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Italy Banks May Face Up to $20 Billion Capital Gap, ABI Says

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Feb. 10 (Bloomberg) -- Italian banks, which have raised money, sold assets and cut costs to boost capital, may face a shortfall of as much as 15 billion euros ($20 billion) as regulators scrutinize their balance sheets this year.

“We are confident that the Italian banks will pass the stress test exercise without major problems,” Giovanni Sabatini, general manager of the Italian banking association, said in an interview in Rome. He agrees with an estimate made by the Bank of Italy of a potential capital shortfall of 10 billion euros to 15 billion euros. “That’s manageable.”

Assets of 15 Italian lenders, including UniCredit SpA and Intesa Sanpaolo SpA, are being reviewed by the European Central Bank as part of a comprehensive assessment before it takes over banking supervision for the euro area in November.

“There are several options for lenders to fill the eventual capital gap found during the scrutiny and most will depend on the timing imposed by the ECB,” said Sabatini, 54. Those alternatives may include share sales, disposals and additional deleverage, he said.

The stress test is the third and final stage of the ECB’s Comprehensive Assessment, an evaluation of whether lenders can survive a downturn. The first phase identified potentially problematic loans and the second stage is the Asset Quality Review to identify any capital shortfalls.

Bad Loans

“It’s possible that lenders, whose capital ratio is about an 8 percent threshold, could consider strengthening their capital base,” according to Sabatini.

Banco Popolare SC, Italy’s fourth-largest bank, said last month it will sell as much 1.5 billion euros of stock after it reported bad loans in the fourth quarter of about 1 billion euros. Banco Popolare is the third lender in Italy to announce a share sale before facing the ECB balance sheet review, following Banca Monte dei Paschi di Siena SpA and Banca Popolare di Milano Scarl.

The nation’s banks are bolstering finances after Italy’s longest recession in two decades and low interest rates squeezed profit margins. The asset quality review and higher capital requirements are also forcing banks to trim balance sheets, pare lending and set aside more money to cover risky loans.

Asset Quality

“Italian banks have been under strong pressure from the Bank of Italy to anticipate the results of the asset quality review and to do their homework well in advance,” Sabatini said. “So, we will probably see some additional provisioning in the fourth-quarter results.”

Italian banks’ non-performing loans are among the highest in Europe. Non-performing loans as a proportion of total loans rose to 9.1 percent in December, almost 7 percentage points higher than at the end of 2008, Governor Ignazio Bank of Italy Governor Ignazio Visco said in a speech Feb. 8.

Italian banks are weighing options for separating bad loans, which have reached record levels and are curtailing their ability to lend. By splitting off some bad debt, the banks would also help eliminate any capital shortages that might arise from the ECB’s asset quality review and stress tests this year.

“Banks may consider the disposal of non-performing loan portfolios, or some of them can join together and set-up a vehicle,” Sabatini said. “These are individual choices to strengthen capital. We don’t believe that a systemic bad bank in the Spanish style is the appropriate recipe for Italy, because this isn’t a systemic problem.”

Bad Bank

The Rome-based central bank isn’t ruling out setting up a bank to take over non-performing loans in order to increase funding capabilities for the nation’s lenders, Visco also said over the weekend. The Italian Treasury said today in an e-mailed statement that it favors the bad bank idea as it would help free up credit for consumers and businesses. It also said that such an initiative should not require the use of Italian nor European taxpayers’ money.

“Further consolidation and more comprehensive reform of the Italian banking system is essential in getting credit flow again and kick-starting economic growth,” Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc in London, said in a note to investors. “A bad bank at the national level could speed up the clean-up process, improve bank valuation and help lure foreign investors back.”

While some analysts expect a new wave of merger and acquisitions among medium and small banks to increase efficiencies, Sabatini is skeptical.

“We have to wait for results of ECB stress tests and more clarity in the regulatory framework,” he said.

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net; Flavia Rotondi in Rome at rotondi@bloomberg.net

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