Election fallout raises fresh fears over state of Italian banks

Investor jitters about Italy’s election hit the banking sector yesterday as shares in the largest lenders fell on concerns about their vast exposure to Italian sovereign debt and fears about the wider economy.

Shares in Italy two largest banks by assets, UniCredit and Intesa Sanpaolo, fell more than 7 per cent as trading on the Milan stock exchange reopened after the outcome of Italy’s national vote revealed no clear winner.

Monte dei Paschi di Siena, Italy’s third-largest bank by assets and already the subject of a €3.9 billion state bailout, lost 6 per cent of its value.

Default insurance

The cost of insuring against default on European bank debt rose to its highest level in three months.

“The markets are over-reacting,” Enrico Cucchiani, chief executive of Intesa Sanpaolo said. “The Italian banking system won’t face any crisis at all.”

But analysts said the return of political instability to Italy after more than year of relative calm during the technocratic government of Mario Monti has renewed markets’ concern about the country’s ability to repay €2 trillion of sovereign debt, and that this was having a knock-on effect on the banks’ holdings of Italian government bonds. “The deadlock in parliament runs the risk of reigniting the euro zone crisis,” Antonio Guglielmi, head of equity research at Mediobanca Securities, said in a note yesterday, advising clients to switch out of banks and into oil or luxury goods if they still wished to keep exposure to Italy.

Widening spreads on Italian sovereign debt returned focus to Intesa Sanpaolo’s €60 billion of Italian government bonds, the largest of any institution, and similar portfolios at UniCredit worth €40 billion, and at Monte dei Paschi worth €25 billion.

The political uncertainty also adds to longstanding concerns about the impact on bank loan books of a deepening recession as thousands of small and medium-sized enterprises that make up the backbone of the Italian economy struggle to survive.

Gridlock fears

“Gridlock in parliament means gridlock in the economy,” said Alberto Gallo, a senior credit analyst with RBS.

“With political uncertainty around key laws and reforms, companies are less likely to hire and invest and banks are less likely to make new loans.

In the worst case, weaker banks could see deposit outflows re-emerge,” he said.

Nonetheless, analysts pointed out that the larger Italian banks have strong liquidity at present due to European Central Bank intervention, and their decisions not to make early repayments of the ECB’s long-term refinancing loans were providing them with a substantial buffer. For weaker banks, the outlook is more troubled as the probability of gridlock has stalled any plans aimed at boosting growth or improving consumption levels.

Some analysts say the instability and the success of Beppe Grillo’s Five Star Movement may also delay or even throw into doubt the €3.9 billion bailout of Monte Paschi. – The Financial Times Limited 2013