The pandemic is proving less of an obstacle to bank marriages than weddings between people. unloved spanish lenders caixabank and bankia agreed to tie the knot in september. italys intesa sanpaolo successfully wooed rival ubi banca with the promise of cost-effective cohabitation. french giant crdit agricole may pair up with banco bpm, another italian. as economies and bank earnings contract, such marriages of necessity will become more frequent.

Weight reduction for the special day remains crucial. southern european banks hoping to wed prioritise non-performing loans in low-single digits. bankia and caixabank, when combined, will have an npl exposure of 4 per cent. italys banca monte dei paschi di siena, already having shed tens of billions, will move to a similar level of npls after a debt sale to state fund amco. banco bpm is partaking in its own npl-reducing exercises.

Italian banks have shed about 130bn of the worst-performing loans or sofferenze since 2015. these defaulted loans represent about half of remaining italian npls of 110bn. unable to pay loans, or utps, make up the remainder. these are typically distressed borrowers that remain clients of lenders; more valuable but costlier to deal with.

The bulk of disposals to date have been of sofferenze. secondary market participants such as credito fondiario, owned by us hedge fund elliott, are highly active. they may buy a 1bn utp portfolio from banco bpm.

A european moratorium has postponed an increase in distressed debts until next year. utps were under control thanks to better lending practices and a growing italian economy. the pandemic has reversed that trend. utps already represent the bulk of bpms gross npl exposure of 9 per cent.

Italian banks are badly exposed as a result of their penchant for corporate lending. provisions for loan losses are rising. at banco bpm these increased by just over a third in the first half of this year. at unicredit they almost doubled. rising utps will begin to threaten merger-friendly npl ratios next year. expect distressed debt funds to take full advantage of that, as banks put more utp assets on the market.