Bank Carige. Monte dei Paschi and their impact on the economy of Italy

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?

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What will happen to Bank Carige of Italy?

One of the longest running themes of this site has been the ostrich like behaviour of Italy about its banks. The official view has been that a corner is just about to be turned on what keeps turning out to be a straight road. I still recall Prime Minster Renzi assuring investors that shares in the trouble Monte Paschi di Siena were a good purchase. Here is an example of this from him in Il Sole from January 2016 via Google Translate and the emphasis is mine.

“The recent turbulence around some Italian banks indicates that our credit system – solid and strong thanks to the extraordinarily high savings of Italian families – still needs consolidation, so that there are fewer but stronger banks (…) Today the bank it is healed, and investing is a bargain. On Mps has been knocked down speculation but it is a good deal, has gone through crazy vicissitudes but today is healed, it is a nice brand. Perhaps in this process that will last a few months must find partners because it must be with others “.

Since then the bank has seen the Italian state take a majority stake and the share price is a bit less than forty times lower than when Renzi made his statement. This has been a familiar theme of the crisis where investors have been encouraged to stump up more money for troubled banks with promises of a brighter future. But it kept turning out that the future was ever more troubled rather than bright as good money followed bad in being lost.

Even worse the whole sector was weakened by the way that other types of bailout were provided by the banking sector itself. For example via the Atlante or Atlas fund which saw banks investing to recapitalise other banks and to buy bad loans. Regular readers will recall that the establishment view was that the purchase of bad loans by this and other vehicles was something of a new dawn for the sector. The reality was that as things got worse there was Atlante 2 before the whole idea got forgotten. It is rude to point out that the subject of today Bank Carige was considered strong enough to put 20 million Euros into the first version of Atlante.

A deeper perspective can be provided by the fact that the Italian banking laws are called the “Draghi Laws” after the President of the European Central Bank Mario Draghi. In his new role he has undertaken three policies which have helped the Italian banks. They have been particularly large beneficiaries of his liquidity operations called TLTROs which have provided cheap ( the deposit rate is -0.4%) for banks. Then the QE programme boosted the price of Italian government bonds benefiting the Italian banks large holdings. Then more opaquely at least in terms of media analysis it bought covered bonds ( mortgage bonds) in three phases and still holds around 271 billion Euros of them.

The catch of this from Mario’s point of view is that liquidity is only a short-term solution and soon falls short when the real questions are about solvency. Even worse the way this umbrella shielded the banks from the rain meant that the promised reforms never happened and the path was made worse rather than better. Also if we think of this from the point of Italy and its economy we see that we have part of the reason for its ongoing economic lost decade style troubles. The banks have helped suck it lower. Also and hat tip to Merryn Somerset Webb for this a letter to the FT today has on another topic covered the issue really rather well.

ECB can’t solve problems because to attempt to do so would be to admit that problems exist.

Carige

If we go back to 2017 we see that as well as a worrying departure of board directors and the beginning of an attempted asset sale which was to include bad loans there was this in December.

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)

There were various features to this of which the first is that existing shareholders took a right caning or as the Italian regulator put it.

The Banca Carige capital increase has characteristics of hyperdilution.

In return there was the implication that the ECB had approved this and a corner had been turned. Less than a year later this all went sour as the ECB decided that Bank Carige needed yet another rights issue in yet another example of the themes described above. This time in spite of statements to the contrary no-one seemed silly enough to believe the official promises and this rumbled on until the New Year when the ECB decided that the first business day of 2019 was an opportune moment to do this.

The mass resignation of Carige directors that followed has given the ECB an opportunity to be creative. The central bank has used its powers of early intervention to step in to stabilise the bank’s governance. It has appointed three special administrators, including Innocenzi, tasked with restoring capital requirements. ( Reuters)

If you want some gallows humour this was described as “temporary” when it was pretty much certain to be anything but as a major shareholder ( Malaclaza) decided it had lost enough. It was hardly likely to believe the ECB again.

The Italian Government

This found itself in between a rock and a hard place as the Five-Star movement has consistently opposed both bailouts and bail-ins. Yet the government of which it is a member took I am told only 8 minutes to decide this last night.

The decree, signed off on Monday after a surprise cabinet meeting, will allow the bank to benefit from state-backed guarantees for new bond issues and funding from the Bank of Italy.

The lender, which last year failed to secure shareholder backing for a capital increase, will also be able to request access to state-backed precautionary recapitalization, if needed.

So yet again in a choice between the interests of the people and the interests of “the precious” we see that the same old status quo continues to play.

Whatever you want
Whatever you like
Whatever you say
You pay your money
You take your choice
Whatever you need
Whatever you use
Whatever you win
Whatever you lose

One of my longest-running themes of this website gets another tick in the box and we even get some Italian style humour.

EU rules permit such a scheme only if the bank is solvent.

So solvent in fact that they can no longer find anyone willing to put their own money into it. Also seeing as Bank Carige cannot even see its own nose I doubt this will be a barrier for long.

According to a financial source close to the matter, Carige would only consider a request for precautionary recapitalization if new and unforeseen problems arose.

Comment

The issue here is that on a generic basis the events described above are so familiar now that even the use of phrases like groundhog day does not do the situation justice. There are always going to be problems because regulators invariably end up being captured by the industry they regulate and banking is perhaps the worst example of this. But changes were promised so long ago and yet the Italian taxpayer will find him/herself on the hook in addition to the 320 million Euro hybrid bond that the deposit protection fund bought late last year. Even worse they may end up backing this enough for someone else to be willing to take it over and profit from. Oh and so much for hybrid!

Meanwhile in a land far, far, away I see that the Financial Times has interviewed the head of the Euro area banking resolution body.

Speaking to the FT to mark three years since the SRB became fully operational at the start of 2016, Ms König said a page had been turned in how the bloc handled bank failures — not least after its first intervention, at Spain’s Banco Popular in 2017 — but that the system remained a work in progress.

There is no mention of Italy at all which is really rather breathtaking, although there may be an implied hint.

Making sure that bank crises could be contained without resorting to taxpayer help was “an ongoing challenge”, she said.

Some claim the lack of contagion is progress, but you see there is a clear flaw in that as the problems here were evident as long ago as 2014 so what is called the “smart money” will have gone long ago. In some ways this makes things worse because in another shocking failure of regulation Italian retail depositors were encouraged to buy bank bonds.