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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Italy faces another bond market crisis

The situation in Italy has returned to what we now consider as a bond market danger zone although this time around the mainstream media seems much less interested in a subject which it was all over only a fortnight ago. Before we get to that as ever we will prioritise the real economy and perhaps in a type of cry for help the Italian statistics office has GDP ( Gross Domestic Product) per capita at the top of its page. This shows that the post Second World War surge was replaced by such a decline since the 28,699 Euros of 2007 that the 26,338 of last year took Italy back to 1999. The lack of any growth this century is at the root cause of the current political maelstrom as it is the opposite of what the founders of the Euro promised.

Retail Sales

These attracted my attention on release yesterday and you will quickly see why.

In April 2018, both the value and volume of retail trade show a fall respectively of -4.6% and -5.4%
comparing to April 2017, following strong growth in March 2018.

Imagine if that had been the UK Twitter would have imploded! As we look further we see that there seems to be an Italian spin on the definition of a recession.

In April 2018, the indices of retail trade saw a monthly recession, with value falling by 0.7% and volume
dropping by 0.9%.

Taking a deeper perspective calms the situation somewhat but leaves us noting a quarterly decline.

Notwithstanding the monthly volatility, looking at the underlying pattern, the 3 months to April picture
reports a slight decline as value decreased by 0.5% and volume contracted by 0.2%.

This is significant as this is supposed to be a better period for the Italian economy which has been reporting economic growth for a couple of years now. It does not have the UK problem of inflation impacting on real wages because inflation is quite subdued.

In May 2018, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.4% compared with April and by 1.1% with respect to May 2017 (it was +0.6% in the previous month).

Actually the rise in inflation there may further impact on retail sales via real wages. Indeed the general picture here sees retail sales in April at 98.6 compared to 2015 being 100. Seeing as that is supposed to have been a better period for the Italian economy I think it speaks for itself.

The economy overall

This is consistent with the general European theme we have been both observing and expecting. From yesterday’s official monthly report.

The downturn in the leading indicator continues, suggesting a deceleration in economic activity for the coming months.

This would continue the decline as in terms of GDP growth we have seen 0.5% twice then 0.4% twice and then 0.3% twice. Ironically that had shifted Italy up the pecking order after the 0.1% for the UK and the 0,2% for France after its downwards revision. But the detail is not optimistic.

Italian growth has been fostered by change in inventories (+0.7 percentage points) and by domestic consumption expenditures (+0.3 percentage points).

The inventory position seems to be a case of “what goes up must come down” from the aptly named Blood Sweat & Tears and we have already seen that retail sales will not be helping consumption.

The trade position is in general a strong one for Italy but the first quarter showed a weakening which seems to have continued in April.

In April, exports toward non-EU countries recorded a contraction (-0.9% compared to the previous month) less marked than in the previous months (- 3.1% over the last three months February-April). In the same quarter, total
imports excluding energy showed a negative change (-0.7%).

So lower exports are not good and lower imports may be a further sign of weakening domestic demand as well. As ever the monthly data is unreliable but as you can see below Italy’s vert strong trade position with non EU countries has weakened so far this year as we mull the stronger Euro.

The trade balance registered a surplus of 7,141 million euro compared to the surplus of 7,547 million euro in the same period of 2017.

An ominous hint of trouble ahead comes if we note the likely impact of a higher oil price on Italy’s energy trade balance deficit of 12.4 billion Euros for the first four months of 2018.

Bond Markets

These are being impacted by two main factors. Via @liukzilla we are able to award today’s prize for stating the obvious to an official at the Bank of Italy.

ROSSI SAYS YIELD SPREAD WIDER DUE TO -EXIT RISK: ANSA || brilliant…

It seems to have been a day where the Bank of Italy is indeed in crisis mode as we have also had a case of never believe anything until it is officially denied.

A GRADUAL RISE IN INTEREST RATES TO PRE-CRISIS LEVELS IS NOT A CAUSE FOR CONCERN FOR ITALY -BANK OF ITALY OFFICIAL ( @DeltaOne )

The other factor is the likelihood that the new Italian government will loosen the fiscal purse strings and spend more. It is already asking the European Union for more funds which of course will come from a budget that will ( May?) lose the net contribution from the UK.

