MILAN Jan 21 Italian banks will need to set aside as much as 42 billion euros ($57 billion) in new provisions for credit losses by the end of 2014 and some may have to raise additional capital, rating agency Standard & Poor's said on Tuesday.
It said a full recovery for the sector, which was badly hit by the euro zone debt crisis and is struggling with rising bad debts, remained a long way off because of Italy's weak economic prospects and continued deterioration in asset quality.
S&P expects the stock of bad loans at Italian banks to rise to 310 billion-320 billion euros by the end of this year, or about 18 percent of customer loans.
That will force the lenders to set aside an additional 32 billion-42 billion euros to cover for credit losses between June 2013 and December 2014, according to the agency's estimates. Combined loan loss reserves stood at 111 billion euros at the end of June last year.
"The large stock of NPAs (non-performing assets) is likely to remain a burden for Italian banks as a protracted economic recovery and rising unemployment could lead to further asset quality deterioration," S&P said in a report.
It said that while most banks should be able to generate enough profits to cover for the rise in loan loss provisions, some may require additional capital.
The agency did not specify which banks may have to raise capital, but said the two largest lenders - Intesa Sanpaolo and UniCredit - as well as most cooperative banks were well positioned to meet new regulatory requirements known as Basel III.
Two mid-sized banks that have already announced plans to boost their financial strength at the Bank of Italy's request - Banca Carige and Banca Popolare di Milano - may struggle to do so within the prescribed timeframe because of their weak corporate governance, it said.
Popolare Milano, a cooperative lender, has delayed a 500 million euro capital increase by three months to July because of governance problems that led to the sudden departure of its CEO at the end of October.
Carige, whose top investor is a banking foundation, has been trying for months to sell its insurance assets to help plug an 800 million euro capital shortfall by March and avoid a big rights issue.
S&P also cited still-high costs of funding and modest profitability as two problems for Italian banks, which are having difficulty emerging from the longest post-war recession, now showing signs of ending, in the euro zone's third largest economy.
It said the weaknesses of the Italian banking industry could "become more evident" during a sector-wide health check-up by the European Central Bank to be completed by November.
"We believe there are some downside risks to our expectations and that the difficult domestic economic and operating environment may be more detrimental to some Italian banks' creditworthiness than we currently anticipate," it said.
"As a result, the outlook on the long-term ratings on most of the Italian banks that we rate is negative." ($1 = 0.7383 euros) (Reporting by Silvia Aloisi; Editing by Anthony Barker)