The Italian banks have certainly kept us busy in the credit crunch era. We have found ourselves observing a litany of cash calls, bad debts, crises, and official claims that there is no problem. Of the latter the worst was probably the claim by Prime Minister Matteo Renzi that equity investors in Monte Paschi dei Siena had a good investment whereas it was soon clear they had anything but. Actually it is back in the news but behind another regular feature which is Bank Carige which you may recall we were looking at this development on the eighth of this month.
Italy’s Banca Carige said on Friday it had raised 544.4 million euros ($645 million) following its recently concluded new share issue, topping minimum regulatory demands. ( Reuters)
Ordinarily on a cash call that would be it but we have learnt from experience that with banks and Italian banks especially these sort of cash calls are not get in what you can to keep the ship afloat for now not for good as it should be. So we should have been expecting this.
Italy’s Banca Carige (CRGI.MI) needs 200 million euros ($227 million) of fresh capital to clean its balance sheet from soured loans and to attract a potential buyer in the future, daily Il Sole 24Ore reported in Tuesday.
There never seems to be any accounting for what has just taken place as in that the prospectus for the recent share issue can hardly have told the truth. This is not just an Italian problem as in my opinion the RBS ( Royal Bank of Scotland ) cash call as its crisis built was a scandal it is just that Italy keeps having more of them. Also my country is hardly Mr(s) Speedy in bringing any such matters to court.
The first criminal trial of senior UK banking executives in the wake of the financial crisis is due to begin on Wednesday.
The case against four former executives has been filed by the Serious Fraud Office over Barclays’ £11.8bn rescue.
The bank avoided a UK bailout in 2008 by raising funds from Middle Eastern investors.
The executives are charged with conspiracy to commit fraud. All four have pleaded not guilty. ( BBC)
Returning to the Italian banks the essential problem has been highlighted with thanks to @DS_Pepperstone.
Deutsche Bank confirms that ROTE or Return on Tangible Equity is lower than the Cost of Equity at all Italian banks – That is they pay more for capital than they make from it. DBK says that fact is already reflected in the Italian bank’s share prices.
You might think that Deutsche Bank has a bit of a cheek saying that about other banks! But the point is that funds poured into Italian banks are a case of good money after bad and repeat.
What now?
Let us return to Reuters.
Italy is considering merging troubled banks Monte dei Paschi (BMPS.MI) and Banca Carige (CRGI.MI) with healthier rivals such as UBI Banca (UBI.MI) as it scrambles to avert a new banking crisis, sources familiar with the matter said.
Shareholders in UBI Banca may immediately be fans of the Pet Shop Boys.
What have I, what have I, what have I done to deserve this?
What have I, what have I, what have I done to deserve this?
It is not as if they have been having a good time of it as I note the share price of 2.3 Euros is down 43% over the past year. Looking back on my monthly chart it was over 20 Euros back in early 2007 which in the heavily depreciated world of bank shares I suppose is healthier in relative terms than the two other banks. But then almost anything is.
As we look for more detail there is yet another scandal in the offing.
Monte dei Paschi, rescued by the state in 2017, and Carige, recently put into special administration by the European Central Bank (ECB), are struggling with bad debts and the prospect of asset writedowns that would eat into their capital.
Their problems threaten to reignite a banking crisis that Rome thought it had ended two years ago and could further damage an economy already at risk of slipping back into recession.
That is the issue of Monte Paschi where the state took a 68% stake but the problems are on such a scale that even that has not fixed things as we wonder if anything has improved over the past two years? It sounds a little like the Novo Banco ( New Bank ) in Portugal that was supposed to be clean but ended up having to effectively wipe out some of its bonds.
Monte dei Paschi is still battling with high bad loan ratios and faces legal claims for over 1.5 billion euros, making it risky to take over without any support from the state.
This issue came back to prominence in the middle of this month when the European Central Bank (ECB) said it wanted banks to raise their covering of non-performing loans to 100% by 2027. It set three categories of bank and think you have already guessed which category Monte Paschi was in.
As you can see the troubles just go on and on which moves me to the next issue. When states and central banks invest in banks it is a case of can kicking into a hopefully better future. But the economy of Italy hasn’t got much better and right now is heading in reverse again.
The economy
This week a review of the century has been produced by Eurostat and if you compare the European Union with Italy you see that the latter line for GDP growth is always below the former. It is this lack of economic growth that is a major driver in all of this. It started in 2001 where the EU grew by 2.2% and Italy by 1.8% but things have got worse as the weakest year relatively was 2012 where the EU economy shrank by 0.4% but Italy’s shrank by 2.8%.
