Italian banks' problem loans to peak next year -Fitch

MILAN Tue Dec 3, 2013 7:33am EST

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MILAN Dec 3 (Reuters) - Fitch Ratings expects problem loans at Italian banks to peak next year amid a slow economic recovery.

Companies, especially small and medium-sized ones, will remain under pressure and banks' asset quality will take longer to improve, the credit rating agency said on Tuesday.

Italian banks are burdened with bad debts as domestic companies, battling the longest post-war economic recession, have found it hard to meet their debt repayments.

Gross non-performing loans in September stood at 144.5 billion euros ($195.89 billion), industry data showed. At 7.5 percent of total loans, their share was the highest since November 1999.

Fitch said it would keep a negative outlook on the bank sector for the third year in a row. The agency also expects low bank lending volumes next year so that profitability will not improve. But on the plus side, the lack of loan growth should help banks' liquidity and funding to remain stable.

The agency said that it expected Italian banks to continue to rely heavily on European Central Bank's funding as their requests will be met in full at ECB refinancing tenders until at least mid-2015 after a recent extension of the full allotment.

But, if market conditions allow it, they might also try to step up bond issuance ahead of an early 2015 deadline to repay the ECB three-year loans. Italian banks held 229 billion euros in longer-term ECB funds at the end of October.

Fitch said a review of the European Union bank sector by the ECB could find some medium-sized Italian banks short of capital.

But the ECB's asset quality review is unlikely to trigger a significant reduction in Italian banks' significant holdings of domestic government bonds next year as these are used for activities that help shore up profits, Fitch said.

Italy's Treasury expects domestic lenders to slow down purchases of government bonds as sovereign holdings will be scrutinised by the ECB in its asset review. It is not clear yet how they will be treated in the stress-tests that will follow. ($1 = 0.7377 euros) (Reporting by Valentina Za. Editing by Jane Merriman)

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