Italy's larger banks are mulling a plan to offer collective support for two of the country's smaller, struggling lenders -- Banca Popolare di Vicenza and Veneto Banca -- according to a report, just days after European officials pushed for the rescue of Spain's fourth-largest bank.
Reuters reported that €1.2 billion ($1.4 billion) could be injected into the two lenders as part of a broader €6.4 billion recapitalization that is needed to steady their balance sheets.
The FTSE Italian Banks index, the sector benchmark, was quoted modestly lower Thursday while UniCredit SpA, the country's biggest lender, was seen 0.13% lower at €15.51 each.
Both Vicenza and Veneto received what was effectively bailout cash from state backed rescue vehicle Atlante, which was also supported by private sector banks, last year so they could address their non-performing loan stocks.
The European Commission approved debt guarantees for both banks in January, enabling the Italian government to underwrite bond issuances that allowed the pair access to new funding in return for a fee is paid to the Italian government.
Popolare di Vicenza had attempted an initial public offering in May, just months before European Banking Authority stress tests and the subsequent implosion of Monte Paschi (BMDPY) , although it failed due to lack of interest from investors.
Bad loans have been a key focus of the European Central Bank since September 2016, when it said that all banks in the euro area must develop a credible plan for reducing their NPLs and that it would assess the proposed actions and monitor their implementation.
It set a deadline of March 2017 for banks to submit their proposals and said that it would come down hard on lenders whose NPL ratios are considerably above the Eurozone average. In September the average NPL ratio in the euro area was 6.4% but Italian banks have an average of more than 15%.
It had a non-performing loan ratio of nearly 40% while weak profitability had made it difficult to reduce its bad debt pile as sales will likely have meant write downs, which reduce regulatory capital, which is then difficult to replace because of a flimsy bottom line.
Santander paid only €1 for Popular but will raise €7 billion order to strengthen the combined balance sheet and facilitate the write down of the remaining bad loans.