Italian Bad Loans Seen Rising to Mid-2014, ABI’s Sabatini Says

Bad loans at Italian banks may keep rising for the next year as the nation’s economy sputters, the director general of Italy’s banking association said.

“Impaired loans, including non-performing and doubtful loans, will probably increase until mid-2014 because of the ongoing recession,” Giovanni Sabatini, director general of the ABI, said in an interview in Rome yesterday. “Italian banks are commercial banks, so they are strongly correlated to the economic cycle.”

Italian companies and households are struggling to repay debts, forcing banks to set aside more money for soured loans. Corporate and household bad loans rose to a record 131 billion euros ($171 billion) in March, according to ABI data. Gross non-performing loans as a proportion of total lending increased to 6.6 percent from 5.4 percent a year earlier.

While bad loans are a concern for lenders, they aren’t a systemic problem, said Sabatini, who ruled out the need for a bad bank to take soured loans off lenders’ books. He also excluded any request for assistance from Italian banks to the European Union.

“There isn’t a systemic issue related to asset quality,” said Sabatini, 53. “Each bank is dealing according to its own policy, and I think that for the time being the data exposed in banks’ balance sheets give a clear and transparent representation of the situation of the asset quality.”

The Rome-based ABI is a trade association representing Italy’s 699 banks.

Cost Cutting

The Italian banks’ main issue is profitability, according to the ABI. Banks need to improve productivity and further cut costs to boost profit as Italy’s longest recession in two decades depresses interest rates and squeezes margins.

“Over the last 15 years, Italian banks were dramatically committed to cutting costs,” Sabatini said. “There is still a gap between the costs of lenders in the country and the European average, so I see all types of costs, labor costs, and operating costs will be cut in the future.” Operating costs should be reduced by 25 percent to come in line with the European average, Sabatini said.

According to plans released in the past two years, banks were seeking to trim more than 11,000 positions by 2015. Lenders employ more than 314,500 workers in the country across 33,000 branches, Bank of Italy data show.

Sound Capital

The nation’s banks, including the two largest -- UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) -- are cutting costs, reorganizing branch networks and selling assets to strengthen their balance sheets and boost equity. UniCredit’s operating costs in the first quarter declined 1.8 percent from a year earlier, while Intesa’s costs were down 5 percent. Both banks are based in Milan.

“Italian banks are sound and I don’t see a capital shortfall for lenders in the country,” Sabatini said. “They already meet Basel III capital requirements.”

The Basel Committee on Banking Supervision, which represents central banks and regulators in 27 nations and sets capital standards worldwide, will force lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, by 2019.

Under current rules, known as Basel 2.5, Italian banks have a core tier 1 capital ratio -- a measure of the ability to absorb losses -- of about 10 percent, in line with the European average, ABI data show.

To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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