Italian banks' bad debt cleanup to expose bigger capital gap

Thu Feb 20, 2014 2:05pm EST
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By Valentina Za and Silvia Aloisi

MILAN (Reuters) - A drive by Italian banks to come clean on bad loans during a European bank health check may force them to raise as much as 20 billion euros in capital, three times more than that penciled in so far, to shore up their balance sheets.

The bad debts are a problem that Italian banks had swept under the carpet because booking soured loans at market value would open a big hole in their accounts.

But the industry health check is forcing them to clean their books to try to get an early claim on investor cash they will need to rebuild their capital.

Five banks already have capital increases in the pipeline for 7 billion euros, with mid-sized lender Carige (CRGI.MI: Quote) confirming on Thursday it was looking to tap investors for 800 million euros as planned asset sales were not going ahead quickly enough.

But now it looks like the industry will need more and may have to compete for it with others in the euro zone when bank health check results are revealed in October.

Bad loans are a major headache for Italy's banks because the country's weak economy has led to an increase in defaults. They are sapping profits and exacerbating a credit crunch that is holding back an economic recovery.

Non-performing loans - least likely to be repaid - soared to a record 156 billion euros ($213.92 billion) in December, twice the 2010 level. Lenders have already had written 76 billion euros off the value of those loans, partly in response to demands from the Bank of Italy which, since the end of 2012, forced them to set aside more cash against expected losses.

But bad debt experts think the banks need to take further write-downs of at least 20-25 billion euros to get buyers specialized in distressed debt to take them off their hands.   Continued...

A man walks in downtown Milan September 12, 2013. REUTERS/ Stefano Rellandini