Italy under pressure to spring clean its banks

Ahead of probing by European regulators Italian banks are announcing heavy loss provisioning

UniCredit branch in Milan: the bank stunned investors with a large annual loss on Tuesday in a massive clean out of its balance sheet. photograph: alessia pierdomenico/bloomberg

UniCredit branch in Milan: the bank stunned investors with a large annual loss on Tuesday in a massive clean out of its balance sheet. photograph: alessia pierdomenico/bloomberg

Fri, Mar 14, 2014, 01:00

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.