Italian banks reduce bad loans to pre-crisis eurozone levels


This is the total size of bad loans held by Italian banks in recent months, according to the rating agency DBRS.

Banks have reduced their bad loans this year to the lowest levels since early 2010, more than ten years ago and before the explosion of the debt crisis in the eurozone.

Italian banks have been busy selling and securitizing their bad loans in order to clean up their balance sheets and help get one of the region’s major economies back on track.

Italian banks have reduced bad loans to lower levels than in 2010, before the eurozone crisis, aided by government-sponsored programs to clean up their balance sheets and more recently by support for companies struggling in the pandemic of Covid-19.

According to the rating agency DBRS Morningstar, the total bad debts on the books of Italian banks is now only 52 billion euros, or about 62 billion dollars. This is down from the 71 billion euros in May 2020 and the peak of over 200 billion euros in 2017.

Cleaning up bad loans from Italian banks has been crucial for the stability of the euro area as a whole. Italy was most of what traders called a “catastrophic loop” that linked the woes of governments and euro area banking systems in the wake of the 2008 global financial crisis.

In Italy, banks were weakened by their bad loans and holdings of Italian government debt, which lost value as government bonds were to be issued to help bail out Italian banks. As investments fled the economy, more and more loans went sour and banks needed more government help.

The government helped solve the problem by launching a program in 2016 to help banks securitize NPLs, also known as NPLs, with government guarantees on the safest senior bonds. Many banks kept the senior guaranteed bonds and sold the riskier junior tranches to investors, including hedge funds, who would suffer losses if bad debts could not be recovered.

It was a quick way to clean up their loan books, turning piles of sour debt into secure titles. Italian banks sold or securitized around 40 billion euros in problem loans last year, up from 34 billion euros a year earlier, according to Moody’s.

Despite the cleanup, Italian banks are still underperforming in terms of stock prices. Since the start of 2010, the total returns of Banca Monte dei Paschi di Siena, Italy’s oldest and most troubled bank, have fallen by almost 100%. Investors in the relatively successful UniCredit saw yields drop by more than 80%. Intesa Sanpaolo, a rare good performer, has total returns up just over 30% over the entire period.

The last step in eliminating bad debt could be as good as it gets. DBRS and rival rating agency Moody’s both predict a bad debt recovery once government-guaranteed emergency repayment holidays for borrowers are withdrawn later this year.

“One would expect the number of [non-performing loans] increase again as special measures are slowly removed and companies artificially backed by government funds linked to the pandemic are exposed, ”said Gordon Kerr, European research manager for global structured finance at DBRS Morningstar. “However, to date these have not yet started to materialize in Italy.”

Since the start of the pandemic, the government has helped keep many Italian businesses afloat by providing state-guaranteed loans and payment holidays on existing debt. This has reduced insolvencies and means banks’ loan portfolios look healthier.

Italian Prime Minister Mario Draghi recently extended the country’s moratorium and state-guaranteed loan programs by six months until December. Moody’s said after that, NPLs in Italy are expected to increase significantly.

“We expect NPLs from Italian banks to increase dramatically over the next 12-18 months, especially after the coronavirus-related repayment moratoriums expire and some borrowers are unable to resume full repayments loans, ”said Fabio Iannò, senior credit manager at Moody’s. .

Italy has the highest number of loans under moratorium in the euro area – 136 billion euros – accounting for around 8% of the loans outstanding in the country. Most of the loans are for small businesses, which are having the hardest time tackling the pandemic.


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