Thus the bond market has been sold off quite substantially again this week. If we look at it in terms of the bond future ( BTP) we see that the 139 and a bit of early May has been replaced by just under 123 as I type this. Whilst there are implications for those holding such instruments such as pension funds the main consequence is that Italy seems to be now facing a future where the ten-year benchmark yields and costs a bit over 3%. This is a slow acting factor especially after a period where the ECB bond purchases under QE have made this cheap for Italy. But there has already been one issue at 3% as the new drumbeat strikes a rhythm.

There has also been considerable action in the two-year maturity. Now this is something that is ordinarily of concern to specialists like me but the sharp movements mean that something is going on and it is not good. It is only a few short week’s ago that this was negative before it then surged over 2% in a dizzying rise before dropping back to sighs of relief from the establishment. But today it is back at 1.68% as I type this. In my opinion something like a big trading position and/or a derivative has blown up here which no doubt will be presented as a surprise at some future date.

Meanwhile here is the Governor of the Bank of Italy describing the scene at the end of last month.

Having widened considerably during the sovereign debt crisis, the spread between the average cost of the debt and GDP growth narrowed to around
1 per cent. It could narrow further over the next few years so long as the economic situation remains positive. If the tensions of the last few days subside, the cost of debt will also fall, if only slightly, when the securities
that were placed at higher rates than newly issued ones come to maturity.

Comment

So to add to the other issues it looks like the Italian economy is now slowing and of course it was not growing very much in the first place. This makes me think of the banks who are of course central to this so let us return to Governor Visco’s speech.

Italian banks strengthened capital in 2017. Common equity increased by €23 billion, of which €4 billion was provided by the Government for the recapitalization of Monte dei Paschi di Siena.

Those who paid up will now be mulling losses yet again as even more good money seems to be turning bad and speaking of bad.

NPLs, net of loan loss provisions, have
diminished by about a third with respect to the end of 2015, to €135 billion. The coverage ratio, i.e. the ratio of the stock of loan loss provisions to gross NPLs, has reached 53 per cent, a much higher level than the average for the
leading European banks.

On and on this particular saga goes which will only really ever be fixed by some economic growth which of course is where we came in. Also whoever has done this has no doubt been suffering from a sleepless night or two recently.

The decrease in the stock of NPLs is partly due to the sharp rise in sales on the secondary market, facilitated by the favourable economic situation
(€35 billion in 2017 against a yearly average of €5 billion in the previous four years). This year sales are expected to reach €65 billion for the banking
system as a whole.

 

 

 

What is going on with the banks of Italy?

Yesterday saw something of a familiar theme as we were told this by Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance.

*PAGANI: ITALIAN BANKS ARE DEFINITELY FIXED ( h/t @mhewson_CMC )

You would be forgiven for thinking not only what again? But also experiencing some fatigue after being told it so often. Less than twelve hours later something else that is rather familiar turned up.

PAGANI SAYS ITALIAN BANKING NEEDS CONSOLIDATION ( h/t @lemasabachthani )

So they weren’t fixed for long it would seem! According to Bloomberg who had the interview we had another hostage to fortune as well from him.

“The story of Italian non-performing loans is over,” Pagani said.

He sounds so much like Finance Minster Padoan doesn’t he? In reality even those who are friendly to such ideas have doubts.

As you can see even Spain which was criticised for acting slowly in fact was 3/4 years ahead of Italy we note that the Italian problem got worse during this period. In fact Spain is in the process of repaying the ESM ( European Stability Mechanism) the money it borrowed for this.

Spain made the request for the repayment on 30 January 2018. One repayment will be for €2 billion, and is planned for 23 February 2018. The size of the second repayment will be €3 billion, and is scheduled for May 2018.

So in total this has happened.

Between December 2012 and February 2013, the ESM disbursed €41.3 billion to the Spanish government for the recapitalisation of the country’s banking sector……….Following the two repayments, Spain’s outstanding debt to the ESM will stand at €26.7 billion.

