Italy’s UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) may need to set aside an extra 5 billion euros ($6.8 billion) for bad loans as the European Central Bank prepares an asset quality review, Barclays Plc (BARC) said.
The country’s banks covered 39 percent of bad loans with provisions compared with a European average of 58 percent, Barclays analysts Antonio Rizzo and Rohith Chandra-Rajan said in an e-mailed report from London today. UniCredit and Intesa, the two biggest banks, are better covered than the country’s average, he said.
Italian banks are struggling to improve credit quality as the longest recession in more than 20 years makes it harder for firms and households to repay their debts. The economy is expected to contract 1.7 percent this year, according to the average estimate of 43 economists on Bloomberg, after shrinking 2.4 percent in 2012.
“With the asset quality review looming, Italian banks are under pressure given their sizeable stock of non-performing loans and relatively lower levels of coverage,” Rizzo and Chandra-Rajan said. “Moreover, recent actions by the Bank of Italy suggest that coverage will increase further.”
The European Central Bank, which will take over supervision of the banking system next year, is due to conduct the review of the continent’s banks that may lead to further writedowns and capital raising.
Though manageable, the extra provision requirements at UniCredit and Intesa will “shed an additional 26 percent of pre-provision profits, on average,” Barclays said.
UniCredit said it set aside 1.67 billion euros for bad loans in the second quarter compared with 1.83 billion euros a year earlier as it doubled profit to 361 million euros. Intesa’s loan-loss provisions increased to 1.4 billion euros from 1.08 billion euros in the period.
Italian banks will be the “hot spot” for the ECB’s review because they are the most vulnerable in Europe in terms of impaired loans, which represent 116 percent of tangible equity, Societe Generale SA (GLE) said in an e-mailed report this month. The lenders have a total capital shortfall of 8 billion euros to 21 billion euros assuming 20 percent to 40 percent of bad loans are cleaned up, it said.
The Bank of Italy ordered banks to set aside provisions amounting to 43.5 percent of non-performing loans in the fourth quarter of last year. The ratio had stood at 31 percent three months earlier. The monitoring of banks’ provisioning and asset quality is continuing, the bank said in July.
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.
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