URL https://www.reuters.com/article/us-italy-politics-banks-analysis/political-storm-threatens-italian-bank-recovery-idUSKCN1IU25F

DATE/ AUTHOR 2018-05-30 13:56:38+00:00	AUTHORS: Valentina Za, Min Read

H Political storm threatens Italian bank recovery

S1 MILAN (Reuters) - Italy’s political crisis risks undoing years spent rebuilding the country’s banks, undermining the value of their assets, choking off access to funding and rekindling euro exit fears.

S2 Renewed doubts over the single currency have chilled Italy’s bond markets and reawakened the spectre of capital flight that shook Italian banks during the 2011-2012 sovereign crisis.

S3 As a result, Italy’s lenders .FTIT8300 have lost more than a fifth of their market value in just two weeks, tracking a fall in its bonds as an anti-establishment coalition sought, and failed, to form a government.

S4 Before the political storm, Italy’s banks had been outperforming euro zone rivals after reducing a bad loan burden that had threatened to cripple them.

S5 And encouraged by Italy’s economic upturn, hedge funds had even piled into the country’s mid-tier lenders, betting on them as the last European recovery play.

S6 But the prospect of snap elections after Italy’s president on Sunday vetoed the coalition’s eurosceptic economy minister has deepened a sell-off on fears of a de facto referendum on the euro and a further boost to anti-establishment parties.

S7 “Risks perceived by investors have risen sharply and that is why they are knocking down the value of Italian banks, which even before the latest turmoil traded below their book values,” said Andrea Resti, a professor at Milan’s Bocconi University and an adviser on banking supervision to the European Parliament.

S8 A 2.3 trillion euro public debt pile, the world’s third-largest, poses a direct threat to the banks, which face steep losses on 352 billion euros of domestic bond holdings after Italy’s benchmark yield hit a four-year high.

S9 Former senior International Monetary Fund (IMF) official Carlo Cottarelli speaks to the media after a meeting with Italy's President Sergio Mattarella at the Quirinal Palace in Rome, Italy, May 28, 2018.
S10 REUTERS/Tony Gentile

S11 (Graphic: Italian banks sovereign bond holdings - reut.rs/2L4hmrj)

S12 PROPERTY HOPE

S13 Rome’s turmoil could also lift returns demanded by buyers of the bad loans banks are desperately striving to rid themselves of, stalling sales and forcing them to offer bigger discounts.

S14 The Bank of Italy forecast on Tuesday 65 billion euros in sales of impaired bank loans this year and urged lenders to press ahead with cutting soured debt.

S15 Despite a 75 billion euro drop from their post-recession peak of 360 billion euros, problem loans in Italy still account for around 14 percent of total bank lending.

S16 That is twice the level of neighboring Spain where the clean-up process has been much faster thanks to European Union aid, solid economic growth and a rebound in real estate prices.

S17 Claudio Scardovi a managing director at Alix Partners said a lagging property rebound was still likely to draw investors to Italy in the face of real estate bubbles in Britain, the Nordics and to some degree in France.

S18 Slideshow (2 Images)

S19 Italy’s real estate market has improved only in large cities such as Milan and Rome, and tourist areas and Francesco Castelli, head of fixed income at Banor Capital, said a continued and more uniform economic expansion was key for the rebound to take a wider grip.

S20 “A property investment has an at least five-year horizon: just as the economy was growing again there are doubts about its mid-term prospects,” Castelli said.

S21 MID-MARKET MAYHEM

S22 Mid-sized lenders, such as Banco BPM (BAMI.MI), UBI Banca (UBI.MI) and BPER Banca (EMII.MI), are seen as more vulnerable to the turmoil because they lag big players like Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI) in cutting bad loans.

S23 Italy’s 10th-largest bank Credito Valtellinese (PCVI.MI) has been among the worst hit, even though just ahead of the March election it managed to raise eight times its market value in a share sale and gain 35 percent in value in its aftermath.

S24 Shares in Creval, which has one of the highest sovereign exposures relative to its capital and a high bad loan burden, are 11 percent below the 0.10 euros at which it sold new shares.

S25 Analysts warn that smaller Italian lenders are also the most at risk from rising financing costs.
S26 Wholesale funding markets have effectively shut down for Italian banks and traders say they will take a long while to reopen.

S27 Italy’s strongest bank Intesa SanPaolo (ISP.MI) placed a 10-year bond IT178534017= after the election at 77 basis points over the swap rate.
S28 This now trades with a 200 basis point spread, showing how conditions have worsened.

S29 Although tight funding markets are not an immediate concern because most banks are awash with liquidity, they do raise a question mark over plans by state-owned Monte dei Paschi di Siena (BMPS.MI) and smaller rival Banca Carige (CRGI.MI) to rebuild their Tier 2 capital buffers with hybrid debt.

S30 Carige CEO Paolo Fiorentino said on Tuesday that political risks had paralyzed markets when asked about the bank’s plan to issue a subordinated bond, a spokeswoman for the bank said.

S31 Monte dei Paschi declined to comment.

