of new bad loans is set to drop from to 1.3%, while in the North-East it is forecast to fall from to. For companies in Central Italy, the rate is forecast at in 2015, slightly below the level. Small businesses: new bad loan rates by geographical area 5.3% 4.9% annual influx of bad loans expressed as a percentage of total loans to companies in each area South & Islands Centre North-East North-West 2.1% 1.2% 1.1% 3.8% 3.7% 2.9% 2.6% 2.4% 2.3% Medium-sized businesses: new bad loan rates by geographical area annual influx of bad loans expressed as a percentage of total loans to companies in each area South & Islands Centre North-East North-West 0.9% 0.8% 4.9% 4.4% 3.5% 3.4% 2.3% 2.0%
11 Large businesses: new bad loan rates by geographical area 3.8% 3.3% annual influx of bad loans expressed as a percentage of total loans to companies in each area 2.6% South & Islands Centre North-East North-West 1.3% 1.0% 0.6% 0.5% 1.3%
12 FORECASTS TO 2017 Based on the macroeconomic scenario outlined by ABI this autumn, growth in the Italian economy will firm up over the next two years, reaching a rate of in 2016-17. All components will contribute to the Italian economic recovery, with the partial exception of public sector consumption, which is expected to continue to slide until 2016. Expectations indicate growth of around 1% in household consumption, while exports and investments are forecast to track livelier trends. ABI and Cerved models indicated that, based on this scenario, the rate of new bad loans for non-financial companies is expected to fall sharply, from the 3.8% peak reached in to 2.3% in 2017. Despite this notable improvement, the rate is still forecast to remain above pre-crisis levels at the end of the period in question. Forecasts indicate that by 2017 the rate of new bad loans for companies will improve significantly from the peak (from to 0.8%), coming close to the 0.7% recorded in. New bad loans for companies of all sizes are also forecast to come down significantly, with the gap from best to worst set to shrink from 2.2 percentage points () to 1.7 (2017). Forecasts for new bad loan rates, estimates for the annual influx of bad loans expressed as a percentage of total loans to non-financial companies, broken down by company size category all companies 3.8% 3.6% 3.1% 1.7% 3.1% 2.9% 1.2% 2.3% 0.8% and forecasts 2016 2017 Forecasts for new bad loan rates by macro-sector 5.9% 5.9% estimated annual influx of bad loans expressed as a percentage of total loans to companies in each sector 3.5% 3.3% 5.0% 4.1% services construction industry agriculture 3.4% 3.0% 2.4% 2.6% 2.4% 2.0% 2.0% 1.7% and forecasts 2016 2017
13 Industrial sector: forecasts for new bad loan rates estimates for the annual influx of bad loans expressed as a percentage of total loans, broken down by company size category 3.5% 3.0% 2.9% 2.4% 2.4% total industrial 2.0% 0.9% 1.3% 0.9% 0.5% and forecasts 2016 2017 For the industrial sector, the only size of company for which the rate of new bad loans will remain above levels is businesses (2.4% vs. 2.2%). For all other categories the rate will fall below pre-crisis levels: indeed, forecasts indicate that at the end of the period, the rate of new bad loans will come to 0.5% for companies (0.8% in ), 0.9% for mid-sized companies (1.2%) and 1.3% for companies (). In the construction sector, in spite of the steep reduction forecast between 2015 and 2017 (from 5.9% to 4.1%), the rate of new bad loans will remain three times higher than in. During 2016 and 2017 the improvement will continue to be driven by companies, which will once again become the least risky. Elsewhere, -sized companies are forecast to suffer a higher rate of new bad loans than companies, which in turn will remain riskier than businesses. Pre-crisis levels remain a distant shore for construction companies of all sizes. Construction sector: forecasts for new bad loan rates estimates for the annual influx of bad loans expressed as a percentage of total loans, broken down category total construction and forecasts 2016 2017
14 Service sector: forecasts for new bad loan rates estimates for the annual influx of bad loans expressed as a percentage of total loans, broken down by company size category 3.5% 3.3% 2.7% 2.2% 2.8% 2.6% 2.1% 2.2% 2.0% total services 1.7% 1.2% 1.3% 0.9% and forecasts 2016 2017 Forecasts for new bad loan rates by geographical area 5.1% estimated annual influx of bad loans expressed as a percentage of total loans to non-financial companies in each area South & Islands Centre North-East North-West 4.0% 3.1% 2.8% 4.3% 3.3% 2.4% 2.3% 3.6% 3.7% and forecasts 2016 2017 In 2017, the rate of new bad loans in the services sector will come down to 2% (from 3.3% in 2015), remaining five tenths of a percentage point above levels. None of the categories will see the rate drop below pre-crisis levels, and the gap between businesses and companies will narrow significantly. From a geographical point of view, models indicate a widespread improvement across all parts of the country, with particularly positive trends for companies based in Southern Italy, which will nevertheless remain the riskiest, and for those in the North- West, for which the rate will come close to that recorded in the North-East, the safest area.
Interactive graphs are available at know.cerved.com