Even the Bank of Italy has now been forced to admit that the future looks none to bright either.
The central projection for GDP growth is 0.6 per cent this year, 0.4 points lower than the previous projection. The downward revision was on account of three main considerations: new information pointing to a sharper cyclical slowdown in the last part of 2018, which reduced the carry-over effect on growth by 0.2 points; the cutback in firms’ investment plans, as confirmed by recent surveys; and the expected slowdown in global trade…… In the two years 2020-21, the central projection for growth is 0.9 and 1.0 per cent respectively.
The other issue which has tightened something of a noose around the necks of the Italian banks is higher funding costs. We can illustrate this by looking at the Italian bond ten-year yield of 2.73%. That is an improvement on the peaks we saw last year but Germany has one of 0.24% and the UK 1.33%.
Comment
There is an element of ennui here as the establishment playbook is used one more time. But there are costs such as the equity and bond capital which has been lost and even worse the way that the Italian banks have been unable to operate in their prime function. Yesterday’s credit standard survey from the ECB confirmed this if we recall who has the Non Performing Loan or NPL problem on the biggest scale.
euro area banks reported that their NPL ratios had a tightening impact on their credit standards for loans to enterprises and housing loans over the past six months. Over the next six months, they expect a net tightening impact of their NPL ratio on credit standards across all loan categories. NPL ratios led to a tightening of euro area banks’ lending policies over the past six months in net terms mainly through banks’ access to market financing.
In the end that is the real problem as the Italian economy continues to weaken the banks and the Italian banks weaken the economy with a grip that shows no sign of loosening.
Moving wider I expect the ECB to help with liquidity ( another TLTRO) but if extra liquidity helped significantly we would not be here would we?
Notayesmanseconomics's Blog 
And also the prospect of the ECB ending its QE programme to add to Italy’s woes.
Looking closer to home and our illustrious banking sector, Shaun is there any chance of you doing an article on the analysis of RBS, BARC and LLOY tier 1 and 2 ratios, balance sheets, their exposure to the UK mortgage market, and sensitivity to possible house price falls?
Hi Kevin
I will bear that in mind and the subject is rumbling so to speak after the news about Metro Bank earlier. For those who have not followed it there was a 39% fall in the share price to £13.45 due to this.
“Metro Bank Plc fell the most since going public after applying an incorrectly low risk weighting to parts of its loan book, with the British lender’s chief saying he doesn’t know how long the mortgages in question had been wrongly classified.” (Bloomberg)
Mortgages being missclassified. I think we have heard that song before…..
“tightening of lending policies….” sort of teaching an old dog new tricks or shutting the stable doors – dream on.
Any feel as to – who to or why the NPLs were made. The NPLs have certainly not helped the Italian GDP – or was it supposed to be some form of informal QE/Social Security?
I suspect it was more of Social security similar to the fact that here in the UK the bad debts of defaulting energy customers is paid for by all the customers .
We’ve seen it all before though , like liar loans , but it’s all ok whilst the bad debts are tiny . Soon as they get to be growing then we have that “unstable lifeboat “……. and things can become unstable very,very quickly.
Forbin
PS: it will , as always, be a “surprise” to those in power…. ( blithering idiots that they are !)
Great article as always Shaun.
Does Italy have it own version of the PPI scandal. I recall that various banks forced people to buy bonds if they took out a loan. Hence the problems with bailing in the banks.
Surely that mis-selling is more scandalous than our own?
Hi anteos
I have heard rumours about the subject you mention but the main scandal has been as follows. As interest-rates were cut by the ECB Italian savers found bank sales(wo)men visiting them telling them that bank bonds offered a higher yield (true) and were perfectly safe (oh dear). Hence the lack of a bail in of the Veneto banks as it would have affected a lot of local savers.
An observation I have frequently made on this blog is that if you enact the same policies as Japan you’ll get the same results as Japan got, the only question is how far are into our lost two decades because that’s what will happen.
As to MBS I’m very cross with the Italian government for saving it as I had several side bets it would be the net European bank to go mammaries upwards.
decade ?
2038 +/- 3 years
Forbin
In a real world you would have won your bet. But we live in a world where the elite fudge everything to keep that poor battered can another kicking down the road.