So Spain is exiting the procedure as Italy begins it and as is so usual Italy is doing it in its own way. For example in the tweet picture above the phrase bail in is used when in fact what it has done have had the features of bailouts as well. Also is this good or simply kicking the can somewhere else?

Investors also snapped up more than 100 billion euros ($123 billion) in non-performing Italian bank loans last year, which has helped reduce the level of net bad debt across the sector by more than a third.

Some may think that this may be more like vultures on their prey.

This month, Bob Diamond and Corrado Passera, the former bosses of Barclays Plc and Intesa Sanpaolo SpA, joined forces to shop for a lender to smaller Italian companies.

Monte Paschi

It too was in the news yesterday as Bloomberg told us this.

Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance, told Bloomberg News that Monte Paschi is in the picture for mergers after taking substantial steps to clean up its balance sheet since its rescue and introduce new management practices.

Who wants to merge with a zombie? I am reminded of what my late father used to tell me which is that more than a few takeovers and mergers only exist because the muddle the figures for a year or to. I can see why the Italian state might be keen as they did this.

A sale of Monte Paschi would cap a saga that saw Italy’s third-biggest bank, an icon of national finance, become engulfed by bad debts, criminal cases, and 6.7 billion euros in losses in the last two years. The government salvaged it as part of a 8.3 billion-euro recapitalization that strained ties between the country and the European Union over bailout rules.

Italy paid some 6.49 Euros a share as opposed to the 3.18 as I type this as we mull how the “substantial steps” have been ignored by the market which has more than halved the share price? We also learnt something from its bond issue in January. From the Financial Times.

Despite the low rating, the bond sale was three times subscribed and priced at a yield of just 5.375 per cent, confirming Monte Paschi’s ability to tap markets after its 2017 recapitalisation,

“Just 5.375%”? As in Europe these days that feels like riches beyond imagination! Especially if you note this.

The Italian government will provide a guarantee to the investment grade rated senior notes in this securitisation, which Monte Paschi will “retain” on its books.

I also thought that the bailout fund Atlante was pretty much out of cash.

It is able to derecognise the non-performing loans, however, because the riskier “mezzanine” and junior notes are being sold to the Italian Recovery Fund………..
While this fund — formerly known as Atlante — is private, it is part of a government-led initiative to clean up the Italian banking sector, and has far lower return targets than typical distressed debt buyers.

Anyway the share price reflects something rather different from the rhetoric as I note that according to Il Populista our old friend Finance Minister Padoan is on the case again.

The state will remain in Mps “for a few years”. Economy Minister Pier Carlo Padoan told the unions to add that “giving a number would be wrong and counterproductive for the markets”.

Giving wrong numbers has never bothered him before as I note this description of him which may be a quirk of Google translate.

The Minister of Economy, without shame,

The ECB

Today has brought news that swings both ways for the Italian banks as we have got the data which determines the interest-rate for TLTRO II so it was not a surprise to see this.

The annual growth rate of adjusted loans to non-financial corporations increased to 3.4% in January, from 3.1% in December.

Of the new 24 billion Euros some 20 billion was for less than a year but presumably long enough to fulfil the ECB criteria with the Italian banks to the fore.

January net lending flows to the non-financial private sector were particularly strong in Germany and Italy (second largest in over 10 years). ( @fwred )

Yet so far they have gained little as the annual gain from this according to @fwred is 769 million Euros for the Spanish banks but 0 for the Italian ( Portuguese and Dutch) ones. Perhaps the last-minute dash will make a difference.

Veneto Banks

The collapse of Veneto Banca and Banca Popolare di Vicenza. last year led to many financial problems in the area. In banking terms this happened.

The two Veneto banks were wound down in June, with the state guaranteeing losses of up to €17bn, after the European Central Bank declared the lenders as failing. Intesa was handed as much as €4.8bn to help preserve its capital ratios from any adverse impact from the deal. ( FT)

Yet as this from IlFattoQuotidiano.it  in January shows the pain for many businesses and savers continues.

He finally gave up. But it took six hours of negotiation because the former Romanian bricklayer Marin Halarambie, 59, agreed to move his car from the entrance of the historic Veneto Banca headquarters in Montebelluna. Christmas Day had arrived to stage a very personal protest, as the bankruptcy of the bank cost him a loss of about 125 thousand euros.

