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

Italian banks’ bad loans may keep rising as the nation’s economy sputters, said Giovanni Sabatini, director general of the country’s banking association.

“Impaired loans, including non-performing and doubtful loans, will probably increase until mid-2014 because of the ongoing recession,” Sabatini, 53, 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. Bad loans of companies and and households 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 soured loans are a concern for lenders, they aren’t a systemic problem, according to Sabatini, who ruled out the need for a bad bank to take them off lenders’ books. He also excluded an aid request from Italian banks to the European Union.

“There isn’t a systemic issue related to asset quality,” he said. “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

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

“The risk of unfavorable developments over the next few years must be countered first of all by effective action to curb costs,” Bank of Italy Governor Ignazio Visco said in Rome today, referring to the country’s lenders.

Banks employ more than 314,500 workers across 33,000 branches, central bank data show. UniCredit SpA plans to cut 350 branches in the country by 2015, Chief Executive Officer Federico Ghizzoni told reporters today.

Sabatini said that operating costs should be reduced by 25 percent to come in line with the European average.

‘Dramatically Committed’

“Over the last 15 years, Italian banks were dramatically committed to cutting costs,” he 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.”

The nation’s banks, including the two largest -- UniCredit and Intesa Sanpaolo SpA -- are reorganizing branch networks and selling assets to strengthen their balance sheets and boost equity. UniCredit’s operating costs in the first quarter fell

1.8 percent from a year ago, 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 global central banks and regulators 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.

UniCredit declined as much as 1.6 percent and was down 0.9 percent at 4.33 euros at 3:14 p.m. local time, while Banca Monte dei Paschi SpA, the third-largest lender, rose 2.5 percent to

24.29 cents. The FTSE Italia All-Share Banks Index, which has gained 9.9 percent this year, dropped 0.8 percent.

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