Shares in UniCredit, Italy’s largest bank by assets, tumbled 9 per cent on Monday after the terms of a rescue plan for Monte dei Paschi di Siena suggested that other Italian banks might have to raise more capital.
Under the MPS rescue plan, the Tuscan bank will shift its entire bad loan portfolio of €27.7bn into a securitisation vehicle, priced at 33 cents on the euro.
But investors calculated that if other Italian banks were to take a similar loss, or “haircut”, on their non-performing loans, they would need to be recapitalised. Some sold down their shares in those banks that could be affected — reversing initial share price gains following Friday’s European bank stress tests.
“We’ve got a plan for Monte dei Paschi . . . and that involves taking a further haircut to their NPLs,” said James Sym, a fund manager at Schroders. “If you were to then apply that to the other banks, other banks would need capital, particularly the regional ones.”
“That’s why you’ve had this turnaround. People are looking at MPS and saying if that’s the new fair value, then we’re going to need to see capital raises from other domestic banks we thought were safe, even though they ‘passed’ the stress test”.
Other investors pointed out that the Monte solution would further deplete the capital of Altlante, Italy’s bank ‘backstop’ fund. “This is a Monte specific solution and it doesn’t address the sector as a whole . . . it will use the remaining capital in the Atlante fund,” said Rahul Kalia, an investment manager at Aberdeen Asset Management.
Shares in Intesa Sanpaolo, which Mr Sym says is less exposed to non-performing loan problems, only fell 2.2 per cent.
In Europe’s bank stress tests on Friday, Unicredit’s fully loaded CET1 ratio, a measure of capital under future regulations, fell to 7.1 per cent under an adverse scenario — the second-worst result of the five Italian lenders tested.
Jean-Pierre Mustier, the bank’s new chief executive, is now working on a plan to boost capital by about €10bn through raising equity and asset sales, according to people informed of the discussions.
By contrast, MPS shares rose 4 per cent in mid-afternoon trading on Monday, making them the only riser among European bank stocks.
Despite emerging as the weakest of 51 banks in the European tests — it was the only bank to have its capital wiped out under the test’s adverse scenario — shares in the Tuscan bank initially rose as much as 11 per cent when its rescue plan was revealed on Friday. This will involve a €5bn recapitalisation of the bank and a clean-up of its bad loans via the securitisation vehicle.
Funding for the vehicle will come from the issuance of €6bn of senior securitisation notes, to be placed with investors and, in the case of the investment grade tranche, potentially backed by state guarantee.
A junior tranche, of up to €1.6bn, will be given to shareholders, while Italy’s Atlante fund will invest up to €1.6bn in mezzanine notes.
Finally, Monte Paschi will aim to raise €5bn in a rights issue by year end, backed by a pre-underwriting agreement from a consortium of investment banks led by JPMorgan. This will be the third time it taps the market in three years.
Lorenzo Codogno, founder of LC Macro Advisors and former chief economist at the Italian Treasury, said: “This first jumbo operation is likely to jump-start a market for NPLs [non-performing loans] in Italy which can become extremely useful in addressing the broader problems”. It could be replicated across Italy’s banking system, he says.
Senior bankers argue a clean-up of Italy’s non-performing loans in turn will pave the way for consolidation. Monte Paschi free of bad loans is considered a potential target for UBI Banca, say some in the industry, although Victor Massiah, its chief, has repeatedly denied his interest.
Meanwhile, northern Italian regional bank Banca Popolare dell’Emilia Romagna, known as Bper, has held talks about buying Veneto Banca if it were rid of its nearly €6bn in gross bad loans, according to two people with direct knowledge of the discussions.
“It looks pretty tense in the Italian banking sector for the next months” as lenders are forced to follow the example of Monte Paschi and shed their bad loans, said one senior banker.
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