* Banks to offload nearly a quarter of bad debts by 2017* Bank of Italy forces banks to cut book value of NPLs* Bad loans a drag on Italian banks' profit, lending* UniCredit already studying sale of two NPL portfoliosBy Lisa Jucca and Francesca LandiniMILAN, Nov 19 Italian banks are preparing to sell nearly a quarter of their problem loans by 2017 thanks to a balance sheet clean-up spearheaded by the Bank of Italy that is tempting specialist investors back into the market. Bad debts held by Italian banks have doubled since 2010 to 145 billion euros ($196 billion), a product of the country's longest recession in 60 years. But this has also exacerbated the country's economic plight as banks have had to set aside more cash for bad loans rather than lend to companies and consumers. The mass of bad loans has also been a drag on Italian banks' returns. But they have been reluctant to offload the non-performing loans (NPLs) to avoid big writedowns on these assets, where book value is often way above what investors are willing to pay to buy them. Persistent pressure from the Bank of Italy to align the value of problem loans with what they could fetch in the market is now expected to spur bad debt sales, removing a drag on banks' profit and benefiting the wider economy.
"I expect the sale of some 30 billion euros of bad debt in the next four years," said Andrea Mignanelli, CEO at Jupiter, an Italian asset manager specialising in bad loans. Bankers say foreign distressed credit funds, private equity funds and banks are prepared to pay between 20 and 50 percent of the nominal value of Italian "secured" bad debt, which means debt backed by a financial or real estate guarantee. For unsecured problem loans, mainly in consumer finance, the price can sink to 2-3 percent of nominal value, Banca Ifis CEO Giovanni Bossi said, who is active in this field. Another incentive for the banks' to tackle bad debts is also next year's European Central Bank's health check of EU banks. Italian banks' bad loans represent, in nominal terms, 7.8 percent of total lending, according to the Bank of Italy and over 9 percent of Italy's annual economic output. This compares with Spain, where the stock of bad debt rose in September to 188 billion euros, or 12.7 percent of total loans.
SENTIMENT CHANGE Before the crisis, Italian banks were routinely able to offload bad debts to investors. They disposed of 60 billion euros of problem loans between 1999 and 2008. But demand almost completely dried up during the financial crisis. There has been only one large deal since then - Intesa Sanpaolo's sale of 1.64 billion euros of bad loans in February 2012 for 270 million, or 16 percent of nominal value.
Investors are prepared to look again at Italy now its economic outlook is approaching a turning point and collection on bad loans are starting to improve. The Italian government and the Bank of Italy expect the country to emerge this quarter from its more than two-year-long recession."Several foreign investors are tiptoeing back into the Italian NPL market," said Antonella Pagano, who leads the Italian unit of PricewaterhouseCoopers European Portfolio Advisory Group. A draft bill aimed at giving banks more speedy tax breaks on loan losses and writedowns is also seen as a catalyst for deals."The sellers (the banks) have realised that market prices have changed and have adapted," said Alessia Garbella, a principal with Bain & Co in Italy and a credit expert."International investors on the other hand are less scared about the Italian sovereign debt risk and, since the summer, have started to look with interest at Italy."Analysts expect the market for distressed credit to start heating up within six months. Federico Ghizzoni, CEO at Italy's biggest bank by assets UniCredit, may be the first to secure a new, sizeable sale of bad debt in Italy."We have discussions ongoing for a couple of (NPL) portfolios. I will not exclude that we can sign a deal. The market is more favourable in this respect," he said last week."We recognise that the total amount of NPLs is too high and has to be progressively reduced."