Bloomberg News - Italy Banks May Face Up to $20 Billion Capital Gap, ABI Says

Italian banks, which have raised money, sold assets and cut costs to boost capital, may face a shortfall of as much as 15 billion euros ($20 billion) as regulators scrutinize their balance sheets this year.

“We are confident that the Italian banks will pass the stress test exercise without major problems,” Giovanni Sabatini, general manager of the Italian banking association, said in an interview in Rome. He agrees with an estimate made by the Bank of Italy of a potential capital shortfall of 10 billion euros to 15 billion euros. “That’s manageable.”

Assets of 15 Italian lenders, includingUniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), are being reviewed by the European Central Bank as part of a comprehensive assessment before it takes over banking supervision for the euro area in November.

“There are several options for lenders to fill the eventual capital gap found during the scrutiny and most will depend on the timing imposed by the ECB,” said Sabatini, 54. Those alternatives may include share sales, disposals and additional deleverage, he said.

The stress test is the third and final stage of the ECB’s Comprehensive Assessment, an evaluation of whether lenders can survive a downturn. The first phase identified potentially problematic loans and the second stage is the Asset Quality Review to identify any capital shortfalls.

Bad Loans

“It’s possible that lenders, whose capital ratio is about an 8 percent threshold, could consider strengthening their capital base,” according to Sabatini.

Banco Popolare SC (BP), Italy’s fourth-largest bank, said last month it will sell as much 1.5 billion euros of stock after it reported bad loans in the fourth quarter of about 1 billion euros. Banco Popolare is the third lender in Italy to announce a share sale before facing the ECB balance sheet review, following Banca Monte dei Paschi di Siena SpA and Banca Popolare di Milano Scarl.

The nation’s banks are bolstering finances after Italy’s longest recession in two decades and low interest rates squeezed profit margins. The asset quality review and higher capital requirements are also forcing banks to trim balance sheets, pare lending and set aside more money to cover risky loans.

Asset Quality

“Italian banks have been under strong pressure from the Bank of Italy to anticipate the results of the asset quality review and to do their homework well in advance,” Sabatini said. “So, we will probably see some additional provisioning in the fourth-quarter results.”

Italian banks’ non-performing loans are among the highest in Europe. Non-performing loans as a proportion of total loans rose to 9.1 percent in December, almost 7 percentage points higher than at the end of 2008, Bank of Italy Governor Ignazio Visco said in a speech Feb. 8.

While some analysts expects a new wave of merger and acquisitions among medium and small banks to increase efficiencies, Sabatini is skeptical.

“We have to wait for results of ECB stress tests and more clarity in the regulatory framework,” he said.

By Sonia Sirletti and Flavia Rotondi