In One Chart: This Chart Shows Bad Loans For Italian Banks Are Dropping Like A Stone

At least by one measure, Italian banks are in much better shape compared with a few years ago.

This chart tweeted by Frederik Ducrozet, an economist at Pictet Wealth Management, shows the dramatic decline of bad loans among Italian banks, a widely held source of concern to investors who fear that stresses in Italy’s financial sector could hurt the eurozone’s economic stability.

Italian banks now hold around €100 billion, or $113 billion, in bad debts at last check, around half of its peak in 2017. Nonperforming loans as a share of total debt in the banking system have fallen to slightly above 6% from more than 12%, data from the Bank of Italy show.

The shrinking holdings of souring debt on the balance sheets of financial institutions may ease some worries that growing debt piles could weigh on the capital cushions of banks like Monte dei Paschi di Siena BMPS, +1.24%  , crimping lending and, in turn, economic growth.

The chief financial officer of Italian bank Intesa Sanpaolo ISP, +0.72%  said the health of domestic banks had improved markedly since the financial crisis, in an interview with MarketWatch. The FTSE Italian All-Share Financials index IT8000, +0.99% is up more than 13% this year, though the banking sector equity index has yet to reclaim its May highs.

Since the eurozone debt crisis started in 2009, investors have scrutinized the mounds of bad loans in economies considered peripheral, including Italy, Portugal and Spain.

To clean up its ailing financial sector, Rome has tried to offload the troubled debt to investors in a bid to recapitalize bank balance sheets.

Data from Debtwire show the steep fall in bad bank loans have been partly driven by efforts to securitize and sell them to investors like Italian private-equity fund Atlante. These plans have been backed by the Garanzia Cartolarizzazione Sofferenze (GACS) scheme, which could be renewed again in the next few days. In effect, the state-run program guarantees the safest portions of these securitized loans, easing their disposal.

Still, Italian banks are left holding sizable sums of bad loans as is in the throes of a recession, its first since 2013. Amplifying fears around these debts is the fact that eurozone growth prospects have taken a hit after the European Central Bank cut its forecast for 2019 gross domestic product for the 27-member economic bloc to 1.1% from 1.7%.

The 10-year Italian government bond yield TMBMKIT-10Y, -2.37%  stands at 2.51%, well below the recent high of 3.67% reached last October, Tradeweb data show. Bond prices move inversely to yields.

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