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MILAN (Reuters) - Storage rooms crammed with loan documents have emerged as a hidden front line in Italy's battle to save its banks from the threat of financial crisis.
Dozens of analysts have been toiling in back offices of the nation's third-largest lender, Monte dei Paschi di Siena (BMPS.MI), in the first stage of a campaign to sell or recover much of Italy's 360 billion euros ($395 billion) worth of problem loans.
The analysts, engineers from a loan data firm, have worked for almost a year with the bank's officials to comb through aging files, copies of which are kept in binders tied together with string and stacked in cupboards, in order to help prepare a 28 billion euro bad loan sale.
"Ours is a painstaking job," said Luca Mazzoni, chief executive of Protos, which has been hired by Monte dei Paschi.
"Documents associated with a single loan can take up an entire cupboard. In one case I remember half a room filled with papers related to just one loan."
Monte dei Paschi, Italy's weakest major lender, is under pressure from the European Central Bank to resolve its bad debt problem by the end of the year, but foreign investors have so far shown little enthusiasm in supporting its rescue plan.
The arduous work of Protos' engineers shows how the patchy state of loan records at Italian banks is likely to hamper sales of bad debts for some time, despite a regulatory push.
Experts say Italian banks may struggle to meet deadlines set by the Bank of Italy to periodically provide very detailed information about bad loans above 100,000 euros.
"Banks are getting hit from all sides: they don't have the time ... They may be stretched in terms of resources and they can't fix things like their IT system overnight," said Joe Giannamore, head of AnaCap Financial Partners which owns a gross 9 billion euros worth of Italian bad loans.
"If they don't have information captured centrally in one place, banks face a long, manual and very labor-intensive job."
Lenders failed to keep records up to date as Italian bad loans quadrupled following the onset of the financial crisis in 2007. When they came under pressure to sell, they realized their databases lacked much of the information that buyers demanded.
Protos analysts have what they call their "war rooms", where they take the information dug out from piles of documents and build easy-to-consult databases.
High-quality information can improve the selling price of a loan portfolio by up to 10 percent, according to Mazzoni.
"One important lesson learnt in the disposal is (that) if you have a good database, the price is higher," BPER CEO Alessandro Vandelli said after the bank sold 450 million euros in bad loans in July.
This is key as banks normally offload bad debts at a loss. Monte dei Paschi's ambitious recapitalization would be an even tougher challenge if a lower selling price for its loans had blown a bigger hole in its accounts.
To shed the bad debts, Monte dei Paschi is relying on a guarantee provided by the state and a major investment by Atlante, a state-sponsored bailout fund financed by leading Italian financial institutions.
Encouragingly, after delving into Monte dei Paschi's bad loans, Atlante last week said the loan quality matched its estimates. Atlante offered in July to pay 1.6 billion euros, or about 27 cents in every euro of face value, for a tranche of the bank's bad loans repackaged as securities.
Monte dei Paschi is now awaiting the outcome of a similar review by JPMorgan, which has pledged to provide a 5 billion euro bridge loan to buy time to arrange the state guarantee.
Strong local ties can make Italian banks reluctant to aggressively call in debts, especially small personal loans taken out to buy a car or a washing machine.
"Banks tread lightly because they don't want to hurt their image or undermine traditionally close ties with the local community," said Carmine Evangelista, CEO of AZ Holding, which specializes in recovering unsecured loans.
"When we get a new portfolio we make a first round of calls to let people know their creditor is no longer the bank. This alone normally prompts some repayments," Evangelista added.
Banks have managed to sell unsecured loans despite poor data because they have standard market prices.
But roughly half of Italy's 200 billion euros in loans to insolvent borrowers is secured against real estate, according to accountancy firm PwC.
To sell or recover those loans, accurate data are essential. For example, the bank or the loan's new owners may find it necessary to relaunch an unfinished property development on land that was pledged as collateral.
That can be a big decision, given a 15 percent drop in Italian house prices over the past four years.
The least efficient way to recover bad loans in Italy is to take borrowers to court where, on average, bankruptcy proceedings drag on for 7.8 years.
"It's vital to seek out-of-court deals with borrowers ... Banks don't do that enough," Riccardo Serrini, CEO of bad loan manager Prelios Credit Servicing, said.
($1 = 0.9096 euros)
Reporting by Valentina Za; Editing by Gareth Jones