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S&P: Italy, Portugal to see slow bad loan reduction

S&P Global Ratings said April 4 that the nonperforming assets, or NPAs, of banks in Italy, Ireland, Spain and Portugal represented about half of the entire European stock at the end of 2016.

That said, strong economic growth and the gradual recovery of the property market in Ireland and Spain will continue to help reduce NPA levels and credit losses in the two countries. On the other side, the reduction of bad loans will likely be slower in Italy and Portugal, reflecting, among other things, less supportive economic conditions.

S&P said that it positively views the ECB's stronger focus on enhancing the timeliness of banks' recognition of problematic loans and related provisions, noting that even if banks now step up measures to tackle asset quality problems, these initiatives will take time to yield significant results.

The more effective resolution of NPAs would hinge on removing obstacles that are keeping banks from disposing them in most of these countries, despite recent improvements, according to the rating agency. Specifically, the deficiencies in the legal and judicial frameworks and the pricing gap between the book value and the market price of bad loans are still discouraging banks from divesting them quickly, especially in Italy and Portugal.

While Ireland and Spain benefited from asset management companies that removed significant NPAs from banks' balance sheets and paved the way for capital injections, political uncertainty in Europe could delay setting up additional bad banks.

"We therefore believe the NPA workout process will take several years and still-high NPA stocks in all four countries will continue to weigh on banks' profits," S&P said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.