Drop in Italian bank bad loans seen due to disposals not turnaround

MILAN: Gross non-performing loans at Italian banks fell in October, the first monthly drop in more than three years, though this was due to the sale of soured debt portfolios by lenders rather than heralding any turning point in the sector.

So-called sofferenze, or bad loans that are least likely to ever be repaid, have been steadily climbing at Italian banks since 2008, and got worse in the past three years as the euro zone’s third-biggest economy slumped into recession.

They now total around 200 billion euros ($219 billion), or 18 percent of total corporate loans, and are only expected to start gradually falling from the second half of next year, analysts say.

However, Bank of Italy data showed on Thursday that in October gross bad loans had dipped by 1 billion euros to 199 billion from a month earlier. As a government-sponsored project stalled to create a bad bank to help lenders offload bad debts, lenders have been seeking to sell portfolios of soured loans to get them off their balance sheet, even if this often means selling at a discount and booking writedowns.

The data showed net non-performing loans were almost unchanged in October at 87 billion euros, an indication that the decline in the gross figure was due to transactions of debts that had already been almost entirely written down rather than to a structural decrease.

“This is probably the combined effect of the sale or securitization of portfolios of old bad loans on the one hand and the fact that those loans had been written down to almost zero before being put on the block,” an analyst said. The previous monthly drop for gross bad loans had been recorded in March 2012.

In October, UniCredit finalised the sale of a portfolio of gross bad loans worth 2.4 billion euros to US investment firm Fortress Investment Group. In addition, Italian banks securitized around 2 billion euros of bad loans in the same month, the Bank of Italy data showed.

Despite the sheer amount of bad loans piled up on their balance sheets, Italian banks are struggling to sell them, as the price at which specialist investors are willing to buy is significantly lower than their book value.

Between 2012 and 2014 Italian banks have shed or securitized 11 billion euros of bad loans, only 2 pct of the overall amount, Bank of Italy Governor Ignazio Visco said last month. Lending by Italian banks to non-financial companies, which has been falling since May 2012, dropped another 1.3 percent in October, the Bank of Italy also said on Thursday.

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