April 30, 2020 / 4:11 PM / a month ago

Bank of Italy warns of financial stability risks from COVID-19 crisis

MILAN, April 30 (Reuters) - The COVID-19 pandemic has significantly increased financial stability risks in Italy, the central bank warned on Thursday, derailing a clean-up process in the banking industry which had cut problem loans to 6.7% of total lending last year.

Italian banks are now reviewing bad loan disposal plans for 2020 to take into account the impact of the pandemic, which will drive higher defaults and affect lenders’ ability to offload them on the market.

Lockdown measures to curb contagion are delaying recoveries on such loans, possibly curbing future demand from investors.

Sales totalled 31 billion euros ($34 billion) last year, the Bank of Italy said, helping to drive the stock of soured loans down to 147 billion euros from a 2015 peak of 360 billion euros.

Out of that total, some 65 billion euros are ‘unlikely-to-pay’ (UTP) loans which are not yet in default and for this reason provisions only cover 41% of their value, compared with 64% on the worst-performing loans.

As the economy slides into a deep recession tipping vulnerable companies over the edge, banks are likely to face losses on their UTP loans.

They would need to book 15 billion euros in additional writedowns to bring the coverage of UTP loans in line with that on defaulted loans. That amount would be above yearly profits for the sector which totalled on average 12 billion euros in the past three years, the Bank of Italy said.

Higher loan losses will compound the challenge for banks’ profits posed by low interest rates and shrinking fees from the sale of financial products given market disruption, the central bank said in the twice-yearly report.

$1 = 0.9136 euros Reporting by Valentina Za and Stefano Bernabei, editing by Giulia Segreti

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