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MILAN, July 21 (Reuters) - The European Central Bank will examine on Thursday a plan by Monte dei Paschi to sell bad loans, three sources close to the matter said, as Italy’s third-largest bank works to comply with a regulatory request to strengthen its balance sheet.
ECB supervisors have told the Tuscan bank to cut its non-performing loans by 9.6 billion euros ($10.6 billion) over the next two and a half years, a much faster pace of reduction than envisaged in the bank’s current strategic plan.
The bank is expected to fare poorly in European banking stress tests whose results will be unveiled on July 29.
By that date it wants to have a plan to sell its bad debts and cover the ensuing capital shortfall to cushion any potential negative market reaction. The stock has already lost 74 percent this year against a 50 percent drop for the sector in Italy.
A source familiar with the matter said the bank had submitted to the ECB a plan that envisaged quickly selling its entire portfolio of loans to borrowers deemed insolvent.
Those loans are currently valued in the bank’s books at 37 percent of their face value, or 10 billion euros.
The source said they could be sold at between 33 and 27 percent of their nominal value — translating into a loss of between 1 billion and 2.7 billion euros.
The ECB and Monte dei Paschi declined to comment.
To fill the capital shortfall, the plan envisages a cash call that could be underwritten either by a consortium of banks that is still in the making or by the Italian state if this was allowed by European authorities, the source said.
Monte dei Paschi has been discussing the sale of its bad loans with Atlante, a bank rescue fund hastily set up in recent months to help Italy’s weakest banks.
Monte dei Paschi, whose balance sheet has been wrecked by a costly acquisition and risky derivatives deals, has long been seen as the weak link in Italy’s troubled banking system.
$1 = 0.9082 euros Reporting by Paola Arosio, John O'Donnell; Editing by Mark Bendeich