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European Bank Shares Fall Out of Bed as Monte dei Paschi Rescue Fails to Reassure

One of the recurrent features of the European kick the can down the road approach to systemic risks like wobbly banks ands sovereigns is that the confidence building measures are quickly recognized as band-aids over gunshot wounds, or even gangrene, and Mr. Market goes back to having fits.

Last Friday, after EU banking authorities revealed the expected, that Italy’s number three bank, Monte dei Paschi, needed yet another rescue, the press reported on a solution. But even with the Financial Times reporting some of the nitty-gritty details, the comments confirmed that there were enough gaps that the FT account had some important gaps.

I’d love readers to correct or add to this 50,000 foot level recap, based on the FT and reader input from the German press:

€50 billion face value of dud loans are transferred to an SPV and severely haircut (I believe to 33-34%)

On the liability side is 3 tranches:

• A senior tranche with a government guarantee, sold to third party investors

* Atlante, the quasi public backstop fund, takes the €3 billion junior bond tranche

• The equity tranche goes to current equity investors (not clear how this is funded without it being a variant of a rights offering…..or this may just be muddied reporting from Germany).

While it would be nice to get crisper details, here’s the key bit, from a FT story last week:

Senior bankers expect the recapitalisation to take place in the fourth quarter…

The proposal is being presented as “the last bailout” for Monte dei Paschi, with the expectation that, if the lender cleans up its bad loans, it will become a takeover target. Still, senior bankers admit it is highly risky and will prove a tough sell to drum up support for the recapitalisation with the bank’s past history of burning investors. Bankers do not rule out that, if the recapitalisation fails to find enough buyers, Monte dei Paschi may be forced to swap some of its debt for equity.

My understanding is “fourth quarter” means after Italy’s referendum, with the ECB’s new bank liquidity facility tiding over the doddering bank until then if support is needed.

What might that mean? Most underwritings have some form of “extraordinary event” out. Given how difficult this deal is expected to be, I’d expect this clause to be at as permissive as they get in European deals.

So the question is: Would a failed referendum be enough for the underwriters to invoke this clause? If so, that means this deal is even more cynical than the usual Eurocrats’ special.

Whatever the cause, investors are now in a funk about European banks in general and Italian banks in particular. From a Financial Times report today:

The Euro Stoxx Banks Index, a broad measure of the continent’s lenders, dropped 3.2 per cent in early trading on Tuesday following a 2.8 per cent decline on Monday…

Appetite for bank shares was eroded further on Tuesday by a blitz of news, including a disappointing set of results from Commerzbank, Germany’s second-largest bank, which reported a 32 per cent drop in quarterly profits. Commerzbank shares fell 8.2 per cent to a record low of €5.28…

Although banks’ share prices have retreated across Europe, Italy has been a simmering flashpoint because of anxiety over whether they will need fresh capital to compensate for their non-performing loans.

Italian bank shares were sharply lower for a second day as investors speculated that lenders may need to write down the value of the loans on the same scale required by a rescue of Monte dei Paschi, Italy’s most troubled bank.

The shares of UniCredit, Italy’s largest lender by assets, were temporarily suspended after dropping 5 per cent following an almost 10 per cent plunge on Monday. Banca Popolare weakened 3.4 per cent, while UBI Banca fell 4.7 per cent.

Investors pointed to the details of Monte dei Paschi’s plan to sell non-performing loans, suggesting that if a similar pricing approach were used for other Italian banks it would force them to raise more capital.

Another story, The vanishing market value of European banks: charts, showed the impressive decay this year in the prices of Commerzbank, Unicredit, Barclays, Credit Suisse, and DeutscheBank share prices.

And Fast FT report that the carnage has gotten worse:

European bank stocks are heading for their worst one-day loss since the prolific falls suffered during the two days after the Brexit referendum, and beyond that, since the bumpy ride seen in February.

Northern Italian lender Banca Popolare dell’Emilia Romagna has sold off hard over the last hour, snatching the biggest faller title from Banca Monte dei Paschi.

Bper shares are now down 10.3 per cent today, its fourth worse one-day loss since the depths of the eurozone crisis.

European bank shares have come under intensifying pressure today as markets continue to digest the outcome of the European bank stress tests, the Monte dei Paschi rescue deal unveiled on Friday, the impact of negative rates on earnings and some shaky earnings from Commerzbank this morning.

