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Italy Bank Bulls Say Bad Loan Panic Overdone as Stocks Slide

Italian Bank Bulls Say Bad Loan Panic Overdone After Stock Slide

(Bloomberg) -- Italian banks are being backed by some investors to withstand tougher European Central Bank rules on bad-loan provisioning that sent their shares tumbling.

A 6.9 percent drop in a gauge of the nation’s lenders in the six days through Tuesday was blown out of proportion, according to Ronald Petitjean, a Paris-based fund manager at LA Francaise Inflection Point. With the International Monetary Fund increasing its growth forecasts for Italy on Tuesday, a resilient economy will disprove any concerns about the health of the country’s banks, he says. The index rebounded 2.3 percent on Wednesday.

“The market over-reacted because the ECB’s new rule is only for new non-performing loans,” said Petitjean, who oversees about 1 billion euros ($1.2 billion) and owns Italian bank shares. “An improving macro will lead to a marked improvement in banks’ asset quality,” he said, adding that the rule is unlikely to be applied to existing bad loans.

Concern over the new regulations triggered the six-day drop and pulled Italy’s FTSE MIB Index down from a two-year high. With the country’s banking industry saddled by 318 billion euros of soured loans, or a third of Europe’s total, such jitters aren’t difficult to explain.

Italy Bank Bulls Say Bad Loan Panic Overdone as Stocks Slide

The stock slide comes only months after a government rescue of Banca Monte dei Paschi di Siena SpA that includes cutting thousands of jobs and selling assets. UniCredit SpA, the nation’s largest bank, has exited businesses, cut bad loans and raised a record 13 billion euros from investors, while the government has committed as much as 17 billion euros to wind down Banca Popolare di Vicenza SpA and Veneto Banca SpA.

“After UniCredit’s huge capital increase, the Monte dei Paschi resolution and the solution on Veneto’s banks, the terrain is becoming more fruitful, unless the ECB kills it,” said Matteo Brancolini, a fund manager at BPER Banca SpA. “This ECB rule will only affect Italian banks. But I do think they will find some compromise on the issue.”

Under the ECB’s new proposal, lenders will have to provision against the entire potential loss on newly-classified nonperforming loans that aren’t backed by collateral after two years. The central bank has promised to publish plans for existing bad loans, including “appropriate transitional arrangements,” by the end of the first quarter.

The European Commission on Wednesday helped reduce concerns, saying in a report that it considered introducing new provisioning policies on soured debt arising from newly-originated loans and not from the existing pile of loans. The commission didn’t define specific provisioning policy and limited the impact of the ECB proposal to individual cases.

“The European Commission has clarified the limit of the SSM mandate and implicitly reduced uncertainty on the treatment of the back book,” Mediobanca SpA analysts led by Andrea Filtri wrote in a note. “Overall, perceived regulatory risk in Italian banks should reduce, for now.”

Higher Losses

Italian banks may face higher loan losses as well as potentially being discouraged from lending, according to Societe Generale SA analysts including Aldo Comi. While most countries on the ECB’s Supervisory Board support giving banks firm deadlines for setting aside cash to cover potential losses from uncollected loans and loan payments, Italy and some others are said to be pushing back.

Goldman Sachs Group Inc. analysts argue that stricter rules help increase financial stability. In the long term, they say the incentive to restructure non-performing exposures faster will likely limit banks’ total losses, and eventually the need for out-sized capital calls or bank resolution.

A stronger banking system may lend further support to Italy’s broader economy,  which is on track to expand at the fastest rate since 2010 this year.

“The Italian market will be a beta market this year and next year,” said Brancolini. “If Europe keeps improving -- and that is an unknown -- Italy will outperform. That’s true also on the opposite. Italy needs some European political and economic stability.”

--With assistance from Sonia Sirletti

To contact the reporters on this story: Jun Luo in London at jluo6@bloomberg.net, Sofia Horta e Costa in London at shortaecosta@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Paul Jarvis, Dale Crofts