Before we start, let me clarify that in this article we will discuss about a generally widespread perception among investors. There is a reason for that: whenever any investor (including households) makes investment decisions, the main drivers of the decision process are indubitably perceptions (aka emotions) and expectations, which are closely linked. Hence, we will not go through all details of recent loan portfolio sales, we will instead try to focalize our line of reasoning at a more macro level. Similarly, we will discuss about general problematics knowing full well that there are necessarily a lot of exceptions in a such complex environment. But if you believe our line of thought can only be challenged using exceptions, that only reinforce the idea that there are indeed general problems in loan sale processes and that there are indeed margins for improvements.
Having said that, let’s jump start by saying how a nationwide deleveraging program should work, at least in theory. Three main factors: committed financial institutions; credible medium-term deleveraging plans and transparent sale processes. These pillars have been at the basis of what we have seen recently in the UK and Ireland. As we are focusing on perception here, the conclusion is not that loan sale processes in the British Isles are (and have been) carried out in an optimal way. The conclusion is in fact that on a more general basis, loan sale processes have been executed just well enough to provide enough comfort to attract committed investors willing to invest money and time in those markets on a continuous basis. And that’s what is not happening in Italy. Or better, even if someone might think that this is happening on the basis of some recent large transactions, the perceptions of international investors do not support this idea. I will show you why this is happening and why this is detrimental for the system.
On the demand side of the equation, leaving John Nash and game theory aside, it is worth reminding two basic concepts: i) investors commitment to a strategy is a direct function of, among other things, the probability to being able to deploy capital; ii) the greater the commitment of investors, the higher the prices that can be achieved through sale processes. We can then conclude that a successful systemic deleveraging program is based on investors commitment, which is obviously a direct function of their perceptions of the market they are operating in.
On the supply side instead, banks will benefit both directly and indirectly by an efficient systemic deleveraging program characterized by committed buyers, willing sellers and credible, transparent sale processes. Well-run sale processes have a direct (positive) impact on the prices that each bank can achieve. Furthermore, a credible national deleveraging program will benefit banks indirectly in a multitude of ways: stock prices, funding costs, etc. In the Italian case it is difficult to doubt that government spread will not benefit from a truly credible deleveraging plan.
Having said that it should be obvious that seller can only gain from well run sale process. So why are investors keep complaining about that? The inconvenient truth is that Italy and Italian banks lack a proper, well planned strategy to dispose non-core loans and individual banks sale process have been on average run below investors expectations at least in terms of transparency and credibility. Usual complaints are always the same: lack of data, poor visibility on seller expectations, poor data room material, unreliable deal timelines, change of perimeter (mostly downwards), etc.
This picture is nevertheless contradicted by enthusiastic feedbacks from banks, regulator and to some extent also from the Government. The analysis seems also ad odds with recent NPL market reports. However, as discussed in a previous article, the size of the market is inflated: moving portfolios from one place to the other without an equal transfer of risk cannot be considered at the same level of properly run arm’s length trades. Also, Italian banks seem very enthusiastic whenever they are selling portfolios. The debate on whether this is a good reflection of reality is simply not existing. But I keep asking myself: is the Italian system doing whatever possible to maximize NPL market prices? Is there a common strategy aimed at minimizing the systemic issues of the NPL problem? Is the system trying to portray a reality through media that does not exist in reality? And there reason why I am asking these questions is that many global institutional investors are disaffected by the way local institutions have been selling loan exposures as a matter of fact.
In conclusion, let me point out that the Italian loan market is and probably will remain for quite some time the most liquid in Europe. Evidence suggests that there are dozens of investors active and that whenever Italian banks are able to put on the market properly homogeneous portfolios and are able to select wisely bidders, then the prices achieved generally exceed expectation. This liquidity should not be taken for granted. The financial system should treasure this liquidity and leverage it off in the long run by creating an investor friendly and transparent environment which might leads to positive repercussion on the real economy as well (FDI mainly).
In summary, this discussion leads to the conclusion that we need to see a bit more debate on a 400bn burden which will affect one of the most important banking system in Europe for at least other 10 years.
In any case, let me finish with simple, logic, straightforward tips for portfolio sellers to improve loan sale processes transparency and enhance bidders commitment (therefore price):