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Does cutting NPLs make Italy a land of opportunity?

The state is making it easier for Italian banks to reduce their cripplingly high level of non-performing loans, but investors should proceed with caution even in the new climate. 
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As temporary rules are implemented to encourage Italian banks to shed their bad loans, opportunities are emerging for specialist investors. But due caution must be excercised.

Non-performing loans (NPLs) weigh heavily on Italy. They amount to more than 10% of total loans in the country and, although their number is decreasing, they are still responsible for one-quarter of Europe’s bad debt. Their decline might accelerate following the introduction of measures designed to ease in the International Accounting Standards Board’s IFRS 9 accounting rules. During a five-year ease-in period, banks forego the need to balance out higher provisions – necessary to write down the value of NPLs they plan to sell – with capital increases.

NPLs weigh heavily on Italy. They amount to more than 10% of total loans in the country

The European Central Bank has already noticed a spike in such provision, particularly in Italy. This is good news for specialist investors as it potentially creates deal opportunities. Sweden’s Intrum, for example, has not only very recently invested in part of Intesa Sanpaolo’s NPLs, it has also entered into a joint venture with the Italian bank to provide debt services in the country, widening its existing presence there.

Italy’s improved economic prospects cast the deal in a good light. As outgoing finance minister Pier Carlo Padoan told The Banker: “I’ve seen a change in the dynamics of NPLs. Banks are happier to get rid of [them] and also the environment has improved: there’s more growth.”

To ensure that investors keep on coming – and Italy solves its NPLs problem – economic growth will need to be sustained. As the country waits for a new government, after inconclusive elections in March, prospective buyers will not only want to take advantage of the new incentive to sell bad loans, they will want to assess the ability of the next government to support growth and enact policy and reforms that will help them recover those bad loans. Given the current political instability in the country, this will be no easy task.

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