Italy Banks Face Capital Risk Amid Low Profit, IMF Says

Italian banks’ capital buffers risk being depleted due to poor asset quality and weak profitability should an economic recession persist, the International Monetary Fund said.

Twenty of Italy’s banks, which account for about one-third of the nation’s banking industry, will see their Basel III core capital measures slide by as much as 14 billion euros ($19 billion) below a key global benchmark in 2015 should an economic downturn continue into next year, the Washington-based fund said in an e-mailed report published today.

Banks in the euro region’s third-largest economy are struggling to improve asset quality and profitability as the longest recession in more than 20 years makes it harder for businesses and households to repay loans. Italy’s economy may contract 1.7 percent this year, according to the average estimate of 43 economists surveyed by Bloomberg, after shrinking 2.4 percent in 2012.

“Addressing the buildup of non-performing loans since the crisis will remain a challenge for Italian banks well after the recession,” the IMF said. Strengthening provisioning practices and creating a deeper distressed-debt market would facilitate the disposal of the credit, it said.

The capital shortfall of banks could widen should they be forced to increase provisions or reclassify loans as a result of upcoming European Central Bank-led asset quality reviews, the IMF said. Accelerating the write-off of bad loans would improve profitability and reduce funding costs, increasing confidence in the industry and helping to increase lending, the IMF said.

‘Hot Spot’

Italy’s economy will probably expand by 0.7 percent next year, the IMF said, confirming its outlook published in July. Under the adverse scenario applied to banks, the economy would contract 3.9 percent this year and by 0.7 percent in 2014, it said.

Italian banks will be the “hot spot” for the ECB review due to their sizable stock of bad loans, Barclays Plc (BARC) said in a report today. UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), the country’s two biggest lenders, may need to set aside an extra 5 billion euros in provisions to cover default risk, it said.

Non-performing loans rose to 7.2 percent of total lending in July from 5.7 percent a year earlier, the Italian banking association ABI said two weeks ago. The bad loans grew 22 percent to 139.8 billion euros in the period, it said.

Business confidence in Italy rose to a two-year high in September, a sign of optimism that the economy will emerge from recession. The manufacturing-sentiment index climbed to 96.6 from a revised 93.4 in August, the Rome-based national statistics office Istat said today.

To contact the reporters on this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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