Shares of Italian Banks Slide as ECB Calls for Bad-Loans Protection

By Patricia Kowsmann 

FRANKFURT -- Shares of Italian banks fell sharply Tuesday on a newspaper report that the European Central Bank wants them to clean up their bad loans more effectively.

Shares of Unione di Banche Italiane SpA closed down 5%, having earlier fallen more than 10%, UniCredit SpA shares dropped 3.2% and Intesa Sanpaolo SpA lost 1.3% after Italian newspaper Il Sole 24 Ore reported the ECB had told its supervised Italian lenders they must fully cover their exposure to all existing and future nonperforming loans by 2026.

The shares recovered some of their steeper earlier losses when UBI and Intesa said in separate statements that they don't expect a significant impact from the ECB recommendations they have received. UniCredit didn't immediately respond to a request for comment.

A person familiar with the matter said the ECB hasn't set the same deadline for all banks, and guidance is being given on a case-by-case basis, although expectations are the same for similar banks. The ECB's goal is to have lenders cover all of their nonperforming loans in the medium term, the person added.

The selloff highlights how skittish investors are about any ECB pressure -- real or perceived -- on the weakest European banks. Some EUR688 billion ($789.27 billion) in nonperforming loans remain the biggest challenge European banks face following the continent's crisis in 2010 that triggered a flood of defaults by companies and individuals. Lenders have resisted cleaning up their portfolios in many cases because that would force them to take losses and raise capital.

Italy, in particular, has complained that a heavy-handed approach would hurt banks' ability to lend. On Tuesday, Italian Deputy Prime Minister Matteo Salvini said the ECB was attacking the country's financial system.

Since Mr. Salvini took office in June last year, pressure on Italian banks has risen sharply after the populist government unveiled a big-spending budget that defied European Union rules and rattled markets. Italian banks are a key buyer of Italian government bonds.

Under the ECB guidelines, banks with NPLs must either sell them, which many are already doing, or set aside capital to cover any future losses.

Filippo Alloatti, a credit analyst specializing in European financial firms at London-based Hermes Investment Management, has estimated it would cost Italian banks EUR60 billion in new provisions to cover all its NPLs by 2026, although some of that coverage is already being taken care of under current plans.

For Spain and Portugal, where banks also have large portfolios of bad loans, the figure would be EUR35 billion and EUR10 billion, respectively, Mr. Alloatti added.

Joe Wallace in London contributed to this article.

Write to Patricia Kowsmann at [e-mail]

(END) Dow Jones Newswires

January 15, 2019 14:41 ET (19:41 GMT)

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