Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

Italy's bank chiefs gathered in Rome this week to discuss what could be done to solve the industry's woes. So far, they have announced precisely nothing.

The silence reflects a stalemate that can't be broken unless there is a major, but unlikely, shift from Italy's banks or the European authorities.

At the root of the problem are Italian lenders' 360 billion euros ($409 billion) of non-performing loans. As a proportion of total lending, the country's banks have more non-performing loans than in any other major European economy.

Debt Woes
Italian banks have some of the highest non-performing loan ratios in Europe
Source: Bloomberg Intelligence

That prevents them from issuing new loans to promote economic growth and stands in the way of consolidation -- which, it is hoped, would create more profitable banks.

There is no easy solution.

Governments in other countries, like Ireland, that were saddled with bad loans in the wake of the financial crisis created state-backed bad banks that took the most troublesome debt off lenders' books, allowing the banks to continue lending. Big asset managers then bought the loans at a discount from the bad bank.

In Italy, the crisis was not so deep and there was no state-backed cleansing of loan books. Since then, the Italian economy has struggled and more loans have soured -- but European Union authorities have blocked further state aid for the banking industry.

That leaves Italy's banks trying to find buyers for their bad loans themselves, something that has proved difficult. The lenders have already marked down their loan books a lot -- the industry has taken provisions covering about 45 percent of total non-performing loans, according to Barclays -- but even at that level, buyers aren't interested, and sales of Italian debt have been meager.

A plan concocted by Italy's government in January offered insurance, at market rates, against losses on securitized parcels of bad loans. It failed to generate much interest from investors, partly because nobody understood what the market rate really was, and partly because potential buyers were unconvinced about how the plan would work in practice.

There are other solutions, but none are especially workable.

Intesa's Pain
The lender's shares are down 30% over the past 12 months
Source: Bloomberg

A relatively strong Italian lender -- Intesa, say -- could buy a weaker domestic peer if the price were low enough. The argument goes that combining a good balance sheet with a bad one creates a mediocre one that can at least support more lending and help economic growth that benefits everyone. The problem, though, is that the acquirer's shareholders would likely balk at the idea and there's little incentive for management to take the risk. It's not clear Italian regulators would allow an overseas buyer to step in, either.

Another option being discussed, according to Bloomberg News's Francesca Cinelli and Sonia Sirletti, is the possibility of a fund backed by foundations, pension funds and others that could help recapitalize banks. But again, this looks difficult given European rules on state-sponsored bailouts.

Plans to inject more capital into some of the banks are increasingly crucial. A proposed 1 billion-euro initial public offering of Veneto Banco has been dogged by concerns it won't draw enough backers. And Banco Popolare must pull off a 1 billion euro share sale to win European Central Bank approval for its planned merger with Banca Popolare di Milano -- a move that could be a bellwether for further consolidation.

Down South
European bank shares have struggled this year, but Italian banks have fared worse than most
Source: Bloomberg

Meanwhile, Italian bank stocks are significantly under-performing European peers and the Italian market as a whole so far this year. A solution to the bank loan problem would flip that trend on its head. But it remains just a distant possibility.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

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