May 28, 2015 / 11:24 AM / 3 years ago

Fitch: Italian 'Bad Bank' Push Seems Credit Positive for Sector

(The following statement was released by the rating agency) LONDON, May 28 (Fitch) The push for a state-sponsored asset management company, or 'bad bank', solution to move impaired loans off Italian banks' balance sheets appears to be firming, encouraged by the IMF's remarks earlier this month. This could be credit positive for Italy's smaller banks, but only if loan transfers are sizeable enough to free up balance sheets and release resources to support economic growth, says Fitch Ratings. The Italian authorities are examining ways to repair bank balance sheets and, with new measures being considered, the chances of achieving some success on this front appear to be rising. Italian banks' balance sheets are heavily weighed down by impaired loans, of which the riskiest portion are the 'sofferenze', or doubtful loans, totalling EUR197bn (gross) at end-2014. Together with our estimate for watchlist and restructured loans of EUR140bn, total distressed loans could have reached 17% of sector loans at end-2014. In our view, the sovereign is unlikely to commit significant resources to a bad bank, but may support other measures such as the extension of additional state guarantees, for example, on securitised portfolios of impaired loans, provided this does not infringe on EU state-aid rules. This might stimulate the market for distressed loan sales. Other possible measures include accelerating provisioning and write-off methods to meet international standards, improvements to the insolvency regime, standardisation of restructuring guidelines and speeding up out-of-court settlements to allow quicker recoveries. The idea of a state-sponsored bad bank has, until recently, met with resistance from the general public, largely because it might put additional strain on public finances in a country already facing exceptionally high sovereign indebtedness. However, Fitch now assesses the likelihood of a solution involving a bad bank as higher than before, thanks both to encouragement from the IMF and to the ability to reduce the cost of the bad bank project through the other measures now being considered. Italy's leading banks, Intesa Sanpaolo and UniCredit, have, over the past two years, established high loan loss reserves and segregated their legacy non-performing exposures into actively managed non-core divisions. The sense of urgency among the two large banks to find a state-sponsored solution for offloading distressed assets is therefore low. Some of the larger medium-sized banks have teamed up with external credit collectors to increase recoveries. The country's smaller banks, which hold significant unreserved distressed loans, stand to gain from a bad bank solution. Private-sector initiatives embarked on by these banks to alleviate the problem never materialised, largely because portfolios of impaired loans offered for sale by individual banks were too small to attract meaningful investors; bundling portfolios across banks also proved difficult because underwriting standards and loan characteristics differed considerably. Disagreements on pricing also slowed down negotiations. Access to state resources to stimulate loan sales might overcome some of the hurdles. Unreserved 'sofferenze' loans in the sector totalled EUR81bn at end-2014, concentrated in corporate loan books. Cleaning up loan portfolios could boost credit flows, particularly to the large SME sector where access to credit can be scarce and expensive. But the sheer volume of unreserved impaired 'sofferenze', watchlist and restructured loans - equivalent to 5% of Italy's GDP - hinders a quick solution. If bad loans had to be written down before being transferred off balance sheets, capital ratios might suffer because banks are not generating sufficient operating profits to absorb additional provisions. When failed Spanish banks transferred distressed loans into SAREB, they were required to write them down beforehand, resulting in heavy losses. SAREB loans were backed by real estate, which, in theory, simplifies valuations, but this is not the case in Italy where distressed loans are largely SME exposures. Ireland's distressed loan manager, NAMA, also dictates values for all its managed impaired loans. SAREB is 45% and NAMA is 49% state-owned. Contact: Francesca Vasciminno Senior Director Financial Institutions +3902 8790 87 225 Fitch Italia Via Privata Maria Teresa, 6 Milan 20123 Douglas Renwick Senior Director Sovereign Ratings +44 20 3530 1045 Fitch Ratings Limited 30 North Colonnade London E14 5GN Janine Dow Senior Director Fitch Wire +44 20 3530 1464 Fitch Ratings Limited Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Related Research 2015 Outlook: Italian Banks [808668 - 03-DEC-2014] here Italy [865048 - 27-APR-2015] here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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