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Intesa enjoys 'market-leading' position, but Italian economy poses risks

A market-leading position, prudent management and relatively diverse loan book mean that Intesa Sanpaolo SpA may be in a better position than its peers to weather further downturns in the Italian economy, according to S&P Global Ratings.

Italy fell into recession at the end of December 2018 for the third time in a decade.

"Intesa enjoys a leading position in several domestic market segments and a more resilient business model than other domestic banks," the rating agency said in an Aug. 2 report.

The bank's recent deals with asset manager Prelios SpA and loan servicer Intrum AB to unload nonperforming loans are also a positive as they will help the bank accelerate its bad debt workout strategy, Ratings said.

Intesa confirmed its deal with Prelios, the Italian-based asset manager of U.S. fund Davidson Kempner Capital Management LP, at the end of July. The deal will see Intesa off-load an initial €3 billion of loans classified as unlikely to pay.

Prior to this, Intesa struck an agreement with Intrum in December 2018 to set up a platform for the servicing and securitization of NPLs. Without taking into account the Prelios deal, the bank had cut gross NPLs by €8 billion in the six months to end-June 2019 to 34.8 billion.

Although a slowdown in the Italian economy could put the brakes on further deleveraging efforts, S&P Global Ratings believes Intesa should be able to bring its nonperforming asset ratio down to about 7% by 2021 year-end, compared with 10% at the end of the first quarter.

But despite Intesa's strengths, its fortunes are ultimately tied to those of the Italian economy. S&P Global Ratings currently has a "negative" outlook on the bank, which it has assigned a bbb- anchor rating and a BBB/A-2 issuer credit rating. A downgrade could be on the cards for Intesa if S&P Global Ratings lowers Italy's sovereign rating in the next 12 to 24 months, the note said.

But the reverse could be true if Italy's rating improves.

"We could revise the outlook back to stable if we took a similar action on Italy," the note said.

Italian banks "continue to face higher economic risks than their peers," according to S&P Global Ratings.

The country still has a large stock of nonperforming exposures, which stood at €180 billion in December 2018, or about 11.5% of customer loans, compared with some €340 billion in 2015.

"Although this represents material progress, this large legacy stock would represent a tail-risk if the Italian economy were to further deteriorate," the note said, adding that inefficient insolvency and foreclosure processes in Italy could further stall bad debt reduction in the future.