ECB letter to Carige reopens Italy bank wounds

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[March 04, 2016]  MILAN (Reuters) - A letter from the European Central Bank (ECB) asking Italian lender Banca Carige to draft a new business plan has rekindled concerns over the health of Italian banks, sending shares in the sector lower on Friday.

Carige said the ECB had asked it to present a new funding plan by the end of March and a business plan two months later in order to reduce risks and meet supervisory requirements.

Carige lost 3.4 billion euros in direct funding last year partly from other banks but also from retail clients worried about the introduction of stricter new European rules on rescuing ailing lenders, which require hitting investors first.

Following the ECB's letter, disclosed late on Thursday, the bank said it had moved to book a 57 million euro ($62 million) writedown so its net loss for last year doubled to 102 million euros.

Its shares lost 10 percent to 0.566 euros by 1107 GMT (06:07 a.m. EST), helping drag down the Italian bank sector as a whole <.FTIT8300> by 2.3 percent.

Two Milan-based traders said the Carige statement had revived concerns over the fragility of Italian banks, as the sector struggles to digest high levels of bad loans without having to turn to investors for cash.

Troubled loans at Italian banks are running at nearly a fifth of total lending after a three-year recession. The economy returned to growth last year but the recovery is already losing steam, raising doubts about the banks' ability to improve poor levels of profitability and asset quality.

UniCredit <CRDI.MI>, Italy's only globally systemic ally important financial institution, has failed to put to rest worries it may need a capital injection, pressuring Chief Executive Federico Ghizzoni, who has repeatedly ruled out the need for a capital increase.

"It's raised again the specter UniCredit may need to ask the market for new capital," one trader said.

Shares in UniCredit were down 3 percent.

Sources said in February Ghizzoni had lost the support of several influential shareholders frustrated with the bank's weak share price performance.

Deputy Chairman Luca Cordero di Montezemolo was quoted on Friday by Corriere della Sera newspaper, in response to a question about the need for management change, as saying the bank needed modernization and governance streamlining.

($1 = 0.9140 euros)

(Reporting by Stephen Jewkes and Valentina Za, Editing by David Holmes)

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