Bill,
If you judge Japan’s recession by their stockmarket, they are coming up to 29 years of a recession/deflation/bear market and it is still going!!!, the Nikkei topped out at 38,000 in 1990, so we have only got at least another twenty odd years to kick that ZIRP+QE can. Obviously, a plan as successful as that was bound to be copied by us in the west, so here we are.
I don’t know if western cans are less well made than Japanese ones(if its anything like the cars god help us), any metallurgists in the house?
I remember those heady days very well, I ran my own catering company and went within an ace of bankruptcy. I was forced to sell my house at what turned out to be top of the market so it all turned out for the best. Failing is not so bad when you’re young enough to start again.
A bank is like a shark, if it stops lending, by the very nature of its business its loan loss ratios deteriorate markedly. This is why these things only come out in the ‘bad’ times. Whilst times are good and lending brisk, loan loss ratios fall and credit standards consequently loosen in a reinforcing loop. Banks’ credit risk departments always look back historically at the performance of its lending. They are always too late to tighten up…you gotta keep dancing I suppose to maintain those market shares, (temporary) profits and (permanent) bonuses. Of course, the issue with the Italian banks is that many of these loans have been literally non performing for as long as 20 years – they sort of thought if you didn’t mark it, you didn’t need to worry….just grow your lending to make the ratios look good. And now they don’t.
And dare I mention the EU at this delicate time? European Banking Union…share loan losses and bailouts…..hahahaha
Hi Hotairmail
In a way you have just agreed 100% of my father’s critic of banking in that his small business had loads of credit offers in the good times but they disappeared in the bad. This of course was the opposite of what he needed and he had a bad time in the 80-82 building recession but survived only for the same banks who would lend him a penny then to restart the cycle a couple of years later.
Meanwhile I wonder if any of the Italian banks have been paying themselves imputed interest on those NPLs?
It seems obvious to me that banks mislead investors all the time. If, say, they have bad debts of £1 billion, they seem to collide with the auditors to admitting, say, £500 mn. They then raise £500 million and all is well. They then announce an unexpected further £300 mn and raise this amount and so it carries on.
The questions I have are
1. Why don’t they go to gaolfor blatant misrepresentation
2. Why do people believe them and invest
3. Why do the auditors it up with it
I’m guessing that the answer to all of them is it’s sn essier life to pretend that all is well.
The ECB has simply joined the fraud by taking a view that all must be sorted by 2027. That is just a joke imho given that no one has any idea of what evil happen by then
Rant over and now calm again
well I’ve always said it’s the Banks who rule us
Governance of the people by the Banks for the Banks….
Forbin
PS the politicians are hand-in-glove with the Banks – nice cozy jobs for the boys
This is an interesting read.
Click to access CIA-RDP80T00702A000900060002-4.pdf
It seems that they knew what the outcome would be.
Hi regis and thank you as I enjoyed my trip back to 1978.
Euro membership stopped the depreciation of the Lire but has it done that much else to change things? Forty years later much is familiar.
The ECB appoints new management to run Banca Carige. They’re now looking for someone to buy the bank.
So, the Bank went bust. They called in the administrators, who are now trying to sell it as a going concern.
Or is that too simplistic?
Hi mwhite
I think that the only way it could be sold is if more capital is put in which would have to be by the state now following the Portuguese model or some of the bad debts are put elsewhere. So I guess the new management’s role if to figure out how much?
Hi Shaun,
Happy New Year from Downunder.
The RNZ is undertaking a review of New Zealand’s banks capital requirements. Here are links to a series of articles setting out the proposal and some background. I am sorry it is quite long however it is an interesting read. So if you cannot sleep one night have a look and I would be interested in your cements.
1. https://www.interest.co.nz/banking/97677/against-backdrop-rbnzs-review-bank-capital-requirements-gareth-vaughan-explains-how
2. https://www.interest.co.nz/banking/97697/against-backdrop-rbnzs-bank-capital-review-gareth-vaughan-details-advantageous
3. https://www.interest.co.nz/banking/97716/against-backdrop-rbnzs-review-bank-capital-requirements-gareth-vaughan-details-nitty
Shaun, this is strange. In Portugal it was all about separating the good banks from the bad. Why are the Italians muddying the waer by merging bad with “good”? Maybe the good are also bad but we don’t know it yet…
Paul C.
Hi Paul C
There are two answers to this.
1. Because it is Italy.
2. Because of the way that ordinary bank savers were encouraged to buy bank bonds which means that applying the new Euro area banking rules would be electoral suicide. Which is another version of because it is Italy.