Don Quijones: The Next Italian Bank Threatens to Topple

By By Don Quijones of Spain, UK, & Mexico and an editor at Wolf Street. Originally published at Wolf Street

Sharp Dose of Deja Vu for Italy’s Teetering Banks.

In a speech that did little to calm investors’ nerves, Italy’s finance minister said yesterday that he was “strangely optimistic” about Italy’s economic outlook. Senior eurocrats in Brussels are far from convinced. “Italy’s accounts are not improving,” blasted European Commission Vice-President Jyrki Katainen at a press conference yesterday.

The financial situation in Italy, according to Katainen, is due to get worse with Italy’s deficit in 2018 now predicted to be €3.5 billion more than previously stated by Paolo Gentiloni’s administration in the spring. “The only thing I can say in my name is that all Italians should know what the real economic situation in Italy is,” he said.

That real economic situation includes the fragile health of the nation’s banking system which continues to teeter on the edge despite the controversial rescue last summer of Monte dei Paschi di Siena (MPS) and the resolution of the Popolare di Vicenza and Veneto Banca, which left over 40,000 businesses in Italy’s wealthy Veneto region starved of credit.

It’s pretty clear that investor concerns about the health of Italy’s toxic debt-laden banking system have not been put to rest. Today’s developments will hardly have helped steady nerves after mid-sized lender Carige, with assets of €26 billion, scuttled a capital increase demanded by European authorities when it failed to get the backing of a banking consortium led by Credit Suisse, Deutsche Bank, and Barclays to underwrite the deal.

In a statement, Carige said it had called a board meeting on Thursday morning to discuss “the next steps.” The shares of Genoa-based Carige, which had already lost roughly half its value over the past year, were suspended on Milan’s stock exchange. They closed on Wednesday at €0.17 a piece. The board had fixed a price of €0.10 euro per share for a capital hike of €560 million demanded by regulators.

The proposed cash call is over four times the bank’s current market value. What’s more, Carige has already gone through a capital expansion worth €800 million in 2014 and another one worth €850 million just a year later. Just as happened with MPS last year, investors appear to have finally cottoned on to the fact that pouring money into a bank saddled with huge amounts of suspect assets and non-performing loans in a country gripped by a systemic banking crisis is unlikely to pay off.

Now, just months after Italy’s government bent EU bank resolution rules out of all recognition to bail out MPS, it seems that another resolution could be in the offing.

“Given current market conditions, we do not rule out Banca Carige will be put under resolution,” Milan broker Akros said. There are, it seems, other options such as the postponement of its expansion, the sale of the group, or the segregation of a ‘bad bank’ with the support of the Italian Government.

The prospect of another bank resolution triggered a panicked sell-off of other mid-sized banking shares. Rival Creval, which has just announced plans to raise €700 million — or 4.4 times its market value — via a share issue, closed down 19%. MPS saw its shares extend a seven-day losing streak after tumbling 4.1% today. In the last five days alone the stock is down over 20%.

If there is another bank resolution or taxpayer-funded bailout, there’s a huge risk that what little confidence remains in Italy’s banking system could crumble, especially given the sheer scale of the rot. As we reported in March this year, almost all of Italy’s largest banking groups, with the exception of Unicredit, Intesa Sao Paolo and the investment bank Mediobanca, have Texas Ratios well in excess of 100%, meaning that the total value of their non-performing loans is greater than their tangible book value plus reserves. Banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.

Granted, many of the banks in question are small local or regional savings banks with tens or hundreds of millions of euros in assets. But the list also includes much bigger fish such as Banco Popolare (€120 billion in assets; TR: 217%), UBI Banca (€117 billion in assets; TR: 117%), Banca Nazionale del Lavoro (€77 billion in assets; TR: 113%) and of course, Carige (€26 billion in assets; TR: 165%).

As long as banks like these continue to languish in their current zombified state, they will continue to drag down the two bigger banks. And if either Unicredit or Intesa begin to wobble, the bets are off.

Wishful thinking may not be enough. Read…  Financial Storm Clouds Gather Over Italy

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  1. Larry

    I continue to marvel at the stability of the European situation. Greek and other countries punished. Looming Brexit. The quashing of independence in Catalonia. And potentially a massive bank crisis in Italy. From the outside it certainly seems like a political and monetary union doomed to fail, but I think I underestimate the resolve of the powers that be to see it through. I cannot tell if the EU ultimately makes it over the long haul, or like other crises, it suddenly comes crashing down when the seams can no longer be stitched together.

    1. Eustache De Saint Pierre

      It appears to me that all signs are pointing to at least an economic downturn with the possibility of inflation rising due to various factors, coupled with the fact that the majority have not benefitted from the upturn, will eventually take it’s toll. Even if there was the will within the EU to try & ease the burden on populations, they appear to me at least to be the equivalent of an ocean liner that even if those on the bridge agreed to change course, that ship of state would take too long to successfully avert the danger. The Commission’s coming third attempt to force glyphosate down the the throats of member states, is for me just one of many illustrations of where the loyalties lie.

      But ” Creaking gate lasts longest “, & nobody really knows.

      1. OpenthepodbaydoorsHAL

        Its easy, just pretend Target2 doesn’t exist. Kinda like the Fed’s $4T balance sheet or the BOJ owning 100% of Japanese ETFs

  2. matt

    Germany is dinging NL. Siemens 600 jobs/location in Hengelo last week. Also suggesting Pharma regulator goes to Athens instead of Amsterdam.

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