The credit industry comes together at the CRIF Finance Meeting
To build (or rather, rebuild) growth and development in the credit industry we need a smooth transformation of the system, and to shine a light on the innovative models that traditional operators have been able to successfully introduce, and which have subsequently become best practices. However, it is also important to pause to consider the interesting experiences from new players, destined to carve themselves out an increasing share of the market. A demanding but stimulating challenge, which all players in the sector are called on to contribute to.
To take stock of the situation, the CRIF Finance Meeting 2017 was organized on October 12 at the Royal Carlton Hotel in Bologna, entitled ”Faster and smarter: credit evolution”.
A spotlight on the future, as Silvia Ghielmetti, Managing Director of CRIF stated in the conference opening speech. Without forgetting, however, how we got to this situation. She underlined two factors, “In the first instance, the banking system was suffering from certain weaknesses even before the financial crisis. Secondly, the system suffered the effects from the rapid adjustment to the regulations which followed. A staggering process, which isn't over yet”. Indeed, during the event, the debate on calendar provisioning was opened (a project, under discussion at the ECB, which involves compulsory minimum write-downs, increasing over time, for non-performing exposures), while the subject of government bond risk remains in the background. At the same time, new European regulations are in the pipeline, opening up the field to non-banking operators, the most important being PSD2. This is the point we need to restart from.
Ghielmetti highlighted two policies: on the one hand, the “recovery of productivity and profitability”, and on the other, “evolution towards multiple financing sources, which for the Bank of Italy is a healthy and essential goal”.
BORROWING FROM MULTIPLE INSTITUTIONS IS ON THE RISE
In this scenario, the broadening of financing sources has undergone strong acceleration “thanks to technology, which is changing the distribution models a little bit everywhere”, explained Simone Capecchi, Executive Director of CRIF. “We just need to think about what has happened to record stores or travel agencies, which are downsizing, even if we still listen to music and people haven't stopped flying”.
And credit? “Credit will continue to exist, but the way in which demand and supply come together will change”. This is seen first of all in the data, and also in the logic. “When we look at our credit reporting system, EURISC”, explained Capecchi, “we can see that the demand for credit from digital operators is growing very strongly”. Above all for the Millenials, young people between 18 and 34, who tend to favor innovative tools to manage their relationships with institutions, and who bank with more than one institution (more than 21% of Millenials apply for credit with more than one institution).
All this is happening while consumer credit is consolidating its recovery, “In 2015 there was a change of course, the following year we saw a significant increase, and now the trend has settled down”, said Capecchi. The trend in loans is particularly significant, driven above all by “retail credit”.
MORTGAGES AND THE REAL ESTATE SECTOR
And mortgages? “There has been a recovery, but still limited”, commented Luca Dondi, Managing Director of Nomisma. The reason is simple, “Since 2014/15, there has been an increase in demand, and as a result a natural resurgence of the real estate market, sustained in part by the banking sector, which, for its part, has resumed lending thanks to a more relaxed and favorable scenario”.
In this context, “property valuation is not limited to the identification of the market value of collateral on the date the valuation was made but, due to the increasing attention to risk mitigation by banking institutions and institutional investors, supported by repeated regulatory effort, must also consider forward-looking factors”, underlined Stefano Magnolfi, Real Estate Executive Director at CRIF. In fact, their use does not stop in the origination phase, but extends over the whole lifetime of the exposure and holding of the asset in the invested portfolio. Forward-looking considerations are more evident when complex real estate and those properties for non-residential use are examined since an income-based valuation method is used in which assumptions regarding income streams and future costs are formulated. That's why “the information and indicators to consider during valuation activities are numerous and diverse”, faced with a valuation process which must be increasingly transparent, verifiable, and above all shared with the counterparty's risk management managers.
Compared to the energy characterizing consumer credit, business credit on the other hand is growing to a lesser extent: on this topic, Gianfranco Torriero, Deputy Director General of the ABI, showed how a reduction in risk favors the recovery of lending, even if the trend is no longer in double figures, like it was in the years running up to the crisis.