Comment

This is a particularly Italian saga where official boasting about the lack of bank bailouts met a brick wall of bank collapses later. Even worse the problem deteriorated as they looked the other way. On this road equity investors suffered – who can forget Prime Minister Renzi telling people Monte Paschi was a good investment ? – and so did the savers who were encouraged to invest in the “safe” bank bonds.

Now the economic outlook is better we wait to see what happens next. But there is a clear distinction between my subject of yesterday the Netherlands and Italy and it is this. From January 11th.

According to preliminary estimates, in the third quarter of 2017: the House Price Index (see Italian IPAB) decreased by 0.5% compared with the previous quarter and by
0.8% in comparison to the same quarter of the previous year (it was -0.2% in the second quarter of 2017);

For all the machinations that have gone on Italy has so far been immune from the suggested cure seen so often elsewhere which is to make the banks mortgage assets look stronger via higher house prices. How very Italian! Still the winners here are Italian first time buyers if they can get a mortgage.

Last week Bank of Italy Deputy Governor Panetta gave a speech which in one way suggested he must know some incredibly pessimistic people.

During the financial crisis, Italy’s banking system proved much more resilient than expected by many observers.

But intriguingly he does agree with me that if the buyers of bad loans are getting a good deal this must weaken and not strengthen the banks?

A generalized sale of NPLs on the market would imply a large transfer of resources from banks to buyers.

No wonder Diamond Bob is on the case! Also this is yet again rather familiar.

While the secondary market for NPLs is showing signs of rapid growth, it is still opaque and relatively oligopolistic.

And?

Simultaneous, blanket sales would further depress
market prices, magnifying the gap between the book and market values of NPLs. The result
for banks would be significant losses and reduced capital. This could have unintended effects
on individual banks as well as macroeconomic consequences through a contraction in credit
supply in countries where high NPL stocks are a concern for several banks.

 

 

 

 

Why have house prices in Italy continued to fall?

One of the features of these times is that economic policy is pretty much invariably house price friendly. Not only have central banks around the world slashed official interest-rates thereby reducing variable mortgage rates but many followed this up with Quantitative Easing bond buying which pushed fixed-rate mortgages (even) lower as well. If that was not enough some of the liquidity created by the QE era was invested in capital cities around the globe by investors looking to spread their risks. In addition we saw various credit easing programmes which were designed to refloat even zombie banks and get them back lending again. In my country this type of credit easing was called the Funding for Lending Scheme which did so by claiming to boost business lending but in reality boosted the mortgage market. Looked at like that we see policies which could not have been much more house price friendly.

If we switch to the Euro area we see that this went as far as the ECB declaring a negative deposit rate ( -0.4%) which it still has in spite of these better economic times and a balance sheet totaling 4.5 trillion Euros. This has led to house price recoveries and in particular in two of the countries which had symbolised a troubled housing market which were of course Ireland and Spain. But intriguingly one country has missed out as we were reminded of only yesterday.

The Italian Difference

Yesterday morning the official statistics body Istat told us this.

According to preliminary estimates, in the third quarter of 2017: the House Price Index (see Italian IPAB) decreased by 0.5% compared with the previous quarter and by
0.8% in comparison to the same quarter of the previous year (it was -0.2% in the second quarter of 2017);

The breakdown shows a small nudge higher for new properties that in aggregate is weaker than the fall in price for exisiting properties.

prices of new dwellings increased by 0.3% compared to the previous quarter and by 0.6% with respect to
the third quarter of 2016 (up from +0.3% observed in the second quarter); prices of existing dwellings
decreased by 0.7% compared to the previous quarter and by 1.3% with respect to the same quarter of the
previous year.

Property owners in Italy may be a little jealous of those in Amsterdam who have just seen a 13.5% rise in house prices in the past year.

A ( space) oddity

The situation gets more curious if we note that as discussed earlier the mortgage market has got more favourable. In terms of credit then there should be more around as at the aggregate level the ECB has expanded its balance sheet and we know that Italian banks took part in this at times on a large scale. Whilst the overall process has been an Italian style shambles there have (finally) been some bank bailouts or rather hybrid bailin/outs.

