Bad loans at Italian banks rise to 202 billion euros in January

MILAN (Reuters) - Gross bad loans at Italian banks rose further in January to 202.05 billion euros (£156 billion), data showed on Wednesday, highlighting the continuing damage to lenders' balance sheets from a deep recession that ended in late 2014.

However, the residual value of the stock of bad loans -- which takes into account writedowns booked by lenders -- fell to 83.61 billion euros in January from 88.95 billion euros in December, reflecting higher loan loss provisions by banks at the end of the year.

The Bank of Italy said gross bad loans were up 9 percent from a year earlier in January, compared to an annual rise of 9.4 percent in December when the stock stood at 200.94 billion euros.

With soured loans tying up precious bank capital, corporate loans in Italy continued to shrink at the start of the year. Data showed bank lending to non-financial companies fell 0.9 percent in January after a 0.7 percent drop in December.

In a positive sign for the banking system, deposits grew 3.6 percent from a year earlier in January after a 3.9 percent rise in December.

Weaker Italian banks suffered a drop in deposits in recent months as clients took fright at the rescue in November of four ailing banks which imposed losses on shareholders and junior bondholders. Tough new European Union rules on state aid that came into force in January would also see deposits of more than 100,000 euros "bailed in" to help avert a bankruptcy.

Overall deposits continued to rise, however, as people moved their money to banks perceived to be stronger.

Banks continued to reduce their stock of debt, with the volume of outstanding bank bonds dropping by 16.5 percent from a year earlier after a 15.1 percent contraction in December.

Bond issuance by banks has been falling in recent years after Italy scrapped a favourable tax regime in place until 2011. The losses suffered by holders of the four rescued banks' junior bonds have further reduced appetite for bank debt among ordinary Italians.

(Reporting by Valentina Za; Editing by Catherine Evans)