Credit portfolio manager of the year: Intesa Sanpaolo

Like many of Italy’s banks, Intesa Sanpaolo emerged from the eurozone crisis saddled with billions of euros in bad loans. In the third quarter of 2015, its non-performing loan pile peaked at €34.2 billion ($38.9 billion), or nigh on 10% of its loan book.

Unlike many of Italy’s banks, however, Intesa’s management hatched a plan to do something about it: not just lowering the total, but systematically all-but eradicating it. Through loan sales, credit insurance and a vast securitisation programme – a credit portfolio strategy that has survived a switch to expected-loss accounting, the buyout of struggling rival UBI Banca and Covid-19 – NPLs stood at €5.6 billion, or less than 1% of Intesa’s loan book on a pro forma basis at the year-end.

Between the beginning of 2020 and the end of H1 2021, Intesa slashed the amount of credit risk-weighted assets on its books by €20 billion. It also reported record revenues in 2021, which was its most profitable year since 2007. Its CET1 capital ratio currently stands at 15.2% – a high watermark among Italian banks, and bang in line with the eurozone average for significant institutions.

And it has no plans to stop there. Biagio Giacalone, the head of the bank’s active credit portfolio steering department, says: “In a nutshell, Intesa Sanpaolo will continue to improve its credit quality, with the ambition to bring the NPL ratio in line with the best-in-class banks in Europe.”

Intesa got where it is not by being more ambitious than its European peers when it comes to executing on its securitisation plans, but by being smarter. Rather than rushing to market in the early 2010s when the appetite for higher yield credit was patchy, the bank instead spent several years carefully broadening its investor base.

It then began to ramp up issuance. In the 12 months to September 2021, Intesa undertook €9 billion of synthetic securitisations and private risk insurance transactions, gaining RWA relief of €3.3 billion.

The bank has won plaudits for the inventiveness of its structures and for its proactiveness on collateral agreements. Large US credit funds praise it for adding new collateral to loans each year to help investors actively manage costs, a move that one describes as “impressive.”

Elisabetta Bernardini, head of active credit portfolio steering at Intesa, says such moves reflect the mutually beneficial partnerships the bank looks to build with investors: “It’s not simply a case of trying to get bad loans off the books, but of proactively managing the loan portfolio that makes up the synthetic securitisation.”

In September, the bank finalised its first synthetic securitisation referencing a portfolio of IFRS 9 Stage 2 loans, comprising €500 million lent to corporates and small or medium-sized enterprises. It featured a €12 million retained junior tranche and a €40 million cash collateralised mezzanine tranche placed with investors. One fund manager says the deal was the first of its type that they had seen, and that other lenders are trying to copy the structure.

Unlike traditional credit risk transfer securitisations, the trigger point for IFRS 9 Stage 2 securitisations is a rise in provisioning after a loan has become impaired, rather than a credit event. Considering the higher perceived risk compared with Stage 1 exposures, Intesa decided to retain the junior tranche while the investors – exposed to any rise in provisioning on the loan book – placed their trust in Intesa’s management of its underlying credit portfolio.

To make the deal more attractive, Intesa injected additional capital into the SMEs whose borrowing makes up the Stage 2 loans by financing their trade receivables. This not only helped reassure investors; it also helped prevent the loans going into Stage 3, where they would be labelled as non-performing.

Pandemic-induced repricing

Following the onset of the pandemic, private investors in first-loss tranches were seeking a 1–2% pick-up in their risk-adjusted returns, especially on granular SME portfolios. At the same time, Intesa had to quickly readjust its 2020–21 pipeline to reflect tougher conditions resulting from the pandemic.

On a leasing portfolio – characterised by higher risk density than pure SME lending – it was able to complete a first-loss transaction with private investors obtaining a positive value creation, even when the repricing was taken into account. On an SME portfolio it involved public supranational investors such as the European Investment Fund; Giacalone says that the risk transfer on the mezzanine tranche offered greater RWA relief.

The bank is making efforts to get the SMEs hit by coronavirus lockdowns back to Stage 1, and thus enable them to support Italy’s economic recovery. Only about 25% of Covid moratoria provisions are still in place in the country, yet Intesa reports that default rates are in line with pre-pandemic averages.

Prudent and supportive lending has played a part in the programme’s success, says Giacalone, but so has domestic businesses’ hard-won resilience to financial ravages. He believes the companies that survived the 2008 financial crisis have been better able to withstand the economic ravages of Covid. “Banks are more capitalised, SMEs are more resilient,” he says. “We were worried about the effects, but we have not seen any cliff effects.”

Intesa’s securitisation programme has expanded to encompass leasing (including commercial property leasing), residential mortgages and specialised lending. The investor base has also expanded, from a handful of private credit investors active in the significant risk transfer market to a broader sweep of credit investors.

The bank has also expanded its network of credit insurers, which have been attracted to the risk-return profile of its residential mortgage book. In Q4 of 2021, Intesa completed a deal with a pool of credit insurers, including Munich Re, Arch Insurance and AmTrust, to cover climate-related risks on home loans. The Garc Residential Mortgages-2 transaction references a portfolio of high loan-to-value mortgages. Credit insurers were sold first- and second-loss unfunded protection on a €1.4 billion portfolio, including cover for the physical climate risk associated with the underlying properties.

Intesa finalised Italy’s first ESG-contingent synthetic securitisation, Garc Energy Renewables-1, underlying a €1.3 billion portfolio of renewable energy loans. This features a replenishment period for the inclusion in the underlying portfolio of new loans to enterprises investing in the generation of renewable energy.

In December 2020, Intesa closed its first transaction on renewable energy projects. The asset class’s historically low default rate, coupled with a detailed analysis of each of the underlying assets, made it possible to obtain excellent pricing from private investors without the repricing effect the bank saw for SME deals.

Last year, Intesa says its active credit portfolio steering department shifted loan origination towards clusters with the best risk-return profiles, resulting in €1.8 billion of additional implicit RWA savings. The unit’s work accounted for 70% of overall RWA savings.

It has also developed an early warning system that produces statistical, qualitative and priority indicators for increased risk in credit positions. The system models the lifecycle of a loan, and the counterparties it intercepts are managed according to dedicated processes differentiated by customer segments. This includes definition of the strategy to solve critical issues, monitoring compliance, the exit from the management process or classification to a higher risk status. The system can also simulate a Covid-19 risk impact and recommend the best risk mitigation strategy.

Intesa is currently drafting the guidelines of its 2022–25 group NPL plan, which is to be submitted to the European Central Bank. The aim will be to further reduce its NPL stock in order to contain the amount of provisions, with a positive effect on the cost of risk.