March 18, 2020 / 6:15 PM / in 16 days

UPDATE 1-Bank of Italy says domestic banks more resilient than in 2008

(Adds details)

By Valentina Za and Stefano Bernabei

MILAN, March 18 (Reuters) - Italian banks are in much better shape than at the start of the global financial crisis of 2008-2009, having boosted their capital buffers and shed problem loans as well as some holdings of domestic government bonds, the central bank said.

In a letter to the New York Times written on Wednesday in answer to an article on the dangers facing the country’s banks, the Bank of Italy said that their core capital stood on average at 14% of total assets at the end of last year, double the level of December 2007.

Higher capital reserves allow banks to cope better with losses they are likely to face due to the coronavirus outbreak which is crippling economic activity and is expected to plunge the Italian economy into a deep recession, bankrupting companies and hurting banks’ balance sheets.

Broker Equita estimates Italian banks could withstand a tripling in default rates among companies without affecting their capital ratios.

Italian banks are made vulnerable by their exposure to the domestic economy, which even before the latest downturn had barely grown in a decade, and their holdings of the country’s debt, which runs at more than 1.3 times the national output.

With Italian yields spiking higher as investors dump riskier assets, the market value of banks’ sovereign holdings has been falling.

However, to shield their balance sheets from market swings, banks have also started classifying domestic bonds as assets held to maturity which they do not have to mark-to-market.

The Bank of Italy said Italian banks held 316 billion euros in domestic government bonds at the end of January, or 9.8% of total assets, after net sales worth 40 billion euros since May.

That is well below a 2015 peak of 403 billion euros, it said.

Italy’s banks have lost 47% of their value since Feb. 20 when the virus first emerged in Italy, slightly underperforming a 43% drop in European banks.

The Bank of Italy highlighted that large disposals of problem loans had helped the industry reduce impaired debt left behind by previous recessions and that the government had introduced tax incentives for further sales.

Italian banks have halved soured debt on their balance sheets from a 2016 peak of 360 billion euros but the economic slump now makes further sales more difficult.

Under a 25 billion-euro economic package Italy approved to soften the blow of the virus crisis on the economy, Rome plans to spend 857 million euros to ease 20 billion euros in bad loans disposals this year.

The Bank of Italy said the government would also cover part of the losses banks could face after a debt payment holiday granted to small businesses hit by the virus ends.

While it lasts, the moratorium prevents a deterioration in banks’ exposures to those borrowers - which must be performing to qualify for the measure. (Reporting by Valentina Za and Stefano Bernabei. Editing by Jane Merriman)

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