UCG Unicredit Spa

By Giovanni Legorano 

ROME -- Italian banks have spent years cleaning up the bad loans on their books. The coronavirus downturn leaves them with more work to do.

Italy's lenders came into the crisis as one of the weaker parts of the European banking landscape, still suffering from some of the effects of the region's sovereign debt crisis and struggling with sluggish economic growth and low rates. After two months of lockdown imposed by the Italian government, uncertainty hangs over how the induced economic coma and its aftermath will translate into losses for local banks as the companies they lend to inevitably default on loan repayments.

Senior management at Italian banks are displaying cautious confidence about the resilience of their businesses and of the nation's economy. However clear signs that pain lies ahead were visible as the country's largest banks reported first-quarter earnings this week.

"It's clear the first issue Italian banks will face in the next months will be a rise in bad loans," said Angelo Baglioni, an economics professor at Milan's Catholic University.

UniCredit SpA, Italy's largest bank by assets, posted a EUR2.71 billion ($2.94 billion) net loss, compared with a net profit of EUR1.18 billion in the same period last year. The loss was driven by EUR1.26 billion in provisions for bad loans, up from EUR467 million a year earlier and a number of one-off costs.

The bank, which unveiled a new strategic plan last December, said it would update that plan at the end of this year or early in 2021, in light of the conditions brought about by the pandemic.

"European economies have only very recently and gradually begun to reopen. It's too early to quantify the pace and shape of any recovery," UniCredit's Chief Executive Jean Pierre Mustier said. "[The pandemic] will have a profound impact on the global economy. This is true also for UniCredit and its stakeholders."

Next year's net profit will likely be between EUR3 billion to EUR3.5 billion, or 75% to 80% of what the bank targeted in its last strategic plan, Mr. Mustier said.

Banking results for the first quarter are offering an initial test on the effects of the lockdown measures the Italian government -- and other European governments -- imposed to contain the spread of the novel coronavirus.

Since March 10, Rome has gradually shut down most nonessential economic activity to contain the pandemic. It only started rebooting its economy on Monday, allowing factories, construction sites and wholesale commerce to reopen.

Much of the consumer economy remains suspended. Most shops can reopen from May 18. Restaurants, bars and hairdressers will have to wait until June 1. Economic normalcy could take much longer to achieve.

Italy's lockdown has been one of the strictest and longest outside of Asia and the impact on the country's economy will be huge. The International Monetary Fund predicts that Italy's gross domestic product will shrink 9.1% in 2020.

The Italian government has so far launched a program of guarantees for bank loans and liquidity available for businesses and households of EUR750 billion.

However, while supporting economic recovery, increased lending and the moratoria on existing loans will further expose Italian banks to the economic downturn, after years in which they went through a painful cleanup of their balance sheet and rebuilt capital buffers.

Many Italian lenders like UniCredit and Intesa Sanpaolo SpA have been selling nonperforming loan portfolios to investors hungry for good returns. They account for 7% of total loans, still high by international standards, but down from 17% in 2015. With such a significant downturn this year, bad loans are likely to start piling up again.

After a painful cleanup and strengthening plan carried out in recent years, UniCredit's plan of share buybacks and dividend increases to remunerate its shareholders forms part of a four-year plan that also includes cuts in jobs and costs.

However, it decided to withdraw its dividend payment proposal for 2019 and to postpone its share-buyback program, following a request to European lenders by the European Central Bank.

Rival Intesa Sanpaolo also suspended its proposed cash dividend for 2019 and its entire 2019 net profit allocated to reserves.

On Tuesday, Intesa said it expected to reach a profit of at least EUR3 billion this year, compared with EUR4.2 billion in 2019.

However, the bank posted a surprise 10% rise in net profit for the first quarter and said it still plans to pay 75% of its net profit as dividend this year, if regulators allow it.

Besides booking EUR403 billion in loan-loss provisions, Intesa said it set aside an additional EUR300 million to cover risks related to the pandemic and that it could use the proceeds of the recent sale of its merchant-acquiring business to cover for additional EUR1.2 billion of pandemic-related losses during the year, if needed.

Write to Giovanni Legorano at giovanni.legorano@wsj.com

(END) Dow Jones Newswires

May 06, 2020 09:07 ET (13:07 GMT)

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