If we move from credit supply to price we see that mortgage rates have been falling in Italy. The website Statista tells us that the 3.68% of the opening of 2013 was replaced by 2.1% at the half-way point of 2017. The fall was not in a straight line but is a clear fall. Another way of putting this is to use the composite mortgage rate of the Bnak of Italy. When ECB President gave his “Whatever it takes ( to save the Euro speech)” in July 2012 it might also have been save Italian house prices as the mortgage rate fell from 3.95% then to 1.98% as of last November so in essence halved.

So if we apply the play book house prices should been rallying in Italy and maybe strongly.

House Price Slump

Reality is however very different as the data in fact shows annual falls. For example 4.4% in 2014 and 2.6% in 2015 and 0.8% in 2016. Indeed if we look for some perspective in the credit crunch era we see the Financial Times reporting this.

In real terms, Italy’s real house prices have been falling consistently since 2007 and are now 23 per cent lower — a drop that has brought the construction and property sectors to their knees.

If we look back to the credit crunch impact and then the Euro area crisis which then gave Italy a double-whammy hit then we see that lower house prices are covered by Radiohead.

No alarms and no surprises

Although existing property owners may be singing along to the next part of the lyric.

let me out of here

What is more surprising is the fact that the economic improvement has had such a different impact on house prices in Italy compared to its Euro area peers.

Italy was the only country in the EU where house prices contracted in the second quarter of last year, according to the latest figures from Eurostat, the EU statistics agency. In contrast, almost two-thirds of EU countries are reporting house price growth of more than 5 per cent. ( FT )

If we look at the house price index we see that as of the third quarter of last year it was at 98.6 compared to the 100 of 2015. So just as Mario Draghi and the ECB were “pumping up” monetary policy house prices in Italy were doing not much and if anything drifting lower. Looking further back we see that the index was 116.3 in 2010 so it has not been a good period of time for property owners in Italy and that does matter because of this.

and in a country where more than 72 per cent of households own their own home

I have to confess I was not previously aware of what a property owning nation Italy is.

The banks

We have looked many times at the troubled banking sector in Italy and we have seen from the numbers above that the property market and the banking sector have been clutching each other tightly in the credit crunch era. Maybe this is at least part of the reason why the Italian establishment has dithered so much over the banking bailouts required as it waited for a bottom which so far has not arrived. This has left the Italian banking sector with 173.1 billion Euros of bad loans sitting on their balance sheets.

Property now accounts for more corporate bad loans than any other sector: 42 per cent compared with 29 per cent in 2011………And for property-related lending the proportion of loans turning bad has been twice as high as in the manufacturing sector, weighing on banks’ €173bn of bad debts. ( FT)

So something of a death spiral as one zombie sector feeds off another as this reply to me indicates.

The trend is getting better for Italian house market but it is a vicious circle: banks’ sales of repossessed property is also contributing to the prolonged house price contraction. The number of real estate units sold via auction increased 25 % in the last 2 years ( @Raff_Perf )

As The Cranberries would say “Zombie, zombie,zombie”

Disposing of bad property loans has also been slower than for other sectors……… In contrast, banks continue to harbour hopes of greater recovery of secured loans to construction and real estate companies. As a result, this lending has remained in limbo for longer.

Another forward guidance fail?

Comment

One way of looking at Italy right now is of a property owning democracy which has had a sustained fall in house prices. This of course adds to the fact that on an individual basis economic output or GDP has fallen in the Euro area as output stagnated but the population rose meaning the net fall must now be around 5%. It is hard not to wonder if the “Whatever it takes” speech of Mario Draghi was not at least partly driven by rising mortgage rates in Italy ( pre his speech they went over 4%) and falling house prices in his home country. Along the way it is not only the banking sector which is affected.

Construction has almost halved from its pre-crisis level. ( FT)

That puts the UK’s construction problem I looked ta yesterday into perspective doesn’t it?

Looking ahead we see a better economic situation for Italy as it has returned to economic growth. What this has done if we look at annual house price numbers is slowed the decline but not yet caused any rises. In some ways this is welcome as first time buyers will no doubt be grateful that they have not seen the rises for example seen in much of my home country but if with all the monetary policy effort the results are what they are what happens when the next recession turns up?

