Banco di Sicilia has joined the long list of Italian banks that are at one stage or another of putting together securitizations backed by non-performing loans, according to banking sources in Italy.

The bank is considering a deal will parcel bad loans with a face value of at least E775 million ($800 million), equal to around a third of the bank's bad loan portfolio, bankers said.

Though a final decision has not been made, bankers said that if a deal goes ahead Banco di Sicilia will hope to close it before the end of the year, as the Sicilian bank is 40%-owned by Mediocredito Centrale, the state-owned development and investment bank, which is being lined up for privatization by the Treasury before the turn of the year.

"They hope to get this deal done before people put forward bids for Mediocredito Centrale. The reason is two-fold: to clean-up the balance sheet and to prove that it is possible to clean-up the balance sheet," said a source close to the deal.

Bankers said that Mediocredito is considering arranging the deal itself, though with help from international investment banks.

Banco di Sicilia joins a long queue of banks hoping to launch securitizations wholly or partly backed by bad loans including a Greenwich NatWest-arranged deal for Italiano di Credito Fondiario, which is expected to hit the market soon and comes after Morgan Stanley and Paribas proved that the securitization of Italian problem loans is possible.

Morgan Stanley Dean Witter, for instance, has privately closed three such deals, the latest of which was worth E120 million and was launched in July, while Paribas arranged a E1.4 billion bad loan deal for Banca di Roma, also in July.

The securitization of problem loans was made much easier by Italy's new securitization law, which stripped away some significant tax and regulatory complications and also introduced a two-year grace period during which a bank can account for losses resulting from the sale of bad loans over five years, rather than take the accounting punishment in one go.

Market pros expect that the two-year grace period will see a steady flow of such deals, as there is no shortage of bad loans in the Italian banking system, with non-performing loans making up 10% of all loans in Italy a figure that rises to 24% in the South.

The pressure to deal with the problem is also increasing as Italian banks prepare themselves for the sector's consolidation and realize that they are no longer just competing against also each other but against banks with healthier loan books from across Euroland.

However, securitization experts in Italy and London point out that there are still considerable obstacles that will prevent asset-backed deals stripping out all of the problem loans in the banking system.

Perhaps the biggest problem is that few banks have a good enough systems to be sure of the performance of each loan information about consumer loans is particularly cloudy a lack of precision that is likely to make securitization very tricky, bankers said.

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