MILAN: Italian banks are stuck in what stressed-debt experts call purgatory, still forced to pay a heavy price for their past sins despite loan data that suggests they are turning a corner. The rate at which loans are souring hit an eight-year low last year, but banks still face some 8 billion euros ($8.5 billion) a year in fresh writedowns, based on past rates at which already-soured loans have gone into outright default.
Italy has 130 billion euros in unlikely-to-pay loans, where borrowers are in trouble but remain in business. As borrowers become insolvent, their loans are added to an existing mountain of debt known aptly as “sofferenze” or “suffering.” Each time that happens, banks make heavy writedowns, wiping out profits, undermining their balance sheets and adding to the instability within the euro zone’s fourth-largest banking industry, which now has 200 billion euros in sofferenze.
The only way to stop loans from ending up there is for banks to get borrowers back on track. “Unlikely-to-pay loans are like purgatory: to avoid plunging into the hell of bad loans you need to wash off your sins,” said Katia Mariotti, associate partner of consultancy PwC, which calculated in an unpublished study that some 26 billion euros in unlikely-to-pay (UTP) loans turned into sofferenze in 2015. “UTP loans don’t go back to performing on their own. They must be actively managed, otherwise a very large share of them is bound to turn into bad debts.” In the port city of Genoa, bankers have taken the hint.
Guido Bastianini, chief executive of Genoa-based lender Banca Carige (CRGI.MI), has set to work to recover UTP loans as part of his pledge to cut the bank’s overall problem loans, which make up a third of its loan book. “It’s an absolutely exceptional and excessive number,” he told analysts on Feb. 10. One of Carige’s unlikely-to-pay debts is a $420 million loan to family-owned shipper Gruppo Messina, which used the money to renew its fleet and order eight of the world’s largest container ships from South Korea’s Daewoo Shipbuilding from 2009 to 2012. The last of the bright-red vessels was delivered in 2015, in the middle of the shipping industry’s worst slump on record as international trade slows and freight rates fall. Messina is restructuring its debts and hopes the world’s second-largest container line, Mediterranean Shipping Company, will become a shareholder. This is also Carige’s best chance of getting its money back. MSC said it and Messina were pursuing an agreement with the help of the bank. All three declined further comment.