© Reuters. Banco BPM close to bad loan deal with Credito Fondiario/Elliott – sources

MILAN (Reuters) – Banco BPM (MI:) is close to selling up to 7.8 billion euros (6.9 billion pounds) in bad loans along with a stake in the Italian bank’s debt recovery business to Credito Fondiario and U.S fund Elliott, three sources familiar with the matter said.

The sale would allow Banco BPM to reduce its problem loan ratio to as low as 10.6 percent of total lending from 16 percent at the end of September, putting to rest concerns the bank may need to raise capital to clean up its balance sheet.

The board of Italy’s third-largest bank will meet later on Monday to pick the winner of the race in which Credito Fondiario and Elliott were up against Italy’s top bad loan specialist doBank (MI:), backed by U.S. private equity firm Fortress, and a third group comprising U.S. funds TPG, Christofferson, Robb & Company and Davidson Kempner.

All the parties involved declined to comment.

Banco BPM earlier this month struck a consumer credit agreement with Credit Agricole (PA:) which helped to boost the Italian bank’s capital, paving the way for this latest bad loan deal.

Problem loans are normally sold at a loss, which depletes a bank’s capital reserves. A source involved 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.

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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.

Created last year from the merger of Banca Popolare di Milano and Banco Popolare , Banco BPM has already offloaded 11.5 billion euros in bad loans since the end of 2016.

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