Still if you want the bill pill Matrix style there is this from AURA who call themselves real estate experts.

“I would say it’s a mathematical fact: house prices cannot drop more than 30%. I believe that this drop of values is over and it’s now time to buy”. Stefano Rossini, Ceo for MutuiSuperket.it,

Perhaps he has never been to Ireland or more curiously Spain.

Me on Core Finance

http://www.corelondon.tv/manufacturing-gives-boost-uk-economy/

 

 

 

The problems of the banks of Italy part 101

It is time to look again at a topic which is a saga of rinse and repeat. Okay I am not sure it is part 101 but it certainly feels like a never-ending story. Let us remind ourselves that the hands of the current President of the ECB ( European Central Bank) Mario Draghi are all over this situation. Why? Well let me hand you over to the ECB itself on his career so far.

1997-1998: Chair of the Committee set up to revise Italy’s corporate and financial legislation and to draft the law that governs Italian financial markets (also known as the “Draghi Law”)

It is a bit awkward to deny responsibility for the set of laws which bear you name! This happened during the period ( 1991-2001) that Mario was Director General of the Italian Treasury. After a period at the Vampire Squid ( Goldman Sachs) there was further career progression.

2006-October 2011Governor, Banca d’Italia

There were also questions about the close relationship and dealings between the Italian Treasury and the Vampire Squid over currency swaps.

https://ftalphaville.ft.com/2010/02/09/145201/goldmans-trojan-greek-currency-swap/?mhq5j=e2

But with Mario linking the Bank of Italy and the ECB via his various roles the latest spat in the banking crisis saga must be more than an embarrassment.

The inspection at Banca Popolare di Vicenza that began in 2015 was launched at the request of the Bank of Italy and was conducted by Bank of Italy personnel. Any subsequent decisions were not the responsibility of the Bank of Italy but of the European Central Bank, because in November 2014 Banca Popolare di Vicenza had become a ‘significant’ institution and was subject to the European Single Supervisory Mechanism (SSM). ( h/t @FerdiGiugliano )

So we can see that the Bank of Italy is trying to shift at least some of the blame for one of the troubled Veneto banks to the ECB. At this point Shaggy should be playing on its intercom system.

It wasn’t me…….It wasn’t me

An official denial

At the end of last month the Governor of the Bank of Italy gave us its Annual Report.

At the end of 2016 Italian banks’ non-performing loans, recorded in balance sheets net of write-downs, came to €173 billion or 9.4 per cent of total loans. The €350 billion figure often cited in the press refers to the nominal value of the exposures and does not take account of the losses already entered in balance sheets and is therefore not indicative of banks’ actual credit risk.

Indeed he went further.

Those held by intermediaries experiencing difficulties, which could find themselves obliged to offload them rapidly, amount to around €20 billion.

I suppose your view on this depends on whether you think that 20 billion Euros is a lot or a mere bagatelle. It makes you wonder why the problems at the Veneto banks and Monte Paschi seem to be taking so long to solve does it not?

Meanwhile he did indicate a route to what Taylor Swift might call “Trouble, trouble,trouble”.

At the current rate of growth, GDP would return to its 2007 level in the first half of the 2020s.

An economy performing as insipidly as that is bound to cause difficulties for its banks, but not so for the finances of its central bank.

The 2016 financial year closed with a net profit of €2.7 billion; after allocations to the ordinary reserve and dividends paid to the shareholders, €2.2 billion were allocated to the State, in addition to the €1.3 billion paid in taxes.

The QE era has seen a boom in the claimed profits for central banks and as you can see they will be very popular with politician’s as they hand them over cash to spend.

The ECB is pouring money in

The obvious problem with telling us everything is okay is that Governor Visco is part of the ECB which is pouring money into the Italian banks. From the Financial Times.

According to ECB data as of the end of April, Italian banks hold just over €250bn of the total long-term loans — almost a third of the total.

There is a counter argument that the situation where the Italian banks rely so much on the ECB has in fact simply kicked that poor battered can down the road.

“Some of them [Italian banks] are unprofitable even with the ECB’s cheap funding,” adds Christian Scarafia, co-head of Western European Banks at Fitch.

