S&P says Italian banks most exposed to ECB's bad loan plan

MILAN (Reuters) - New European Central Bank rules on impaired debts could hit Italian banks hard and lead them to cut lending to companies, credit rating agency Standard & Poor's said on Monday.

The ECB has faced criticism for proposals that would force euro zone's banks to set aside money to cover 100 percent of a loan turning sour within two years if unsecured, or seven years if backed by collateral.

The ECB is trying to find a way to tackle European banks' bad loans, which stand at around $1 trillion (£752.8 billion). But the latest proposals could raise the amount some banks have to set aside against bad loans.

Italian officials have warned it risks hurting corporate credit in a country where companies are mostly small and reliant on bank financing.

"We see Italian banks becoming increasingly less keen to lend to domestic corporations," S&P's said in a report looking at the effects of the ECB's proposal. S&P singled out Italian, Greek and Portuguese banks as the most affected.

The rating agency said loans to firms in Italy were up 0.5 percent year-on-year in June net of disposals, after dropping by around 20 percent a year since 2008.

"Overall, we think Italian banks are potentially most exposed among eurozone banks to the new proposal by the ECB because of the very long workout periods in the country," S&P said.

S&P forecast 100-120 billion euros in problem loan sales in Italy by 2019 and said offloading large amounts of impaired debts at current prices could force banks in Italy and Portugal to take capital strengthening measures.

(Reporting by Valentina Za. Editing by Jane Merriman)