Italian banks cut bad loans to pre-crisis levels in the eurozone

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

Banks have cut their bad debts this year to their lowest level since early 2010, more than a decade ago, before the eurozone debt crisis exploded.

Italian banks have been busy selling and securitizing their bad debts to clean up their balance sheets and help bring one of the region’s leading economies back to normal.

Italy’s banks have cut bad loans to levels lower than in 2010 before the eurozone crisis, aided by state-sponsored programs to clean up their balance sheets and recent support for companies battling the Covid-19 pandemic.

According to the credit rating agency DBRS Morningstar, the total bad debt on the balance sheets of Italian banks is now only 52 billion euros, which is equivalent to about 62 billion dollars. This is less than in May 2020 – 71 billion euros, and in 2017 – more than 200 billion euros.

Clearing up bad loans from Italian banks was critical to the stability of the entire eurozone. Italy was the biggest part of what traders called The Fatal Loop That Tied the Failures of Eurozone Governments and Banking Systems after the 2008 global financial crisis.

In Italy, banks were weakened by bad loans and Italian government debt holdings, which fell in value as more government bonds were required to help Italy’s banks bail out. As investment went out of the economy, loans became unprofitable and banks needed additional government assistance.

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

It was a quick way to clean up their credit books turning a pile of bad debts into safe securities… Italian banks sold or securitized about 40 billion euros in problem loans last year, up from 34 billion a year earlier, according to Moody’s.

Despite the purge, Italian banks still lag far behind in share prices. Since the beginning of 2010, the overall profitability of Banca Monte dei Paschi di Siena, Italy’s oldest and most troubled bank, has declined by almost 100%. Investors at UniCredit, a relative success story, saw yields drop more than 80%. Intesa Sanpaolo, a rare good performer, has a total return of just over 30% over the entire period.

The latest milestone in bad debt elimination can be as good as it gets. Both DBRS and rival ratings agency Moody’s forecast NPLs to rise after the cancellation of the emergency government payment holidays for borrowers later this year.

“We expect that the number [non-performing loans] “said Gordon Kerr, head of European research for global structured finance at DBRS Morningstar.” However, to date, they have not yet begun to be implemented in Italy. “

Since the start of the pandemic, the government has helped keep many Italian companies afloat. provision of government-guaranteed loans and deferral of payments on existing debt… This has reduced the rate of insolvency and means that banks’ credit books look healthier.

Italian Prime Minister Mario Draghi recently extended the moratorium and government loan guarantee programs by six months through December.… Moody’s said it would expect a significant rise in NPLs in Italy after that.

“We expect non-performing loans from Italian banks to grow substantially over the next 12-18 months, especially after the coronavirus-related repayment moratorium expires and some borrowers are unable to resume full loan repayments,” said Fabio Janno , Senior Loan Officer, Moody’s. …

Italy has the largest number of loans in the euro area subject to the moratorium – 136 billion euros, which is about 8% of all outstanding loans in the country. Most of the loans are provided to small businesses that are hit hardest by the pandemic.

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