Shares in Monte dei Paschi have skidded 10.2 per cent and are down 17 per cent from the high they hit on Friday after a long awaited rescue deal was finally agreed.

Commerzbank shares are plumbing new record lows, down 8.9 per cent this afternoon.

Shares in every large listed European bank are in the red, and the Stoxx 600 banks index has skidded 4.4 per cent, its third deepest one-day drop of the last six months.

Investors are going to keep hammering banks, pressing EU authorities to relent and let the Italian government fund bailouts, as prime minister Matteo Renzi has sought from the beginning of the year. One colleague argued that if Deutsche Bank’s share price dropped below €10 a share, that would alarm officials so as to induce them to take more aggressive measures. The price is now €11.27, just a tad above the 52 week low of €11.22. The grim tone of the reports today does not lead one to expect a big bounce in the next few days, although there could be a weak relief rally. In other words, this drama is very much in play, and not in a good way.

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10 comments

  1. Synoia

    As I understand it is is effectively a private bankruptcy. The shareholders take the losses on the exchange of their bank shares for shares in the SPVs.

    I had to read multiple announcements, with my limited knowledge, to understand who takes the loss. I was ignoring the jargon, and looking for the losers.

    As you so correctly point out, the result is shareholders exit a “lesser rated” or “at risk”European bank shares.

    1. sunny 129

      Most of the shareholders, at least in Italy are retail investors and ordinary citizens who were sold the Bank bonds as ‘safe’ products!

      Remember the guy who lost 100,000 euros of pension investment and committed suicide. If he had invested that amount in ‘saving’ account and not invested in Bank’s bonds, he didn’t have to meet that fate. No one is held accountable for this outright fraud b/c Govt was complicit in order to save the Banks.

  2. Clive

    Another problem is the stress-free (not quite, but they leave a lot to be desired) stress tests. No-one either inside the industry nor outside really believes them. When you have complete garbage barges like RBS and Deutsche Bank “passing”, rather than enhancing confidence, confidence is eroded.

    It would of course be far better to have more banks assessed under a tough no-nonsense set of criteria — completely immune from bank and government lobbying — and end up failing and being told to cut bonuses and retaining earnings. It is much easier to raise capital in that fashion in the current investment climate than having zombie banks get towards the event horizon and then have to try (and possibly fail) to raise capital from investors.

    But no. Flaky banks are still being allowed to pay dividends in a valiant but probably ultimately doomed attempt to look like everything is back to normal. And publish those fantasy Tier 1 ratios which are meaningless if they are based on highly correlated asset classes such as residential and commercial real estate which all look fine and hunky dory right up until when they collectively fall off a cliff.

  3. Jim Haygood

    A stock chart of the stricken Banco Monte Paschi is posted here:

    http://tinyurl.com/z9ace8c

    Looks like it has shed nearly a quarter of its value from Monday’s open.

    Anyhow, the shares still fetch a princely 26 euro centesimi, or about 29 US cents.

    As we might’ve said back in the payphone era, “Here’s a Monte Paschi share; call someone who cares!

  4. sunny 129

    ‘impressive decay this year in the prices of Commerzbank, Unicredit, Barclays, Credit Suisse, and DeutscheBank share prices.’

    As I am repeating for weeks, the charts of above Banks are proof that Global banking is a farce with the complicit of CBers and the corrupt politicians!

    The only surprise is why there has been NO BANK RUNS?

  5. hemeantwell

    My understanding is “fourth quarter” means after Italy’s referendum, with the ECB’s new bank liquidity facility tiding over the doddering bank until then if support is needed.

    Do you think they might also be factoring in the US election and the likely effect on NYSE share prices?

  6. Bimbo

    Nobody is crying because the bank oligarchs are losing hard.

    Others lose the shirt? Sure. It is the way to clean the system.

    Slowly the goals are getting hit. The banks are losing share in the economic activity in Europe.

    Others complain because of that. But the life goes on.

    Meanwhile in Spain:

    El paro registrado ha bajado en 83.993 personas en julio, hasta un total de 3,68 millones. Es la mayor caída en ese mes desde 1997. Además, se han creado 84.721 empleos.

    http://www.expansion.com/economia/2016/08/02/57a0452c22601dba4d8b466b.html

    The data is interesting too in other way but not today to point that. All can read by themselves.

    Ciao

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