Italy’s latest banking crisis

April 2017  |  FEATURE  |  BANKING & FINANCE

Financier Worldwide Magazine

April 2017 Issue

April 2017 Issue

Though the last remnants of the financial crisis are dissipating in most countries, in Italy the banking crisis arguably never went away. In mid January, DBRS, a Canadian rating agency, downgraded Italy’s sovereign debt, stripping the country of its last A rating. As a result, government bond-yields rose, as will the cost of funding for Italian banks in the coming months.

In a sign of the fragility of the country’s banking system, already the Italian government has been forced to step in and rescue Monte dei Paschi di Siena, Italy’s fourth largest lender and the world’s oldest surviving bank (for now).

In January, the bank’s chief executive, Marco Morelli, alerted a Senate committee that the organisation would need to close 500 branches over the next three years, a decision which would lead to nearly 2500 job losses. Monte dei Paschi is soon expected to issue a state-backed bond, worth around €1.5bn, which has been designed to shore up the bank’s liquidity. Ultimately it hopes to raise €15bn to replace deposits that were lost in 2016. In early February, the bank reported a second consecutive quarter loss on higher bad-loan provisions. Its net losses of €2.53bn for the fourth quarter of 2016 were up from €196.6m recorded in the same period in 2015. Total losses for 2016 hit €3.38 as the bank’s liquidity dropped and its capital buffers eroded. In December, it announced that may run out of liquidity by April.

Negotiations are ongoing to see how the bank can be saved. To that end, the European Central Bank has told Monte dei Paschi that is must raise €8.8bn to bolster its balance sheet under a precautionary recapitalisation plan. The bank has previously received more than €4bn in taxpayer-funded bailouts, which it has repaid, and €8bn from investors since 2009, to shore up its finances. Despite repeated recapitalisation attempts, it has continued to perform poorly, failing European Banking Authority testing in 2014 and 2016.

The rehabilitation of the country’s banking system will be key to restarting the Italian economy.

However, Monte dei Paschi is not the only Italian bank in peril. Bad loans across the industry reached €360bn in 2016. The majority of these originated in industries like construction, manufacturing and real estate. A number of the country’s smaller banks, including Banca Marche, Popolare Etruria, CariFerrara and CariChieti, were bailed out at the start of 2016 as part of a €20bn rescue plan designed to prop up the Italian banking system. Some analysts are suggesting that it may require as much as €52bn in state aid in order to survive.

The Italian government has also launched a €13bn rights offer to recapitalise UniCredit, Italy’s largest bank by assets. By late February, the rights offering was 99.8 percent subscribed. UniCredit reported a €13.6bn loss in Q4 2016, in part due to a write-down on a number of bad loans. The bank was selling the new shares at a 38 percent discount to its price at the time. The bank agreed to sell stock at €8.09 per share and offer 13 new shares for every five held and will use the money generated to recapitalise and to fund future expansion plans. 2016 also saw Banco Popolare SC raise €1bn in a rights offer, pricing new stock at a 29 percent discount.

Nationalisation of Monte dei Paschi – which failed to attract a €1bn investment from private investors last year – looks increasingly likely. But the state may have to bail out other financial institutions. In December, the government created a €20bn fund to rescue Monte dei Paschi and potentially other banks in the future. Government intervention prevented Monte dei Paschi customers from having to participate in a Cypriot style ‘bail in’, under EU rules adopted in 2016. This was done via an exception built into the new rules to avoid a bail-in of senior bond and savings account holders.

The decision could have serious consequences for both Italy and the European project itself. With the country still on the ropes following a deep recession and a sputtering recovery, eurosceptics such as the Five Star Movement have gained political influence. Germany and the EU have begun to take an increasingly negative view of bad loans, making a split between European and Italian banks more likely. Italy’s use of the exception has set a dangerous precedent for other crisis-struck lenders both in Italy and elsewhere. Having skirted the need to clean up balance sheets, Italy could destabilise the European banking space in the future. Given its position in the EU, and the size of its banking system, Italy’s financial difficulties could have wider repercussions for Europe.

The outlook for the Italian economy is far from rosy. GDP growth of just 0.7 percent is expected in 2017 and 0.8 percent for 2018. The rehabilitation of the country’s banking system will be key to restarting the Italian economy. Going forward, Italian banks must promote sustainable economic development to break the cycle of stagnating growth.

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Richard Summerfield

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