European Commission and Italian banks reach deal on bad bank

Under the terms of the agreement, Italian lenders will be allowed to offload up to €337bn in non-performing loans - 17.5% of Italian banks´ total loans) to a special purpose vehicle which in turn will securitise them - including special incentives - and sell them.

Critically, the Commission decided that the deal - the technical details of which still need to be thrashed out - do not constitute state aid under the bloc´s competition rules. That is because the state guarantees which the new securitised loans will carry will be extended at market prices.

The guarantees will also only be offered on those securities which have not previously enjoyed an investment grade rating.

Banks participating in the scheme should thus be able to avoid having to bail-in their creditors and uninsured depositors, RBS explained in a research note sent to clients.

"Shifting NPLs (€337bn in total, or 17.5% of total loans) is important for relieving banks of unproductive capital and allowing them to increase lending to productive businesses.

"This is especially important for the Italian economy because over 95% of Italian firms are micro-companies (<10 employees), reliant on bank lending for credit," RBS said.

Nevertheless, the broker retained a cautious stance on the sector.

"Italy and the EC reach a deal on “bad bank”, but NPL sales with state guarantees are not a game-changer for Italian banks, in our view. Stay long [on credit of] only the strongest banks: Intesa, UBI, Mediobanca. Avoid everything else," the broker added.

"Italy’s banking system needs to become leaner and more efficient. To get there, more cost reduction and consolidation will be needed. While some reform efforts have been made results have been slow to materialise."