Italy under pressure to spring clean its banks

For Italy's banks seeking to present a clean slate going into European stress tests così fan tutte is the theme of the day.

After UniCredit, Italy's largest bank by assets, stunned investors with a €14bn annual loss on Tuesday in a massive clean out of its balance sheet ahead of probing by European regulators, it was joined on Wednesday by a queue of smaller Italian banks following its lead.

Monte dei Paschi di Siena, Italy's third-largest bank by assets and the subject of a state bailout, sank to its seventh straight loss-making quarter reporting a €921m net loss, far worse than even the most pessimistic forecasts.

Along with UniCredit and MPS, Banca Popolare di Milano, Italy’s fifth-largest bank by assets, also reported a rise in provisioning in the fourth quarter as did UBI, its sixth-largest bank by assets, although both also managed a small profit.

The "kitchen sinking" by Italy's largest banks – which is also expected to be followed by Intesa Sanpaolo, Italy's second-largest lender, when it reports later this month – underlines the pressure the Italian banking system is under to clean up its balance sheet before the probing of European regulators.

"I guess we could say that in the past we looked at the balance sheet as half full and we now look at it as half empty with [the stress tests] coming up which has translated into additional provisioning in the fourth quarter," says Bernardo Mingrone, head of finance at MPS, attempting to explain the Siena bank's latest round of hefty provisioning.

Timing
Some analysts also noted that the timing coincides with a spring clean mood in Italy evidenced by the arrival of Matteo Renzi, Italy's new prime minister who is promising a wider clean up of the Italian economy.

Also on Wednesday, Renzi announced a $14 billion package of measures, including tax cuts, designed to stimulate Italy’s slumbering economy.

Alberto Gallo, credit analyst at RBS, says: “Italy is approaching a much needed spring cleaning ... in parliament ... and across the banking system.”

The Bank of Italy had already warned investors to expect “lots of provisions” from Italian banks in the fourth quarter as they rush to clean their balance sheets ahead of the probing by European regulators, although the scale of the clean up was surprising.

Nonetheless, shares in Italian banks rose on Wednesday (less so yesterday), especially strongly at UniCredit – which had ruled out a capital raising – and UBI, which is considered the strongest among Italy’s mid-sized banks.

Italian banks have underperformed European peers this year amid concerns about their exposure to a sharp rise in non-performing loans as millions of local companies have stuttered during Italy’s crippling two-year recession.

That said, analysts point out that UniCredit’s loss also stemmed from a goodwill write-off related to a decade of frenzied acquisitions in eastern Europe in the run up to the financial crisis.

The Italian banking clean up does not stop there. At least five Italian banks, including MPS, are preparing to raise a total of €7bn of capital in the coming months with more expected. Goldman Sachs estimates that the aggregate capital shortfall for the Italian banking sector stands at a midpoint of €17bn.

UniCredit said it would cut 8,500 employees between now and 2018.

MPS is cutting about 4,000 staff and shutting 400 branches as the sector seeks to scale down its total of 33,000 branches to try to offset weak profitability in a low growth economy.

Tie-ups
Mergers of mid-sized banks are also on the cards in a move backed by the central bank that mirrors the consolidation across peripheral European banks in Greece and Spain.

UBI and Banco Popolare di Verona, BPM and Banca Popolare dell’Emilia Romagna, Credito Valtellinese and Banca Popolare di Sondrio are all considered potential tie-ups, say senior bankers with direct knowledge of the discussions.

Nonetheless, there are parts of the Italian system that the clean up under way does not – at least so far – reach: weak profitability and governance especially among mid-sized banks.

Mr Gallo of RBS argues that Italian banks still trade at the lowest price-to-book valuations in Europe because the Bank of Italy has remained behind other policy makers on transparency measures and only recently floated the idea of a bad bank.

“UniCredit and Monte Paschi’s results highlight the difficulties faced by mid-tier Italian banks which cannot count on the same revenue base as Intesa or UniCredit and therefore may struggle to cover against all upcoming losses as bad loans rise,” he says.

MPS, Carige, Banca Marche, CariFerrara, Tercas, BP Spoleto, Veneto Banca and Banca Cividale are only some of the many Italian banks under special supervision by the central bank as the surge in bad debts is jeopardising capital adequacy.

These banks jointly hold €300bn in assets or 7 per cent of the industry’s total stock, creating a potentially systemic issue.

But their peculiar governance – whereby the local community through banking foundations holds much of the shares – is representing an obstacle for their recapitalisation as the economic slump hits the finances of companies and individuals.

The situation is exemplified by MPS where the management remain on tenterhooks since the foundation which owns 30 per cent of its shares forced the bank in January to pull a €3bn capital increase demanded by Brussels as it wanted more time to find the money to defend its stake.

The foundation has since voted to launch the capital raising at an unspecified date after mid-May but the delay has caused problems for management who on Wednesday said they would be issuing financial instruments in order to pay the coupon it owes to Italy’s treasury this year to avoid nationalisation.

Andrea Filtri, analyst at Mediobanca said in a recent note that “the IMF, ECB and Italian treasury are all pointing to a reform of the banking foundations” through a change to Italian laws.

But whether that reform actually happens is likely to depend on the success of Mr Renzi’s spring clean.

(Copyright The Financial Times Limited, 2014)