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In the NPL universe, manufacturing is seeing significant improvement

by Luca Orlando

As bad loans at Italian banks hover at extremely high levels—€200.9 billion at end December, albeit 2% below the highs from November of 2015 - one key element of optimism seems to be coming from the manufacturing sector, where risky credit has dipped to the lowest levels since April, 2014.

It’s the result of a recovery that started in September 2015 and has continued to strengthen almost without pause month after month and has succeeded in reducing the total stock (of bad credit) to €33.5 billion, down 9.3% year-on-year. That figure improves by €4.5 billion if the reference point is the record low hit 15 months ago.

It’s a significant improvement and worthy noting because it’s widespread, the result of progress in a number of areas, even those that, over the years, were the hardest hit by the declining economic activity created by the recession.

From its peak at the end of 2015, the textile-clothing sector has, for example, reduced its stock of bad loans by €1 billion (-15%), another €400 million reduction comes from the wood-furniture sector, and the machine tool sector has become less risky, with bad loans reduced by 10% from their high in September 2015 of €300 million, bringing them down to the level of the beginning of 2014.

If manufacturing can start to breathe again, the same cannot be said of the two main sectors that lead the pack in risky credit: construction and real estate activity. December data for the construction sector is still at an historically high level, more than €44 billion in bad loans, a figure that has nearly tripled over five years. It’s analogous for real estate, with bad loans at €24.3 billion—a new historic record. That’s also nearly tripled in value. These results have in large part been discounted given the deep crisis that has hit the building sector, perhaps the area hardest hit by the long crisis that started in 2008.

Between 2011 and 2015, fixed investment in construction fell by €37 billion (-22%) and the limited inversion of the trend that started at the end of 2015 has not yet produced appreciable results on the market. If the global industrial production index is, today, distant by a few points (3.5) from 2010 levels, for construction, the gap is still significant, at about 28 percentage points. Looking at sector risk, construction has, over time, opened the real abyss for banks, with €44 billion of gross bad loans out of €133 billion of total loans.

In fact, for every €100 lent, €33 ended up in the bad loan pile. That’s higher than real estate (21.3%) and more than double the average for manufacturing, where the bad loan to total loan ratio is 16.4%.

Wood-furniture (at 27.4%) and textile-clothing (at 24%) are the areas of manufacturing hardest hit by the crisis, while at the opposite end, among food and machine tools are in the best shape, with bad loans at about 13%.

The undisputed winner, in terms of reliability, is the energy sector, as the payment of bills by families and companies guarantees revenue almost automatically. Bad loans in the sector are equal to almost €741 million, or 2.7% of total loans.