Italy Bank Non-Performing Loans at Turning Point, Visco Says

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  • Sale of four troubled lenders scheduled during summer
  • Reduction in NPLs gradual, banks to face low profitability

Italy’s economic recovery is helping banks reduce non-performing loans that are a legacy of the country’s "long and deep recession," said Bank of Italy Governor Ignazio Visco, a member of the European Central Bank’s governing council.

"We have now reached a turning point,” Visco said in the text of a speech delivered on Tuesday at the central bank’s annual meeting in Rome. The moderate economic recovery under way since last year is being reflected in a significant decline in the flow of non-performing loans.”

Authorities are racing to shore up a financial system burdened by more than 360 billion euros ($400 billion) of troubled loans, equal to about a quarter of Italy’s gross domestic product. Prime Minister Matteo Renzi has been pushing a package of reforms to modernize Italy and spur growth since he took office in February 2014. He has pressed cooperative lenders to become joint-stock companies, encouraging mergers to help reduce duplication and boost profitability.

"The actual situation of the individual banks will be assessed and the most appropriate measures identified considering the context," he said in the remarks. "For the banks that are in difficulty, swifter and more resolute cost containment is indispensable.”

Italian banks profits have been squeezed by the recession, low interest rates and bad loans, Visco said. Lenders need to further reduce branches, cut operating costs and improve efficiency. He called for further consolidation in the industry to create economies of scale and scope.

Atlante Fund

The non-performing loans market will "receive a boost from the investments of Atlante," Visco said, referring to the state-orchestrated bank-rescue fund. But he warned the reduction in bad loans will be gradual, given the large volume of bad assets and low earning capacity among banks.

"Even with relatively modest resources for the moment, Atlante can demonstrate that buying bad debts at higher prices than those now offered by specialized investors can in fact produce attractive returns," the bank governor said.

Government and bank officials last month agreed to set up Atlante to buy shares of troubled lenders seeking to raise capital and help them securitize and sell bad debt. In its first action, the fund bought 1.5 billion euros of shares of Banca Popolare di Vicenza SpA after investors balked. It may have to do the same with Veneto Banca SpA if investors stay away from its upcoming 1 billion-euro IPO, according to Intesta Sanpaolo SpA Chief Executive Officer Carlo Messina, whose bank is coordinating the sale.

ECB Coordination

Italy and the European Commission, the European Union’s executive arm, in January agreed on a plan to help banks offload bad debts, ending months of negotiations on how to ease the burden on the nation’s lenders while staying on the right side of the bloc’s restrictions on state aid.

The ECB is increasing pressure on Italian lenders to clean up their balance sheets and tackle troubled and defaulted loans that are undermining lending. Visco said European supervision authorities are aware that reducing non-performing will be gradual.

Supervisors requested a strict timetable for reducing deteriorated credit as part of its conditions for approving the merger of Banco Popolare SC with Banca Popolare di Milano Scarl. Veneto Banca, Banca Monte dei Paschi di Siena SpA and Banca Carige SpA face deadlines to sell stock or reorganize while four lenders rescued last year are up for sale.

Italy in November approved a 3.6 billion-euro plan to place the four lenders under special administration with the Bank of Italy, clearing the way for their rescue. The rescue rattled investors because the authorities imposed losses on bondholders, many of whom were unaware of the risk they had assumed.

Visco Tuesday confirmed reports that the sale of the four banks is at an advanced stage and that the process is scheduled to be completed during the summer.

"Banking crises are always delicate to navigate for supervisory authorities," Visco said.