RPT-Fitch: Italian Banks' results flag varying clean-up efforts

Tue Mar 18, 2014 6:15am EDT

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March 18 (Reuters) - (The following statement was released by the rating agency)

Large Italian banks' 2013 results highlight variations in clean-up efforts ahead of economic recovery and the ECB's asset quality review this year, Fitch Ratings says. These efforts have improved the banking system's health as the operating environment stabilises, although it remains to be seen whether more is needed.

Italian banks have so far reported over EUR20bn of loan impairment charges for 2013. The vast majority of these were booked in the fourth quarter. Doubtful loans, the riskiest class of problematic exposures, reached EUR156bn - their highest level since the late 1990s. The high bad debt costs also reflect banks' efforts (and those of the Bank of Italy) to reduce the impact of the ECB's exercise. This was particularly the case at UniCredit.

Although impairment costs were higher, the slowdown in new impaired loans in 4Q13 supports our view that asset quality will stabilise and that aggregate non-performing loans will peak for Italian banks in 2014. But any reversal in asset-quality trends is likely to take time to materialise, particularly as credit growth is subdued. Italian banks that have not cleaned up their portfolios as much as UniCredit are likely still to experience high loan impairment charges this year, although below 2013 levels.

Nearly 70% of the loan impairment charges reported to date were at UniCredit, mostly in its Italian operations. We believe the bank will be able to report significantly lower loan impairment charges in 2014 as impaired loans stabilise. Underlying credit quality risks for UniCredit have been significantly reduced as it was more rigorous than many peers in increasing provisions for its problem exposures. This should help the group as it tries to turn around its consistently loss-making Italian franchise.

Banco Popolare and UBI Banca have lower impaired loan coverage ratios than peers, at 30%-40% at end-2013, even after taking higher losses. Banco Popolare raised loan impairment charges by 32% yoy to EUR1.7bn, while UBI Banca increased bad debt costs by 11% to EUR0.9bn. However, both banks estimate their fully loaded Basel III common equity Tier 1 ratios at above 10%, which compensates for the less conservative reserve coverage. Banco Popolare's ratio includes a fully underwritten EUR1.5bn capital raising to be launched at end-March.

All rated large Italian banks that have reported annual results have fully loaded Basel III common equity Tier 1 ratios above 9% for end-2013. This should leave most well positioned for the ECB's review, especially those that took a tougher approach with asset quality.

There are other signs of stabilisation. There was some relief on net interest income from funding costs as banks trimmed relatively more expensive funding sources they originally tapped to reinforce liquidity and funding. These were mainly large term deposits from corporate customers. Operating costs also continue to fall and are still a top priority for management.

Intesa will report full-year results next week. We believe these will confirm that the bank has stronger capital and income generation capabilities than its Italian peers.

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