Intesa move reignites 'bad bank' debate

Intesa Sanpaolo is working on plans to become the first Italian lender since the financial crisis to set up an internal "bad bank" by setting aside a chunk of its €55bn of non-performing loans ahead of banking stress tests by the European regulator.

Carlo Messina, Intesa's new chief executive, and chairman Giovanni Bazoli are expected to discuss the move with shareholders of Italy's second-biggest bank by market capitalisation in the next few weeks, according to people familiar with the matter. They are due to present their new strategic plan alongside annual results on March 28. Intesa declined to comment.

Mr Messina, who was promoted from general manager last September, is expected to present the plan to work through non-performing loans and cut the bank's leverage as a decision made from a position of strength, rather than weakness, according to people familiar with the matter.

The move would reignite debate in Italy about whether its banking system needs a state-sponsored "bad bank" - as introduced after the crisis by Ireland and Spain. The Bank of Italy and the IMF have ruled out the need for one, but some Italian officials privately say the issue is still being debated. Analysts have argued that Italy could do with a bad bank worth €9-12bn.

UniCredit and Intesa Sanpaolo, Italy's two largest banks by assets, are considered to be securely capitalised ahead of the stress tests; Intesa recently repaid €36bn of crisis loans to the ECB, and has one of the highest tier one capital ratios of any European bank.

However, Italy's smaller and midsized regional banks, hit hard by a deep recession, are regarded as more vulnerable. Gross non-performing loans in the Italian banking sector reached nearly €150bn in November, rising 22 per cent year on year, according to data published this month by Italy's banking association.

Intesa's new strategy is likely to draw parallels with Royal Bank of Scotland, the state-controlled UK lender that last year established an internal bad bank to house £38bn of its most risky and capital-draining assets.

Internal bad banks are designed to help wind down non-core assets while encouraging investors to focus on the strengths of the remaining operating business.

The new strategy is expected to be presented as a cleaning up of a bank that has fallen out of favour with investors; despite a share-price gain of 40 per cent over the past year, Intesa is still valued at less than two-thirds of its book value - one of the lowest multiples among European banks.

According to banking sources, Mr Messina is also expected to announce plans to cut long-held €2bn in minority stakes, including holdings in Telecom Italia and Alitalia, following the example of Milanese investment bank Mediobanca and insurer Generali.

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