Silvia Cappelli explains how TEGoVA members have contributed to the regulation of non-performing loans in Italy
April 2018 – European Valuer | Issue No. 11 (pag. 3-4)
All over Europe, the amount of non-performing or uncollectable loans (NPLs) has increased during the years in which the economic crisis has impacted upon companies and households.
This particular issue has been tackled by the European Central Bank (ECB), which, publishing its “Guidance to banks on non-performing loans”, has put financial institutions under the spotlight. In particular, the NPL issue is extremely relevant for Italian banks, given that, at the end of 2016, it equated to 173 billion Euros – 9.4% of the overall loans. The NPL ratio at European level accounts for 5.7% of on-balance loans, whereas in Italy this figure reached 17% (March 2016)1. In this respect, the Italian institutions and authorities enforced new regulations and best practices to address NPL reduction, which are giving their initial results. Indeed, according to the Italian Banking Association (ABI), the amount of Italian banks’ NPLs fell, in the last year, to 25.8%, reaching 64.4 billion Euro. Accordingly, the reduction was equal to 24.5 billion Euro, compared to the highest level reached in 2015.
However, the management of the NPL issue is still ongoing and entails several issues concerning the estimation of value of real estate assets, as outlined in the ECB after the 2014 Asset Quality Review. Therefore, after this test, ECB issued the Guidelines for NPLs, encompassing a specific chapter on the real estate collateral valuation, as proof of the relevance of this topic for the stability of the financial system. If we incorporate this into Italian jurisdiction, the very first element to take into account while valuing NPLs is the calculation of the market value, if the collateral is not marketed or is not through an auction. An additional factor of complexity is the wide range of variability among different Italian courts.
Among the variety of initiatives carried out to manage the remarkable amount of the NPL, ABI decided to promote and coordinate a specific working group to establish best practice at the national level on valuation issues, aiming to improve the efficiency of NPL management.
“The first part of the Guidelines is focused on the requirements of competence and professionalism that a valuer must have. In this regard, an important role is attributed to TEGoVA’s European Valuation Standards (EVS).”
ASSOVIB and TEGoVA, together with other sector associations and professional orders, have actively contributed to this initiative, providing their qualified expertise to the working group. Other TEGoVA Italian member Associations that contributed to this project were the National Council of Surveyors, E-Valuations and Is.I.V.I.
This joint effort has led to the publication of the “Guidelines for Valuation of Real Estates as Collaterals of NPL Loans”, a self-regulatory protocol that provides important support for a more efficient management of debt recovery. In particular, the purpose of the Guidelines is to provide operational guidance to valuers and all the players involved in foreclosure proceedings, establishing principles in favour of transparency, accuracy and reliability to guarantee uncollectible loans, providing standardised definitions and approaches.
The first part of the Guidelines is focused on the requirements of competence and professionalism that a valuer must have. In this regard, an important role is attributed to TEGoVA’s European Valuation Standards (EVS). As evidence of their relevance, Recognised European Valuer (REV) status is the standard whereby valuers demonstrate their competence and experience. ASSOVIB, together with the other Italian TEGoVA members, have translated EVS 2016 to facilitate a wider adoption of these requirements.
One of the most relevant innovations introduced by the Guidelines focuses on the conditions that are actually encountered during the foreclosure proceedings. In this respect, there is a considerable difference among the conditions whereby a property is sold in the event of an auction or through the free market. Such conditions might include the possibilities at least that:
• the access to the property is often denied or factually impossible for the potential buyer
• the conditions of the credit offer are limited, if compared to a “traditional” property purchase on the free market
• the timescales whereby the new owner actually takes possession of the property are still not determined, because the tenant often creates obstacles in order to postpone the sale of the property
• the seller/debtor is not always willing to dispose of the property
• the valuation is often carried out with a considerable advance compared to the actual disposal date.
Considering such hurdles and peculiarities of the disposal during a foreclosure procedure, the Guidelines use as definition of value the “market value with assumptions”. The Guidelines also describe the Valuation Certificate, a document that was envisaged for the very first time by EVS 2016 (Chapter 5, 4.4). The EVS Valuation Certificate has been introduced as best practice, to promote a better access to information for the purpose of property advertising and to provide a standardised information document guaranteeing NPL assets throughout Italy. The Valuation Certificate consists of a summary of the main contents of the assessment report. It can be a separate document or may be included in the valuation report, to which, however, it refers for a full understanding. Finally, the Guidelines give relevance to a series of activities and technical studies on due diligence, special assets valuations and notes on real estate leasing.
Guidelines on Valuation of NPL Real Estate Collateral are the latest milestone in property market regulation in Italy. Indeed, in 2010, ABI promoted the Guidelines on property valuations, which are considered to be the first protocol for valuations in the banking sector. Also in this respect, ASSOVIB gave its valuable contribution, steering in the direction of ensuring that Italian property valuation is market compliant with international and European valuation standards. In conclusion, a consistent step was made in 2016, with the adoption in Italy of the Mortgage Credit Directive, which confirms the crucial role of property valuations at regulatory level.
Silvia Cappelli is a TEGoVA Board Member
and Vice President of Italian property valuation association ASSOVIB.