For UniCredit SpA (UNCFF), the largest Italian bank by assets, news of the request from the European Central Bank’s Single Supervisory Mechanism sent shares tumbling amid rising concerns about the lack of collective action in dealing with the problem. After years of fumbling following a rapid pace of acquisition and expansion in the lead up to the sovereign debt crisis, the company’s leadership is now tasked with paring down its cross-border exposure as the bank struggles to show returns to investors.  However, the nonperforming loans issue will weigh heavily on the shares in the near-term as UniCredit remains under pressure to show shareholders it is capable of a turnaround after a substantial downturn.

Loan Crisis

Recently announced regulatory requests for data on Italian lending from key regional banks comes on the heels of a sharp deterioration in valuations.  According to the most recently available statistics from the IMF, nonperforming loans for Italy currently sit at approximately 17% of the total outstanding, substantially higher than comparably European and American metrics.  UniCredit’s share stands at approximately €84 billion, nearly 20% of total loans outstanding from the bank and the highest among all European banking peers. While other Euro Area countries have setup bad banks to handle nonperforming loans and keep the lending pipeline open, Italy has been slow to respond to this lingering issue. 

Efforts undertaken by the European Central Bank to ease credit conditions and access to liquidity have seen a demonstrable uptick in lending activity for the region.  After falling steadily since 2011 with the onset of the sovereign debt crisis, 2014 marked a turnaround with the asset purchase program announced in 2015 seeing loans to the private sector climbing over the past 12-months.  However, by comparison, Italy has experienced no such improvement, and nonperforming loans burdening bank balance sheets are the main culprit as loans to the private sector continue to slide.  Without new loan origination and a mechanism to dispose of nonperforming loans like a bad bank, UniCredit will continue to be impaired by souring assets for years to come.