Non-performing loans vs. non-performing exposures

A lot of uncertainty right now stems from clarifying the size of the problem. The worst-performing loans in Italy are known as sofferenze, which can be broadly translated as “very bad debt.” It refers to those loans that have already defaulted. It is this category, which is currently €87 billion on a net basis,1 that the banks and government consider the stock of NPLs.

Many regulators and market participants, however, prefer to look at non-performing exposures (NPEs). As well as the stock of NPLs, this includes loans unlikely to pay in the future, or that are currently past due, but are not yet bad enough to classify as NPLs. While transparency around loan performance could be improved, our understanding is that loans over 120 days past due are classified as NPEs at a minimum.

The question for investors – and the reason for much uncertainty today – is whether NPEs are actually NPLs, and whether the banking sector’s exposure is closer to €87 billion or €197 billion? Markets and regulators appear to be saying yes, while banks and governments are saying no. From our perspective, we think the €197 billion of net NPEs is the best place to start. Of this, around 60% is concentrated in five banks 

More readings on https://www.advisorperspectives.com/commentaries/2016/07/21/losses-on-italian-non-performing-loans-severity-and-solutions