UPDATE 2-Banco Popolare cash call hits Italian banking shares

Mon Jan 27, 2014 11:33am EST

(Rewrites first paragraph, adds comments from analysts, interview with BPER CEO)

By Valentina Za and Andrea Mandala

MILAN Jan 27 (Reuters) - Shares in Italian banks fell on Monday after Banco Popolare warned of a higher than expected yearly loss and announced a surprise cash call, fuelling speculation other stretched lenders may tap the market to boost their capital.

Italian banks have seen bad loans soar during a two-year recession. And in a regulatory push ahead of a European Central Bank (ECB) review of balance sheets across the sector, the Bank of Italy has been encouraging lenders to set aside more money to cover losses.

Banco Popolare shares led the day's losses with a 13 percent fall by 1500 GMT in response to plans for a 1.5 billion euro ($2.1 billion) rights issue of new stock. Italy's fourth-biggest bank also said late on Friday large loan-loss provisions had led to a 2013 net loss of 600 million euros, which it said was higher than analysts had estimated.

"Banco Popolare's capital hike raises additional questions over Italian banks' asset quality," analysts at Goldman Sachs wrote in a note to clients.

Shares in mid-tier banks such as Banca Popolare Emilia Romagna (BPER) and Credito Valtellinese, dropped around 8 percent amid concerns they too might have to raise more capital.

Both belong to a group of 15 Italian lenders under scrutiny by the ECB in a sector "health check" of their balance sheets this year.

Besides Banco Popolare, three of these lenders - Monte dei Paschi di Siena, Banca Popolare di Milano and Banca Carige - plan to tap markets before the summer to plug a combined capital shortfall estimated at around 6 billion euros.

Monte dei Paschi, Italy's No. 3 Bank, plans the biggest issue, totaling some 3 billion euros. Genoa-based Carige must plug a capital shortfall of at least 800 million euros, while Pop Milano needs 500 million to repay state aid.

Unlisted Veneto Banca, meanwhile, says a planned conversion of debt into equity, along with asset sales, should boost its core capital ratio above the 8 percent target set by the ECB, allowing it to avoid a rights issue.

CORE CAPITAL

In an interview with Reuters, BPER Chief Executive Luigi Odorici said the bank's core capital was in line with ECB requirements and it had no plans for a rights issue.

Credito Valtellinese declined comment.

Royal Bank of Scotland analysts said they expected the ECB's review to unveil further recapitalisation needs at as many as 10 mid-tier Italian banks struggling with low profitability and bad loans.

Banco Popolare said it had substantially increased loan-loss provisions in the fourth quarter, adopting stricter criteria for classifying loans as non-performing in line with guidance from the Bank of Italy.

"We doubt ... that reclassification of problematic loans to be a Banco Popolare-specific situation and we would expect other Italian banks to be under pressure, given (the) risk of higher loan-loss provisions in the fourth quarter," analysts at brokerage Keefe, Bruyette and Woods said in a note.

Banks with weak capital such as Monte Paschi and BPER would be under the spotlight, they added.

BPER's Odorici said loan-loss provisions in the last quarter were in line with the average of the previous three.

The Bank of Italy has reviewed BPER's loans over the course of two inspections in 2012 and 2013. It focused on performing loans and the value of guarantees during a second audit ended in September with a "partially favourable" outcome, he said.

"Following that audit we've scrupulously followed the Bank of Italy's guidelines on provisioning and loan classification," Odorici said.

In a further sign of problems afflicting Italian banks, shares in Banca Popolare di Milano (BPM) lost 4 percent after a source close to the matter said its biggest shareholder, businessman Andrea Bonomi, had sold his entire stake.

Bonomi had wanted to change the ownership structure of the lender to make it more attractive to potential investors, but his plan was shelved at the end of last year because of opposition from trade unions.

The stake sale casts further doubts over the cooperative bank's reform efforts, even as the Bank of Italy pushes Italian cooperative lenders to reform and give shareholders powers that better reflect the size of their stake.

($1 = 0.7307 euros) (Aditional reporting by Silvia Aloisi and Elisa Anzolin Editing by Jane Merriman and David Holmes)

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