Italian banking stocks saw another day of meltdown Tuesday as skittish investors were spooked by the country's burgeoning toxic loan crisis.
Fresh data showing non-performing loans hitting a new record high undermined confidence amid fears Italy's already weak economy -- struggling to recover from a three-year recession -- would take a battering.
The world's oldest bank, Banca Monte dei Paschi di Siena (BMPS), was hit hardest and was briefly suspended from trading following an equally bleak Monday which saw stocks plummet across the board.
News that the European Central Bank (ECB) was asking several banks -- including BMPS, Banco Popolare and UniCredit -- for data on their bad loans fuelled concerns the situation was spiralling out of control.
The shares in all six -- including Carige, Banca Popolare dell'Emilia Romagna (BPER) and Banco Popolare di Milano (BPM) -- fell for a second day running.
Italy's Finance Minister Pier Carlo Padoan insisted there was "no specific concern regarding Italian banks" and the ECB was merely carrying out "a study to identify best practices in the management of non-performing loans (NPLs)".
The ECB is collating information from a series of eurozone countries in an effort to draw up an action plan on bad loans.
Italy's Banking Association said Tuesday that bad loans, which experts say are unlikely to ever be repaid, hit a record 201 billion euros ($219 billion) in November.
With the steady rise tightening the screws on the banking sector, Raj Badiani from IHS Insight told AFP he expected " the stock of NPLs to remain troublesome in the next few years".
- 'Pressure to offload NPLs' -
"Italian banks are under pressure to address their capital shortfalls by forgoing dividend payouts, selling assets and cutting costs even considering some consolidation across the sector, while putting in place strategies to offload accumulating NPLs to private investors," he said.
Bank consolidation is a hot topic in Italy, which boasts over 700 different banks. Delays in consolidation and efforts to cleanse the sector of its toxic loans were making investors "increasingly impatient", he said.
Italy has been negotiating with the European Union over setting up a "bad bank" to help banks shed NPLs but so far has run into stiff opposition on the lines that government intervention would qualify as state aid.
Bank stocks have been volatile for weeks as rumours fly over possible mergers. Last week reports cited advanced negotiations between Banco Popolare and Banca Popolare di Milano (BPM), as well as talk of a BPM - UBI partnership.
Should either of these mergers go through, it would create the third biggest Italian bank, behind Unicredit and Intesa Sanpaolo.
At the end of last year, Italy launched a 3.6-billion euro rescue of four small saving banks: Banca delle Marche, Banca Popolare dell'Etruria, Cassa di Risparmio di Ferrara and Cassa di Risparmio di Chieti.
Under the plan, which was rushed through before EU "bail-in" rules came into force in January, the Bank of Italy will create a "bad bank" containing the impaired assets of all four failing lenders, and seek buyers for what will then be sound banks.
But while the government hoped the measure would stem panic among small savers, Badiani said that "with a highly fragmented financial sector, and a number of small lenders affected by Italy's two recessions from 2012, we can envisage further rescues".
Banking stocks all closed massively lower on the Milan stock exchange, vastly underperforming the FTSE Mib index which ended 1.04 percent higher on the day.
BMPS closed down 14.37 percent, Carige down 11.23 percent and Banco Popolare ended 6.30 percent lower.