UPDATE 1-Monte Paschi flags bad loans as bank's biggest problem
(Adds CEO comment, background, context)
SIENA, Italy, April 29 (Reuters) - Bad debt is the main problem for Monte dei Paschi di Siena, its chief executive said, after the bank increased its planned share sale to 5 billion euros ($6.9 billion) to help plug any gap in its finances a Europe-wide check might find.
Italy's third-biggest lender had 21 billion euros of net soured loans at the end of 2013, accounting for 16 percent of its loan portfolio - one of the highest percentages among Italian banks.
"Credit quality is the most significant problem the bank is facing right now," CEO Fabrizio Viola told the bank's annual shareholder meeting on Tuesday .
The need to set aside more cash to cover potential losses and comply with an asset review being conducted by European regulators was behind the board's decision to increase the size of the cash call from 3 billion euros, a source with knowledge of the matter said.
"The asset quality review is giving the bank a very hard time," the source told Reuters, adding the bank needed to increase its coverage of bad loans in line with bigger domestic rivals like UniCredit.
Viola and Chairman Alessandro Profumo - both appointed in 2012 to turn the bank around - faced criticism on Tuesday from small shareholders worried about the prospect of a cash call that is 2 billion euros larger than the bank's market value.
"Our fear is even 5 billion euros may not be enough. We are not out of the woods yet," said shareholder and former Monte dei Paschi employee Romolo Semplici.
Italian banks are cleaning up their accounts and setting aside billions of euros to shield themselves from bad debts which rose sharply as Italy suffered its longest recession since World War Two. Continuación...