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Italian banks make steady progress in bad loan reduction but future uncertain

Italy's biggest banks have steadily reduced their nonperforming loans since the end of March 2018, with Banca Monte dei Paschi di Siena SpA showing the most improvement in terms of both total bad loans and NPL ratio, according to S&P Global Market Intelligence data.

Monte dei Paschi's bad loans totaled €11.57 billion as of March-end, compared to €42.59 billion in the same period in 2018, while its NPL ratio fell to 14.11% from 47.68%. The bank, however, still had the highest NPL ratio in the sample of large Italian banks as of March 31.

Intesa Sanpaolo SpA, meanwhile, had the highest total bad loans of €30.18 billion as of March 31, followed by UniCredit SpA with €24.91 billion. The figures were down from €50.63 billion and €44.54 billion, respectively, in the first quarter of 2018.

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Credito Emiliano SpA sat at the bottom of both the total bad loans and NPL ratio tables, with NPLs of €1.03 billion as of March-end and an NPL ratio of 3.37%, down from €1.30 billion and 5.08%, respectively, from the same period in 2018.

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But this positive trend is not expected to continue in the near future given the impact of the coronavirus pandemic on the banks' operating environment. Italy had 231,139 coronavirus cases as of around 7 a.m. London time on May 28, the sixth-highest figure across the globe, according to Johns Hopkins University. The country has so far recorded 33,072 deaths related to COVID-19.

Earlier in May, the European Commission forecast that Italy's real GDP could contract 9.5% in 2020 and partially rebound in 2021 with growth of 6.5%. The third-biggest eurozone economy is also expected to see its unemployment rate reach 12.7% in 2020, according to the IMF. The figure is higher than a 10.3% forecast in October 2019.

Meanwhile, Scope Ratings expects Italian banks' full-year cost of risk to be in the range of 100 basis points to 150 basis points, noting that the lenders did not classify loans under payment holidays as nonperforming.

"Provisioning efforts either remained generic or were targeted to increase coverage of existing buckets, with coverage ratios going up both on performing and nonperforming loans," Marco Troiano, deputy head of financial institutions at Scope, said.