Italy's banks ready to sell up to 16 bln euros in bad loans by 2016

MILAN, July 8 Tue Jul 8, 2014 8:37am EDT

MILAN, July 8 (Reuters) - Italian banks are preparing to sell between 10 billion euros and 16 billion euros of bad loans over the next two years to free up capital to support new lending to companies and households and to improve profits, a survey by Deloitte showed.

This would represent up to 10 percent of a record 166 billion euros ($226.43 billion) of sour loans on the banks' books built up as a result of Italy's two-year recession, its worst in 70 years.

The bad debt sales would mark a step in the right direction, but there is still a long way to go. Reluctant to book too many losses, the country's banks have so far sold only 5.7 billion euros of non-performing loans since the beginning of 2013, a fraction of the total.

Most banks expect sour loans to continue to rise until 2016 according to the survey by Deloitte of Italy's biggest 25 commercial banks that was shown exclusively to Reuters.

The rise in bad debts reflects the impact of Italy's weak economy that makes it difficult for retail clients and small companies to repay loans on time.

Deloitte expects Italy's non-performing loans, the worst-quality debt, to rise to 188.5 billion euros in 2016.

The bad loans are a big problem because banks need to set aside money against them that could otherwise be used to back new loans to help to revive the economy.

In April, for example, lending to companies by Italian banks fell by 4.4 percent, Bank of Italy data showed.

One way to reduce the pile of bad debts is to sell them below book value to investors who can make money if the borrowers' fortunes improve over time.

In Deloitte's survey, all banks said they had been contacted by investors willing to buy their bad loans and three-quarters said they had completed a non-performing loan (NPL) trade in the past two years.

"The bid-ask spread is the main barrier preventing the sale of NPL portfolios. The gap used to be between 20 and 30 percent, but it is now narrowing," Antonio Solinas, Head of Corporate Finance Advisory for Italy at Deloitte, said.

A massive balance sheet clean up by Italian banks to prepare for a Europe-wide review of banks' asset quality has brought down the book value of the loans and is expected to spur more sales.

"With the European asset quality review there will be a great opportunity to purchase NPL portfolios after September and October," Davide Serra, CEO of hedge fund Algebris, said.

But he also estimated that bad loans in Italy, if calculated with strict criteria, could reach 250 billion euros.

Unlike Spain and Ireland, Italy has not stepped in to ease the banks' bad debt burden by creating a state-backed "bad bank" to take on problems loans. As a result, the banks have had to try to tackle the issue themselves.

Intesa Sanpaolo, Italy's biggest retail bank, has been working on setting up its own bad bank. UniCredit earlier this year sold 700 million euros of non-performing loans to Anacap Financial Partners. In December, the bank announced a sale of bad loans worth 900 million euros ($1.2 billion) to private equity fund Cerberus European Investments.

In June, Banca Monte dei Paschi di Siena agreed to sell 500 million euros of bad loans to U.S. private equity firm Fortress Investment Group.

This month, Banca Ifis, a mid-sized bank that has aggressively pushed into the credit management market, bought a 1.26 billion euro portfolio of unsecured loans, the biggest deal of this kind it has done so far.

Unsecured loans, small sums taken out by retail investors that do not carry a guarantee, are usually sold at a heavily discounted price of around 90 percent of their nominal value.

Such trades are less complicated than sales of loans secured on property because real estate repossessions can take up to 10 years in Italy.

Last month, the International Monetary Fund said it was encouraged by signs that Italian banks were willing to deal with the problem of their bad debt.

"But NPLs continue to rise, reaching a record level of 16 percent of loans, as the slow pace of write-offs has not kept up with the inflow of new bad loans," it said. ($1 = 0.7331 Euros) (Reporting by Lisa Jucca. Additional reporting by Maria Pia Quaglia. Editing by Jane Merriman)

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