Fitch also observes that the TLTRO funding is tied up with Italy’s management of the non-performing loans that beset its banks. “The weak asset quality in Italy is certainly the big issue in the country and access to cheap ECB funding has meant that banks could continue to operate without having to address the asset quality problem in a more decisive manner,” says Mr Scarafia. (FT)

It was intriguing to note that the Spanish bank BBVA declared 36 million Euros of profits in April from the -0.2% interest-rate on its loans from the ECB. A good use of taxpayer backed money?

The Veneto Banks

For something that is apparently no big deal and according to Finance Minister Padoan has been “exaggerated” this keeps returning to the news as this from Reuters today shows.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks, sources familiar with the matter said.

Good money after bad?

Italian banks, which have already pumped 3.4 billion euros into the two ailing rivals, had said until now that they would not stump up more money.

As you can see the ball keeps being batted between the banks, the state , and the Atlante fund which is a mostly private hybrid of bank money with some state support. Such confusion and obfuscation is usually for a good reason. A bail in has the problem of the retail depositors who were persuaded to invest in bank bonds.

Monte Paschi

On the 2nd of this month we were told that the problem had been solved and yet the saga like so many others continues on.

HEDGE FUND SAID IN TALKS TO BUY $270 MILLION MONTEPASCHI LOANS ( h/t @lemasabachthani )

Seems odd if it has been solved don’t you think? Mind you according to the FT the European Banking Authourity may have found a way of keeping it out of the news.

The EBA said it would be up to supervisors to decide whether to include any bank in restructuring within the stress tests, and European Central Bank supervisors have decided not to include Monte dei Paschi, people briefed on the matter said.

So bottom place is available again.

Comment

This has certainly been more of a marathon than a sprint and in fact maybe like a 100 or 200 mile race. The Italian establishment used to boast that only 0.2% of GDP was used to bailout Italian banks but of course it is now absolutely clear that this effort to stop its national debt rising even higher allowed the banking sector to carry on in the same not very merry way. This week the environment has changed somewhat with Santander buying Banco Popular for one Euro. Although of course the capital raising of 7 billion Euros needs to be factored into the equation. I guess Unicredit has troubles enough of its own and could not reasonably go for yet another rights issue!

Me on TipTV Finance

http://tiptv.co.uk/living-extraordinary-times-not-yes-man-economics/

 

The British and Irish Lions

I have been somewhat remiss in not wishing our players well on what is the hardest rugby tour of all which is a trip into the heart of the All Blacks. I am thoroughly enjoying it although of course we need to raise our game after a narrow win and a loss. Here’s hoping!

 

 

 

The economic problem that is Italy continues

Today brings the economic situation in Italy into focus as it readies itself for a ratings review. Friday the 13th may not be the most auspicious of days for that! However I should be more precise in my language as the Italian government will know as they get told 24 hours before. So as we live in a world where things leak, today will be a day where some traders will be more equal than others so take care. But there are plenty of worries around due to the fact that one of the central themes of this website which is Italy’s inability to maintain any solid rate of economic growth continues. To be more specific even in the good times it struggled to have GDP (Gross Domestic Product) growth of more than 1% per annum. This it was particularly ill-equipped to deal with the credit crunch and was left with weak economic foundations such as its banks.

Some better news

This was to be found in yesterday’s production numbers.

In November 2016 the seasonally adjusted industrial production index increased by 0.7% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was +0.9.

The calendar adjusted industrial production index increased by 3.2% compared with November 2015

As you can see these were good numbers although not so good for economists whose expectations so often misfire. As the Financial Times pointed out there was a positive change in response to this.

Economists at Barclays have doubled their projected fourth quarter growth forecast for the eurozone’s third largest economy to…0.2 per cent…….. GDP growth is now expected to clock in at 0.2 per cent from an earlier projection of 0.1 per cent in the three months to December,

If you really want to big this up then you can say that the expected growth rate has doubled! Of course the issue is that it is so low and that even this would be a reduction on the 0.3% achieved in the third quarter of 2016. For a little more perspective imagine the outcry if a post EU vote UK had grown like that, twitter would have been broken.