At the same time, it should be noted that the overall scenario is affected by the new regulations, which are reinventing the concept of credit: from the new default definition to the impacts on the IFRS9 standards, to calendar provisioning.
It was then the turn of Andrea Resti, Associate Professor at Bocconi University in Milan and CRIF Senior Advisor, to wrap up the first part of the conference, underlining the many aspects that had emerged, including legislative and regulatory “overflow”, with Italy being the hardest hit from a banking supervision point of view. Why? The figures themselves answer this and highlight “a misalignment in Italy”. The inconsistencies identified include a very low ROE (1.5%, compared with an average of 5.4%) and the impact of non-recurring items on operating profit (94.5% compared with 77% for Europe). And so, Resti stated, “We risk being seen as a threat by other countries in the Eurozone”. How did this problem come about? That's easily answered, “A high number of NPLs, few performing loans, and relatively few provisions”. Poor growth is responsible for this situation, but this is not a mitigating factor. In fact, on a community level this is seen as an aggravating factor and we are accused of not being able to restart the economy, in part due to endemic problems such as corruption and tax evasion. This it the real, great challenge.
OPERATOR EXPERIENCES: ROUND TABLE
From theory to practice. That is, the experiences of credit, banking and non-banking players, which were discussed at a round table chaired by Chiara Frigerio, Secretary-General of Cetif (Catholic University),with participation from Massimo Porega, Head of Consumer and Business Credit at Bancoposta, Flavio Salvischiani, Client Director at Agos Ducato, Tommaso Gamaleri, Italy CEO at Younited Credit, Pierpio Cerfogli, Deputy Director General of Bper, and Enrico Duranti, Director General of Iccrea Banca Impresa.
Specifically, the round table was an opportunity to compare experiences in the field, with contributions from businesses that are developing particularly interesting paths in order to adapt themselves to the new paradigms the world of credit is evolving towards, with digitization driving the creation of new business models, and the concept of service which is increasingly replacing the product. This is without forgetting one, no less important, aspect represented by the world of data and analytics: the way of using these will change lending, and so finding the balance between automation and in-depth knowledge of the customer could be the challenge for an industry ready to face this new phase.
DIGITAL LENDING, BUSINESS CREDIT, NPLs: SUCCESS STORIES AND LESSONS LEARNED
After an intense morning of work at the plenary session, experiences shared directly by industry players at the CRIF Finance Meeting - success stories and lessons learned on topics/projects already faced in the field by Italian lenders - were at the center of three in-depth vertical sessions.
In the first, entitled “Digital lending: path for survival or regeneration?”, the focus was on big data analytics, smart onboarding, and advanced outsourcing. Specifically, best practices for the optimization of the customer experience in acquisition and fraud prevention processes were discussed, as well as the frontiers of outsourcing, multi-channel and ‘phigital’ strategies, customer insights and how to capitalize on investments made in digital transformation with big data and marketing analytics for business development. CARTASI, CREVAL, DEUTSCHE BANK EASY, INTESA SANPAOLO, and SATISPAY talked about their experiences.
The second session focused on “Business credit and risk governance: from the business to processes, to capital optimization”. ECAI ratings were discussed as well as prudential capital requirements, streamline processing and process optimization in the Credit Value Chain with methodologies, application solutions and outsourcing, real estate collateral and the role of non-residential appraisals as a risk mitigation and compliance tool, the IFRS9 accounting standards, and credit tools from today to 2020. The session heard from ALBA LEASING, CRÉDIT AGRICOLE, and FINDOMESTIC.
The third and final parallel session related to the “Management of anomalous credit: from portfolio monitoring to NPL management”: early warning, portfolio risk, tools and processes, data quality, strategic choices between disposal and outsourcing in the management and optimization of NPL portfolios, and the role of the servicers were the keywords. There were speakers from BANCA POPOLARE DI SONDRIO, BANCO BPM, BPER CREDIT MANAGEMENT, CRÉDIT AGRICOLE and DOBANK.