January 11, 2018 / 6:58 PM / a year ago

Intesa's change of plan on bad loans driven by ECB tough line - sources

MILAN (Reuters) - Intesa Sanpaolo’s (ISP.MI) sudden change of plan for tackling bad debts was driven by the European Central Bank’s tough line on problem loans, sources familiar with the matter said.

FILE PHOTO - The main entrance of Palazzo delle Colonne at the Intesa San Paolo bank is seen downtown Milan, Italy, November 13, 2017. REUTERS/ Stefano Rellandini

Intesa on Wednesday said it was in talks on a possible sale of its debt collection business and a bad loan portfolio to Swedish credit servicing group Intrum Justitia (INTRUM.ST).

This marked a change of direction for Intesa, which had been tackling bad debts in-house to boost recoveries and avoid sales that are normally done at a loss and burn through capital.

This strategy contrasted with rival UniCredit (CRDI.MI), which spun off its bad loan business in 2015 and last year completed a record 16 billion euro disposal.

One of the sources said Intesa would only sell part of its debt recovery business, which was set up in 2014 and has grown to employ 800 staff.

Though Intesa’s debt recovery unit was often held as a model for other banks, it still had to contend with Italy’s slow moving judicial system, where recoveries take years. Bankers say the ECB has stepped up pressure on banks to speed up the clean-up of their balance sheets.

The ECB in October proposed tougher rules on new loans turning sour and said it would also review its stance on existing bad debts.

Several sources said the prospect of tighter EU regulation on bad debts and the ECB’s unyielding stance had triggered Intesa’s move. The ECB declined to comment.

According to one banker the ECB wants Italian banks to quickly lower their soured loan ratios to below 10 percent and not too far from the European average, which is 4.5 percent.

Despite writing down and selling off tens of billions of euros in bad debts in recent years, Italian banks still hold soured debts equivalent to around 15 percent of total loans.

Intesa’s bad loan ratio stood at 13 percent at the end of September and the bank aims to cut it to 10.5 percent by 2019. CEO Carlo Messina has said the bank could improve that target under a new business plan due in February.

UniCredit in December lowered its 2020 target to 7.8 percent and even smaller rival Credito Valtellinese (PCVI.MI) next month will to raise 700 million euros in cash to cut its bad loan burden below 10 percent in 2020.

Equita SIM’s analyst Giovanni Razzoli said Intesa’s decision had other advantages.

“Even aside from any possible regulatory pressure, Intesa’s move makes a lot of sense from a capital management point of view,” he said. “It’s a strong bank which has got investors used to a steady stream of capital gains that boost profitability and support dividends.”

“There is strong appetite at present for debt servicing businesses in Italy and Intesa can take advantage of really high market valuations for such assets. It could be a once in a lifetime chance.”

Editing by Jane Merriman

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