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Here’s how toxic Italy’s bad loans really are

Italian banks may be rallying on Monday, but the sector has still to shake off the concerns over their hefty bad loan books.

Out of many of the euro zone's banking systems, Italy's has been one of the most scrutinized, with the sector facing some 360 billion euros ($411.5 billion) in bad loans.

However, despite the turbulence, experts suggest the country's financial system isn't nearly as bad as the market thinks.

"The actual issue of the Italian banking system has been by far highly overestimated," Valerio De Molli, managing partner of The European House – Ambrosetti, told CNBC on the sidelines of the Ambrosetti workshop, over the weekend.

"If you look into the gross amount of non-performing loans (NPLs), you have quite an immense figure; we are the worst in Europe in comparison to total lending. We are one third higher than European average, that's bad."

"However, if you look into the net figures, all relevant banks have already amortized those costs and eventual risks. So that's one fact which is underestimated and under-evaluated in my opinion."

Intesa Sanpaolo's chief executive backed up these beliefs back in February, telling CNBC that its stock of bad loans had decreased and suggested how the focus should be more on net.

"If you have, like Intesa Sanpaolo, 40 billion euros of gross bad loans, but you have 15 billion euros net — because we posted 25 billion euros of provisions — and you have 30 billion euros of collateral facing the 15 billion euros, you are in a situation of having a proxy of zero risk. And then you have all the benefit of the recovery in the real estate market in Italy," Carlo Messina, the bank's CEO told CNBC.

De Molli's comments come as reports suggest Italy's largest lenders are to meet with the Treasury and the Bank of Italy on Monday to discuss plans for a state-backed fund to tackle bad loans, sources have told Reuters.

The fund itself would have a maximum capitalization of 5 billion euros ($5.7 billion), one source said to Reuters. The news caused Italian banks to soar in European trade, with BMPS, Unicredit and Banco Popolare all posting sharp gains on Monday.

With Italy's economy and the banking sector being "undermined" by the bad loan situation, it's now become a key task for Italy's government to start "cleaning up" the NPL situation, David Benamou, managing partner at Axiom Alternative Investments, told CNBC Monday.

While some may say forcing a "fire sale" of the NPLs could be easier and quicker, Benamou believed this reform process would be better for the banking sector.

"Mr (Matteo) Renzi has pushed a reform of the bankruptcy proceedings in Italy, which now has been done but has still to be implemented. So if this reform takes place it's going to change completely the way Italian banks will operate from a non-performing loan perspective."

"The way that they're pushing currently the reform and the setting up of this 'bad bank', (is) in a way is (smoother) and endangers much less the Italian banking sector, than having a one off (fire sale)."

Reuters and CNBC's Katy Barnato contributed to this report.

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