MILAN (Reuters) - Banco BPM (BAMI.MI) said on Monday it had agreed to sell up to 7.8 billion euros (6.97 billion pounds) in bad loans along with a stake in its debt recovery business to Credito Fondiario and U.S. fund Elliott, confirming what sources previously told Reuters.
The sale will allow Banco BPM to reduce its problem loan ratio to as low as 10.6 percent of total lending from 15.9 percent at the end of September, putting to rest concerns the bank may need to raise capital to clean up its balance sheet.
Credito Fondiario and Elliott were up against Italy's top bad loan specialist doBank (DOB.MI), backed by U.S. private equity firm Fortress, and a third group comprising U.S. funds TPG, Christofferson, Robb & Company and Davidson Kempner.
Banco BPM, created last year from the merger of Banca Popolare di Milano and Banco Popolare, said it had an option to cut the size of the loan sale to 7 billion euros.
Italy's third-largest bank said the impact on its CET 1 capital ratios of the sale of the portfolio and its debt recovery business would be smaller than the boost from its consumer credit changes.
Banco BPM earlier this month struck a consumer credit agreement with Credit Agricole SA (CAGR.PA) which helped to boost the Italian bank's capital, paving the way for this latest bad loan deal.
The bad loan recovery business, which will be 70 percent owned by Credito Fondiario, will manage the portfolio being sold but will also have a 10-year contract to manage 80 percent of new bad debt flows generated at the bank.
Banco BPM said the operation valued the whole of the loan recovery platform at 143 million euros.
Founded in 1898, Credito Fondiario has taken on a growing role in the Italian distressed debt market after London-based hedge fund Tages bought it from Morgan Stanley in 2013. Elliott became an investor in Credito Fondiario in 2016 and it recently increased its stake to 81.6 percent.
Earlier this year Credito Fondiario closed the acquisition of the debt collection business of Banca Carige (CRGI.MI) and now manages more than 45 billion euros in bad loans in Italy.
Problem loans are normally sold at a loss, which depletes a bank's capital reserves. A source involved in the bidding process told Reuters last month Banco BPM's bad loans were being valued at a fifth of their gross book value.
Banco BPM's latest efforts to clean up its balance sheet had run into difficulties due to a sharp rise in state borrowing costs under the country's eurosceptic government, which has made foreign investors nervous and hit the value of banks' sovereign bond holdings.
Like other Italian banks, Banco BPM had seen its core capital eroded by the falling value of its domestic government bond holdings in the three months through June. This has added to pressure on Banco BPM's shares, which trade at an almost 70 percent discount to its assets.
However, the bank managed to bolster its capital levels in the third quarter with an asset sale and accounting changes.
It gained a further capital benefit by selling part of its ProFamily consumer financing business to the Agos consumer credit joint-venture it has in place with Credit Agricole for 310 million euros ($352.66 million).
Since the end of 2016, Banco BPM has offloaded 11.5 billion euros in bad loans.
The bank said it expected to close the deal with Credito Fondiario and Elliott by the end of the second quarter of next year.
Banco BPM was financially advised by Deutsche Bank and Banca Akros, with Deloitte as industrial and Chiomenti as legal advisers.
(Reporting by Massimo Gaia, Cristina Carlevaro, Valentina Za and Stephen Jewkes; editing by Jane Merriman and Lisa Shumaker)