* Property asset valuations key source of uncertainty in ECB
* JPMorgan analysts apply 70 pct haircut on Italian banks'
* Banks' capital raising bill seen at up to 20 bln euros
By Lisa Jucca and Valentina Za
MILAN, March 7 The Bank of Italy is hiring up to
five real estate consultants to assess whether banks are
correctly valuing property used as loan collateral amid
depressed market prices, potentially forcing them to set aside
more cash against defaults.
Collateral valuations are one of the biggest sources of
uncertainty for Italy's banks as they prepare for a Europe-wide
review of the sector, starting this month, with seven banks
already planning to raise more than 7.5 billion euros ($10
billion) to shore up their balance sheets.
A doubling of bad debts in Italy since the end of 2010 means
that many experts are already saying the capital raising bill
could rise to as much as 20 billion euros with the question of
collateral valuations adding to the pressure.
Most banks are currently working on updating their
valuations of real estate collateral ahead of the European
Central Bank's review, industry sources say.
"The issue of the correct valuation of collateral is still
open and is a very sensitive issue," a senior banker told
Reuters on condition of anonymity.
"Banks have already written down the value of collateral but
they are wondering: is this enough? At the same time, excessive
prudence could have catastrophic consequences, as it would
further depress the real estate market," the banker added.
Small and medium-sized enterprises put up properties such as
warehouses and factories as collateral for loans but a 25
percent drop in Italy's industrial output since a 2008 peak,
thousands of company bankruptcies and a slide in property sales
have cut the price of these assets, in some extreme cases close
to zero, and made others hard to value.
To help with valuations carried out as part of the ECB
review, the Bank of Italy has put a tender notice up on its
website seeking real estate advisers.
The Bank of Italy is drawing up a short-list from 12
property firms admitted to the tender, an industry source said.
Another source said a final decision on who will be chosen was
Bidders include Prelios Valuations, part of property group
Prelios, and U.S. commercial property adviser CBRE
. Both companies declined to comment.
BIGGEST SOURCE OF UNCERTAINTY
The ECB is reviewing the balance sheets of the euro zone's
largest banks before it takes over as their supervisor in
November. The review is due to end in June and the banks will
then be subject to stress-tests. Overall results will then be
published in October.
The head of the European banking watchdog told Reuters this
week that euro zone banks could be forced to disclose any major
balance sheet gaps discovered in the health check before
Rocco D'Acunto, a partner at Bain in Italy, said he
expected fresh valuations of properties held as collateral
against loans to start impacting banks' balance sheets around
"We expect this might have a negative outcome in terms of
additional coverage and provisions for the banks, but it will
also increase transparency and help reduce the price gap that
now holds back sales of problematic loans," D'Acunto said.
Analysts at JPMorgan said in a note they were applying a 70
percent haircut on all collateral held by Italian banks.
"The reason why we apply such a big haircut to the value of
collateral is that this is the biggest source of uncertainty for
Italian banks, according to both banks' management and the Bank
of Italy," they said.
JPMorgan said that a 60 percent drop in the number of
property sales peak to trough during the crisis made real estate
Of the 15 Italian banks that are under scrutiny by the ECB,
only UBI Banca answered a Reuters request for comment
on its collateral valuations.
"Our group traditionally has a careful policy of
conservative coverage of non-performing loans," UBI said. "We
update every six months the fair value of collateral in a
further proof of the attention we pay to the coverage issue."
Italian banks have already set aside billions of euros to
cover loan-loss charges partly in response to the Bank of
Italy's demands to hike provisions since late 2012.
Bad debts are forecast to keep rising in coming years
topping 190 billion euros in 2015, from 156 billion euros last
December, even as the economy slowly returns to growth, banking
group ABI said.($1 = 0.7225 euros)