Market news :: Finance, Savings & Commerse

Italian banks start to offload bad loans

* 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."

Money markets ecb rate cut bets pared, still on the table

* Short-term rates inch higher after Draghi speech* Markets still discounting ECB rate cuts in 2012* Bets may pile up again if Spanish, Greek worries remainBy Marius ZahariaLONDON, June 6 Short-term euro zone interest rates rose slightly on Wednesday after the European Central Bank failed to flag it was ready to ease monetary policy, but markets are still pricing in a large probability the bank will cut rates later this year. The ECB kept its refinancing rate unchanged at a record low of 1 percent and the deposit facility at 0.25 percent and President Mario Draghi warned his bank cannot make up for other institutions' lack of action. This disappointed markets, which had expected him to at least send out a signal that more easing was forthcoming."From the tone of it, as of today we cannot expect any significant measure in July because he looked very defiant and imperturbable - the ball is very much in the court of the politicians," BNP Paribas rate strategist Matteo Regesta said. However, rate cut bets have not been taken off completely.

Regesta estimated that the forward overnight euro zone interbank EONIA rate markets - which moved 1-3 basis points higher across the 2012 curve after Draghi's speech - was still pricing in 24 percent probability that the deposit facility rate will be slashed in half in July. For the end of the year, a December EONIA of just over 23 basis points discounted a 66 percent probability of that happening, compared to some 80 percent at the end of last week. Euribor futures also sold off a few ticks after Draghi's speech, implying expectations for higher fixings of three-month Euribor rates in the future. The December Euribor contact was 3 ticks lower on the day and also compared with levels seen earlier in the session at 99.43, implying a 0.57 percent Euribor fixing in the last month of the year versus Wednesday's 0.663 percent.

After May's ECB meeting, which also disappointed markets waiting for more central bank easing, the December contract sold off to as low as 99.29, but it was bought back in the past few days as rate cut bets have been put back on the table. Analysts say the same thing could happen next month if the conditions that led to speculation the ECB could cut interest rates on Wednesday are still in place. Tensions over Spain's stricken banking sector are rising and the risk that Greece could leave the euro zone after its June 17 election is perceived as high. This is hampering business sentiment and growth potential even in the euro zone's powerhouse Germany, as shown by recent data, strengthening the case for the ECB to act."(A rise in ECB easing bets) could happen again, it depends on developments in Spain - if they get help, how large recapitalisation needs for the banking system are," said Commerzbank rate strategist Benjamin Schroeder.

"Also there is no clear indication what the outcome (of the Greek election) would be.""VERY DYSFUNCTIONAL" Moody's cut the credit ratings of six German banking groups and Austria's three largest banks on Wednesday, giving a glimpse of how far the ramifications of a potential Greek exit from the euro zone might go. Banks more than tripled their uptake of ECB dollar funding on Wednesday, the latest indication that some are finding it increasingly hard to source cash in the market. Traders say three weeks is the longest period for which most banks are willing to lend in cash markets, and that's only to a select group of counterparties, also because they are dressing their books for the half-year turn. In his post-meeting remarks, Draghi himself described interbank markets as "very dysfunctional".