Italy Bad Loans Fall as Economy Picks Up

The stock of bad debts held by Italian banks fell by a record amount in July, in a sign that Italy’s struggling financial sector is starting to benefit from stronger economic growth and greater investor interest.

In the second quarter of this year, Italy’s gross domestic product grew at its fastest annual pace since 2011, news outlets reported.

The drop in bad debts is in line with an incipient recovery in some sectors of the Italian economy. Corporate bad debt linked to the manufacturing sector has fallen €6 billion since the start of the year; industrial production rose by an annual 4.4% in July, beating expectations.

The total volume of bad debts shrank by €18 billion ($21.54 billion), or nearly 10% compared with the previous month, to €173 billion—the largest decrease since the Bank of Italy started to record data in 1998. The stock of bad loans is now at its lowest level since 2014.

Italy’s stock of non-performing loans has weighed on banks over recent years, making it more difficult for them to extend new credit to customers. This has held back the country’s economic recovery, prompting concerns from domestic and European policymakers.

The recent reduction in volumes comes alongside evidence of improving economic conditions in Italy, contributing to wider confidence in the eurozone’s return to economic health.

The drop comes after increased investor demand to buy bad debts from Italian lenders and greater regulatory pressure from the European Central Bank on banks to improve their balance sheets.

In July, UniCredit finalized the sale of €17.7 billion of bad loans to Pimco and Fortress, while smaller banks have sought to securitize—or parcel up for sale—portfolios of loans.

Italy accounted for the largest amount of NPL deals globally in the first half of the year, according to data from Deloitte, which says Italy is set to be “the most active market for distressed debt in Europe” this year, FT reported.

Investors have been reassured by reforms that have helped to speed up insolvency and enforcement proceedings and strengthen bank corporate governance.

Banks’ sale of NPL portfolios will “free capital to do additional profitable business, improve their credit standing and thus reduce their cost of capital”, said Lorenzo Codogno, a former chief economist at Italy’s Treasury and founder of LC Macro Advisors.

Analysts say the market for NPLs has matured and banks selling loans are achieving higher prices.