Time to Remove Italian Banks from List of Global Worries
Bad loans threat receding as sector finally gets cleanup underway
By Paul J. Davies
COMING CLEAN
Italian Banks´ total bad and doubful debts before loss provisions
Here’s one less thing for global investors to worry about: Italy’s once-tottering financial system isn’t nearly as scary as it was.
About €300 billion ($348 billion) in bad and doubtful loans is still big figure—and almost one-third of Europe’s total—but a banking cleanup through sales, higher provisions and capital injections is well under way. Fears that Italy’s banks could be the source of a wider financial panic are finally fading.
Accelerating economic growth this year and pressure from European supervisors have been carrot and stick for the sector, while government-led bank rescues in the summer—after a long wait—dialed down the risk of systemic collapse.
A string of midsize lenders have launched recovery plans in recent months, including just this week Credito Valtellinese and BPER Banca, after several of Italy’s biggest offenders were persuaded or pushed into dealing with their balance sheets this year.
UniCredit , Italy’s biggest by assets, led the way, raising €13 billion in fresh equity and selling €18 billion in bad loans. It was followed by state-backed recapitalizations or liquidations for Banca Monte dei Paschi di Siena, Italy’s oldest bank, and two smaller but deeply troubled banks from the region near Venice.
The upshot of these actions is that €62 billion of toxic loans are already being cut out of the sector. Meanwhile, UniCredit and Intesa Sanpaolo , Italy’s two largest and strongest lenders, are left with €105 billion of the remaining pile. They will further cut these through sales and work outs and their size means that these loans are now worth just 11% and 13% of total loans respectively.
Those levels are above the European average of about 5% but are much improved. As a whole, the sector wide gross bad-loan ratio, before any provisions, was down to 15% at the end of the second quarter, according to the most recent national data, from 16.5% in summer 2016.
Further, Italy and Europe’s strengthening economy means fewer good loans are turning bad. Intesa said this week that new bad loans in the third quarter were the lowest quarterly inflow since 2007. UniCredit also reported a big decline Thursday and others have this month, too.
Harsh standards from European regulators on the treatment of new bad loans might be delayed after questions over their legal basis, but this doesn’t really matter: Italy’s banks now know they can clean up their act and have got the message that supervisors will find a way to penalize them if they don’t.
In another year’s time, much of the heavy lifting ought to be done and Italian banking will no longer be the threat it has been for too long.
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