MILAN, Oct 18 (Reuters) - Italian banks have not suffered from a property collapse like the one crippling their Spanish peers but they are still at risk of large writedowns from the declining real estate market.
Italy’s property prices have fallen 16 percent since 2008 in real terms and 44 percent of bank loans are tied to the sector.
This means banks are on track for property-related losses for between 9 and 65 billion euros, on top of 23 billion euros of bad loan impairments built up during the recession, consultancy AlixPartners estimates.
“This could be a ticking bomb for Italian banks,” Claudio Scardovi, managing director at AlixPartners, told Reuters.
“We may have not had the excesses of the housing bubble seen in Spain and Britain, but we still risk crashing sooner or later if nothing is done about it.”
Italy’s housing market drop has not been as dramatic as in Spain or Ireland. Madrid has forced lenders to book 137 billion euros of losses on bad real estate loans and foreclosures.
Italian banks exposure to the real estate sector - mortgages and loans to property developers - totals 662 billion euros, compared with 951 billion euros for Spain. The difference is mainly due to the fact that the stock of mortgages in Spain is almost double that of Italy.
Luca Dondi, a real estate analyst at think-thank Nomisma, expects the number of transactions for Italian residential housing to have fallen by 38 percent this year from 2006.
Meanwhile, sellers take twice as long to find a buyer and have to offer discounts of 15 percent on average to close the deal, Italian business lobby Confindustria says.
Another sign of weakness is that buyers are shunning foreclosure auctions to sell houses that were used as collateral for defaulted loans despite cheap prices. The commercial property market is not doing any better.
“There are signs of great fragility,” Dondi said, estimating the number of unsold new houses in Italy now at 500,000-600,000 units versus a 1.5 million forecast for Spain.
“DELAY AND PRAY”
House prices, particularly in big cities like Milan and Rome, have however held up relatively well. Real housing prices in Italy have fallen by 4.3 percent a year since 2008, compared with 7.3 percent in Spain and 11.7 percent in Ireland.
But that is partly because Italian banks are keeping prices artificially high by refusing to write down their loans to the real estate sector, Dondi and other property experts say.
“It’s a ‘delay and pray’ tactic. The banks are offering moratoriums and other forms of breathing space to debtors. But by doing so, they risk depressing the market for a lot longer,” said Dondi, who does not expect a recovery before five years.
“The Spanish bubble inflated quickly and burst quickly. Here the bubble is smaller, but we are only letting the air out little by little.”
“The banks are just postponing their day of reckoning.”
Another real estate consultant, whose clients include some of Italy’s leading banks, said: “The banks don’t want to mark-to-market their real estate exposure because they would have big losses, I think in the region of tens of billions of euros.”
“But until we see a clean-up in the banks’ balance sheets there won’t be a recovery in the property market.”
At the same time, banks have become a lot more selective in lending new money in the face of rising bad loans, higher funding costs and more stringent capital requirements.
Mortgage loans in Italy halved in the first quarter of 2012 compared with a year earlier, statistics agency ISTAT said.
A report last week by the International Monetary Fund drew some parallels between Italian and Spanish banks, noting that for both the real estate sector accounted for most of a sharp rise in non-performing corporate loans.
The report was strongly rebuked by Italian bankers, with Intesa Sanpaolo Chief Executive Enrico Cucchiani saying a housing bubble was unlikely in Italy and banking lobby ABI complaining to the IMF that the comparison was misleading.
One mitigating factor in Italy is the low level of households’ debt, which at roughly 60 percent of disposable income is well below the EU average and less than half the indebtedness of families in Spain or the United States, according to Bank of Italy data.
That makes Italy’s mortgage debt stock of 368 billion euros “in theory one of the safest in the world,” AlixPartners said - as a comparison, mortgage loans in smaller Spain totalled 644 billion euros in June this year.
The big concern is rather the health of loans granted to the property development sector.
“Banks don’t know how to deal with it. There were hundreds of building projects in 2007-2009 that got stuck because the demand vanished. We funded all of them to find that only 60-70 percent of the work involved was done,” an executive at a top Italian bank said on condition of anonymity.
“Now we’re stuck with unfinished assets whose main value is probably not more than the land they are built on.”