Italian bank Creval to shed bad loans as M&A beckons

MILAN (Reuters) - Italian mid-sized bank Creval said on Tuesday it would shed risky assets and streamline its business in an effort to become more attractive to a potential merger partner.

Creval, hit hard by bad debts after a deep recession in Italy, is trying to put itself in shape ahead of an expected wave of consolidation, especially among mid-tier banks.

Under a five-year plan unveiled by new chief executive Luigi Lovaglio the bank plans to put its bad debts into a separate unit and cut its exposure to domestic government bonds.

It expects roughly to halve its gross bad loan burden to below 6.5% of total lending by 2023, mainly by selling a further 800 million euros ($899 million) in problem loans. It has already sold around 4 billion euros in loans since 2016.

Following the lead of bigger rival UniCredit, Creval said it would put 1.9 billion euros in bad debts into the special unit and halve its holding of investment securities, more than two-thirds of which are Italian government bonds.

Creval, based in the Alpine Valtelline area north of Milan, said operating cost cuts and lower loan provisions would enable the bank to triple net profit over three years.

“The plan goes in the right direction in ensuring a sustainable profitability with a lower risk profile,” broker Equita Sim said in a research note, adding that revenue growth was uncertain.

Lovaglio, who made his name as the head of UniCredit’s former Polish business Bank Pekao, was appointed in February as part of a boardroom shake-up.

Creval raised 700 million euros in shares last year - nearly eight times its market value at that time - to replenish capital as it wrote off and sold bad loans. That created a heavy institutional shareholder base, fuelling market expectations of a merger deal.

CEO Lovaglio said the bank could sit down with interested parties about a merger, but it wanted to first spend two years implementing the new business plan.

In last year’s share issue, shareholders bought the stock at 10 euro cents, almost double the current price of 5.8 cents.

Creval aims to return to paying a dividend on 2020 earnings with a pay-out ratio of more than 50%.

The bank plans to keep its core capital above 14% of assets both in 2021 and 2023, compared with 14% at the end of March.

Reporting by Andrea Mandala; Editing by Valentina Za/Mark Potter/Jane Merriman