Italy Bank Rescue Won’t Fill $54b Hole in Balance Sheets

Italian banks need at least €52 billion ($54 billion) to clean up their balance sheets, much more than the rescue package proposed Monday by the government.

The shortfall is an estimate of how much lenders would have to increase loan-loss provisions to allow for the sale of bad debt, according to data compiled by Bloomberg. It includes the €8 billion of provisions UniCredit SpA has said it will add before selling €18 billion of its worst loans and uses that ratio as a proxy for the gap at other banks.

The total also includes the €5 billion Banca Monte dei Paschi di Siena SpA has been struggling to raise in recent months.

The Italian government asked parliament this week to increase the public borrowing limit by as much as €20 billion to potentially backstop Monte Paschi and other lenders. The rescue package needs to be closer to €30 billion to solve Italy’s bad-debt crisis, according to Paola Sabbione, a Milan-based analyst at Deutsche Bank AG. That conclusion assumes UniCredit and some other lenders can raise about €20 billion through capital markets, asset sales and profit retention—leaving the government to fill the rest of the €52 billion hole.

“Some of the publicly traded banks can probably raise some of the funds needed for a cleanup, including Monte Paschi,” said Sabbione, who has covered Italian banks for the past decade. “So the government would have to plug in the rest. But still, at this level, it won’t do the full job.”

UniCredit, the nation’s largest lender, plans to increase loan-loss provisions to 75% for nonperforming loans with the lowest chances of recovery and 40% for two other categories considered less dire.

The increased writedowns will help the Milan-based lender sell about a third of its bad loans to asset manager Fortress Investment Group.

UniCredit is planning to raise €13 billion of new equity funding to cover the increased provisions as well as other restructuring costs and to improve its capital ratio.

The company’s shares have jumped 15% since the Dec. 13 announcement, giving analysts confidence the bank will have little trouble tapping investors for the funds.

Italian banks had €356 billion of bad loans at the end of June and €165 billion of provisions against them, according to the latest Bank of Italy data.

To get the worst category to 75% provisioning and the rest to 40%, as UniCredit is doing, would take €52 billion.