What happens to the credit moratoriums of Italian banks
Maurizio Sgroi's analysis on The Walking Debt blog
In the long story that we are going to write, where we will tell about the effort of our country – in good company – to land the debts left to fly due to the pandemic, a chapter will certainly be dedicated to the considerable work that the banks will have to do, which have had to provide credit to the economy in so many ways, first of all by not demanding back the money that debtors owed them on schedule.
It was certainly not an act of liberality. The decision to grant moratoriums to debtors is part of the Cura Italia decree (DL 18 of 2020) which over a year ago established the possibility for families and businesses to ask banks to suspend payments on performing loans, which gave the via a series of initiatives through which the audience of possible beneficiaries has been extended.
The result, illustrated in the latest Bank of Italy report on financial stability, was that in December 2020 there were 41 billion of loans in moratorium for families and even 106 for businesses. Loans on moratorium for 66 billion had expired. Overall, "the loans affected by the measures still in place represented 9.3 per cent of total loans to the non-financial private sector".
In essence, almost 10% of total loans, with a much higher share for the less significant banks, were subject to a moratorium. But the data to underline, however, is that relating to loans that have entered stage 2 (S2) of the IFRS9 classification. That is, those loans “which have undergone a significant increase in risk”. The latter, in fact, have also increased significantly, and this time much more for the significant banks than for the less important ones. For the former, S2 reached 32% of performing loans on moratorium (which were 9.1% of total assets). For the latter, 21.7%, against performing loans on moratorium equal to 12.4%. The banking system as a whole saw S2 growth by 29.1%. In practice, nearly one in three of these moratorium claims saw their health deteriorate.
It should be remembered that this incidence of S2 on loans on moratorium is well 15 points higher than that recorded by the total of loans granted to the non-financial private sector. The reason is soon said: "The gap is attributable both to the greater uncertainty on the evolution of the creditworthiness of the loans benefiting from a moratorium, and to their composition, which is more concentrated in those sectors that have been most affected by the pandemic crisis".
In essence, the general principle applies that whoever asks for a moratorium has or expects to have difficulty repaying a debt. And this is enough to transform these credits into an unknown factor that weighs heavily on the balance sheets of Italian banks, and which well explains the cry of pain recently launched by the banking trade association, which we talked about during a chat with Republic some time ago.
The good news is that loans in S3 (problem loans) are still a modest share, globally equal to 1.5% of the outstanding moratoriums and 2.7% of those overdue. If it were not for the fact that “this data, however, could not constitute a reliable indicator of the credit quality of the moratoriums still in place. It is indeed possible that the moratoriums already
overdue payables refer to relatively solid debtors who may have asked for a moratorium mainly as a precaution ”.
The problem, however, is that "the share of loans classified in stages 2 and 3 is likely to grow further in the coming months, leading to the need to increase value adjustments". Bank of Italy estimates that in the two-year period 2021-22 these losses could reach 9 billion, which corresponds to 0.8% of the risk-weighted assets of the entire banking system. In short, a manageable problem which, however, will require a lot of commitment on the part of intermediaries. It is no coincidence that the banks have long begun to organize themselves "in order to avoid a possible amplification of the effects linked to the expiry dates of the moratoriums". What in the jargon is called cliff effect. And which, in practice, is the edge of the ravine on which we will have to get used to walking for the next few years. Without slipping.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/banche-moratorie-crediti/ on Sat, 22 May 2021 06:09:43 +0000.