* Intesa Sanpaolo and UniCredit in talks with KKR - sources
* Preliminary talks concern restructured loans - sources
* The two had 11 bln euros gross restructured loans end-Sept
By Gianluca Semeraro
MILAN, Feb 6 Italy's top two banks, Intesa Sanpaolo and UniCredit, are in preliminary talks with U.S. investor KKR about setting up a fund to hold some of the lenders' problematic loans, two sources close to the matter said.
Such a vehicle would help both banks get rid of a chunk of bad debts and clean up their balance sheets as European regulators conduct a health check of euro zone lenders.
It would also potentially allow KKR to benefit from any recovery in the Italian economy.
"There are preliminary talks about a possible plan to create a fund between Intesa, UniCredit and KKR," said one of the sources on Thursday, following a report in La Repubblica newspaper. "There are no numbers yet and no documents have been exchanged."
A second source said the initiative targeted so-called restructured loans, which have already been renegotiated. At the end of September, these totalled 8.1 billion euros ($11 billion) at UniCredit and 2.5 billion euros at Intesa before writedowns.
La Repubblica said KKR would invest in the vehicle, while the two banks would have a minority stake allowing them to take the loans off their consolidated balance sheet.
Intesa and UniCredit declined to comment. KKR was not immediately available for comment.
Both banks are seen leading a balance sheet clean-up by Italian lenders, with a major focus on bad loans, which are a big concern for banks as they grapple with the fallout from Italy's longest post-war recession.
Italy has lagged behind Spain and Ireland in restructuring its banks, analysts say, but the looming asset quality review by the European Central Bank is stinging lenders into action.
Non-performing loans at Italian banks, the ones least likely to ever be repaid, have reached 150 billion euros and are expected to keep rising through 2016 even as the economy shows the first signs of a pick up, according to think tank Prometeia.
A source close to the situation said earlier this week that Intesa, Italy's biggest retail lender, was working on plans to set up an internal "bad bank" for its souring loans. On the same day, UniCredit announced the sale to a private equity fund of a batch of bad loans, its second such deal since December.
Analysts say that separating problematic assets from good ones will help investors gauge the underlying profitability of core businesses and also make it easier to sell the non-performing loans.
Both the Bank of Italy and the International Monetary Fund have said Italy does not need a system-wide bad bank like the ones set up in Ireland and Spain at the height of the euro zone debt crisis, so analysts expect individual banks to engineer their own solutions to tackle souring loans.