One of the first things Andrea Ricci did when he was promoted to head the new problem loan division at Italy’s Banca Nazionale del Lavoro this year was to launch a recruitment campaign.
The shake up in an area sometimes viewed as a backwater by ambitious employees reflects a push by Italian banks to claw back bad debts that make up some 15% of total loans — three times the European average.
Gross bad loan sales in Italy totalled just €15bn in 2015-2016, according to the Bank of Italy.
Up to €70bn in sales are now in the pipeline, driven by ECB-enforced clean-ups at Monte dei Paschi, Italy’s fourth-largest bank, and the two Veneto lenders.
Together the three are set to offload €45bn in bad loans, using taxpayers’ money to cover the bulk of ensuing losses. Italy’s top bank UniCredit is meanwhile preparing to sell €18bn of its bad loans, having already raised fresh capital to cover the hit to its balance sheet. Instead of the lawyers that have traditionally dominated loan recovery, Ricci hired as his No 2 a former senior executive at Goldman Sachs’ Realty Management Division.
Italian banks have largely held onto loans backed by property and are now seeking to manage these assets more actively, as repossessions take years and judicial sales curtail their value.
“We brought in some big guns...but also several mid-level people from loan recovery specialists.
And we moved staff with a more business-like approach from other areas of the bank to complement customary legal and technical skills,” Ricci said. “The challenge is to make everyone sing from the same hymn sheet.”
Even after crises at Monte dei Paschi di Siena and Popolare di Vicenza and Veneto Banca are resolved, Italy’s banks will be sitting on €300bn ($335bn) of loans that soured during a harsh recession.
The fragility of Italian banks, compounding chronic low growth and a huge public debt, make the country a dormant risk to eurozone stability.
As the economy recovers, inflows of new problem loans have slowed to pre-crisis levels. But banks are struggling to shift impaired debts off their balance sheets, hurting their already weak profitability. Accounting rule changes and a European Central Bank review next year of assets held by small cooperative lenders could fuel fresh loan losses, warned Katia Mariotti of consultancy EY.
Bank of Italy officials have publicly advised healthy lenders against selling their problem loans, however, warning that fire sales enrich only a handful of specialised buyers and risk blowing a hole in banks’ capital.
The ECB, which is yet to respond to bad loan reduction plans banks submitted in the spring, may see matters differently. “We don’t know yet if our goals will be seen as sufficiently ambitious.
It’ll be a moment of reckoning when we hear back from the ECB,” one source at an Italian bank said.
“If the ECB takes a hard stance it’ll be hard to avoid the significant sales that the Bank of Italy is warning against.” A person familiar with the matter said the ECB, which directly supervises Italy’s 13 largest banks, was analysing the heaps of data banks provided and assessing how realistic each lender’s projections were. The eurozone’s central bank can take measures to ensure compliance with its bad loan guidelines, which the Bank of Italy is set to adapt for the smaller banks still under its supervision.
Senior supervisor Ignazio Angeloni said in May the ECB expected the guidelines to significantly speed up disposals. Battling with a sluggish judicial system and patchy loan records, Italian banks on average recover in a year a sum equivalent to around 4 % of their impaired loan stock. To boost that, some banks have struck joint ventures with collection specialists while others are bringing in fresh skills to explore ways of recouping debts while steering clear of Italian courts.
But insiders say a cultural shift is required as well as an overhaul of processes that, partly because banks have not invested in technology, still rely largely on paper documents.
“Italian banks will be given some time, even a year maybe, but, without selling, it will be hard for them to meet their non-performing loan reduction targets and the ECB will then be in a position to step up pressure,” said Andrea Resti, an academic who advises the European parliament on banking supervision.
The entrance of Monte dei Paschi di Siena bank’s headquarters is seen in Italy. Up to u20ac70bn in sales are now in the pipeline, driven by ECB-enforced clean-ups at Monte dei Paschi and the two Veneto lenders.
