MILAN, April 30 (Reuters) – Italian banks could face around 9 billion euros ($11 billion) in loan losses this year and next as the economic damage wrought by the pandemic becomes apparent, the Bank of Italy said on Friday.<\/p>\n
While the portion of corporate loans turning sour is still very low at 1.5% of the total, the Bank of Italy flagged the threat posed by the growing share of loans which are still performing but are classed as \u2018Stage 2\u2019 under international accounting standards.<\/p>\n
Stage 2 loans, which require lenders to set aside more provisions, grew by 11% at Italian banks in the second half of 2020 to account for 10.7% of overall performing loans.<\/p>\n
That proportion is higher for loans under moratorium, where Stage 2 loans are 29% of the total.<\/p>\n
Urged by regulators to prepare for the possibility borrowers may be unable to resume payments when debt holiday ends, Italian banks have classed as Stage 2 almost a third of loans under moratorium.<\/p>\n
Loans for which payments have been frozen in Italy totalled 147 billion euros at the end of 2020, accounting for 9.1% of total loans at larger banks. That is much higher than a euro zone average of 2.6%.<\/p>\n
The higher proportion of loans under moratorium – often held by sectors worst hit by the pandemic – means large Italian banks have more loans classed as Stage 2 than euro zone peers.<\/p>\n
Italian lenders increased loan loss provisions by a third last year, further hitting profitability. The average return on equity for the industry dropped to 1.9% in December 2020 from 5.0% a year earlier net of one-offs.<\/p>\n
Encouraged by tax incentives, Italian banks cut impaired loans on their balance sheets by a quarter in the second half of 2020, to 103.6 billion euros, or 4.4% of total lending from 6.1% at the end of June.<\/p>\n
That is below a benchmark 5% threshold set by European authorities and less than a third of the peak hit in the wake of the global financial crisis of 2008-2009 and the euro zone debt crisis.<\/p>\n
Disposals of problem bank loans totalled 33 billion euros last year, the Bank of Italy said.<\/p>\n