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Veneto banks heading toward €20 billion bad bank

by Luca Davi and Marco Ferrando

After Intesa Sanpaolo spelled out the conditions for it to purchase the two ailing lenders Banca Popolare di Vicenza and Veneto Banca, the ball is now in the Italian Treasury’s court.

Formally it has not yet accepted the conditions. According to sources on both sides (and in the Bank of Italy, which has a very active role), yesterday was a work day dedicated to bringing the different sides closer together. The requests formulated by Intesa are also written in a resolution approved by the executive board, but evidently there is some room for maneuver and it is likely to be used before the approval of the decree that is said to be already written in draft form.

Meanwhile the market is assessing what remains an unexplored scenario. Firstly, on the front of the liquidation of the two former Veneto mutual banks: they will be managed by commissioners nominated by the Bank of Italy who will be in charge of the division of assets between the good ones, destined for Intesa, and the bad ones, which will instead remain in the banks in liquidation, downgraded to a bad bank. It is a complex operation that calls for in depth knowledge of the boundary in question, and it is for this reason that probably the current CEOS of the two Veneto lenders, Fabrizio Viola and Cristiano Carrus, will be nominated among the commissioners.

In the division of assets, non-performing loans will play a determining role. This is because the form of the bad bank as well as the amount of the intervention on the shoulders of the state will depend on the destination and treatment of deteriorated credit, an extremely delicate subject from a political point of view but also for public finance (investment or non-repayable intervention). Analysts have formulated estimates that range from a minimum of €3.5 billion to a maximum of €6-6.5 billion.

Everything will depend on how much remains in the two banks in liquidation, which on the active front will have the NPLs but on the passive front they will have to be recapitalized by the State (unless it intervenes on the side of the good bank). Based on Intesa’s conditions, Banco Popolare di Vicenza and Veneto Banca will still have €9.6 billion in bad loans but also €8.3 billion of unlikely to pay loans and €238 million of past due exposures; these figures bring €18.8 billion of gross deteriorated credit into the new bad bank, making it one of the biggest vehicles among those currently present in Italy.

Then it will be necessary to add the high-risk performing loans that Intesa does not want to take on: at least another €2.5 billion, analysts estimate, of the €31 billion of the banks’ non-deteriorated loans at end-2016. In total, it is a bad company with more than €20 billion of gross credit.

According to an outline seen by Il Sole24Ore-ItalyEurope24, this vehicle would have capital of around €7 billion, partly brought by the two banks, partly covered by other items and, in theory, by the State: aside from the bad loans, stakes in Arca, Bim and Cattolica will remain in the bad bank, while Banca Apulia and Banca Nuova should go to Intesa. It should see a total of €30 billion of risk-weighted assets come its way, with more than €4 billion of capital, so as not to impact the 12.8% Cet1 ratio of the purchaser.