The Labour Market

The data here is far from positive however as on Monday we were told this.

In November 2016, 22.775 million persons were employed, +0.1% compared with October. Unemployed were 3.089 million, +1.9% over the previous month……..unemployment rate was 11.9%, +0.2 percentage points in a month and inactivity rate was 34.8%, -0.2 percentage points over the previous month.

This is the Italian equivalent of a Achilles Heel and separates it from the general Euro area performance where the unemployment rate has been falling and is now at 9.8%. In fact it was one of only four European Union states to see an annual rise in its unemployment rate and we should make a mental note that Cyprus was another as this does not coincide with the message that the bailout was a triumph. Returning to Italy there was more bad news in the detail of the numbers.

Youth unemployment rate (aged 15-24) was 39.4%, +1.8 percentage points over October and youth unemployment ratio in the same age group was 10.6%, +0.7 percentage points in a month.

I hope these sort of numbers do not lose their ability to shock us and also note that time matters here as Italy is in danger of seeing a lost generation as well as a lost decade. So many must have no experience of what it is like to work.

Consumer Inflation

The last week or so has seen quite a few nations recording a pick-up in inflation in December so we see yet another area where Italy is different.

In December 2016, according to preliminary estimates, the Italian harmonized index of consumer prices (HICP) increased by 0.4% with respect to the previous month and by 0.5% with respect to December 2015 (from +0.1% in November 2016).

Yes there was a rise but to a much lower level and in terms of Italy’s own CPI prices fell in 2016 overall albeit by only 0.1%. So as we observe low rates of economic growth we see that Italy is in fact quite near to deflation which for me would be signaled by falling output and prices.

Italian consumers are unlikely to be keen on the rising inflation level such as it is because it was mostly fuel and food driven.

House Prices

Here is another difference as you might think that an official interest-rate of -0.4% and 1.5 trillion Euros or so of bond purchases in the Euro area would lead to house price rises. That is of course true in quite a few places but not in Italy.

In the third quarter of 2016: – the House Price Index (see Italian IPAB) increased by 0.1% compared to the previous quarter and decreased by 0.9% in comparison to the same quarter of the previous year (slightly down from -0.8 registered in the second quarter of 2016);

So not much action at all and in fact Italy has been seeing house price disinflation. The official index has done this after being set at 100 in 2010. It has gone 102.4 (2013), 100.1 (2014), 98.6 (2015) and 97.4 in the third quarter of last year.

So good for first time buyers and in many ways I think more welcome than the UK situation but surely not what the Italian President of the ECB Mario Draghi had planned.

The banks

This is a regular theme as well and I covered the Monte Paschi bailout on the 30th of December and apart from a debate as to how bad the bad loans are there is little change here. Yes the same bad loans which we were told were such great value only a couple of months or so ago. Also Unicredit is continuing with its 13 billion Euro capital raise confirming the view I expressed on Sky Business News just over 5 years ago. Eeek! Where did the time go?

http://www.mindfulmoney.co.uk/mindful-news/unicredit-collapse-the-invasion-of-zombie-banks/

We do have some news on this subject and it does raise kind of a wry smile.

UBI Banca, Italy’s fifth-largest bank by assets, has been cleared to buy for €1 the rump of three lenders rescued by the state in the latest step in Italian bank consolidation. UBI made the offer for Marche, Etruria and Carichieti to the state bank resolution fund on the condition the so-called good banks are stripped of €2.2bn in bad loans. ( Financial Times).

Oh and 1 Euro may turn out to be very expensive if you read my 30th of December post and the relationship of Finance Minister Padoan with reality and honesty.

Pier Carlo Padoan, finance minister, told lawmakers in Rome he was “convinced” the deal was good for the bank in question and confidence in the Italian banking system.

The discussion these days turns a lot to those bad loan ratios and how much of them have been dealt with. As ever there appears to be some slip-sliding-away going on.

Comment

The simplest way of looking at Italian economic performance this century is to look at economic growth and then growth per head. Sadly we see that GDP of 1555.5 billion Euros in 2000 ( 2010 prices) was replaced by a lower 1553.9 billion in Euros in 2015. But the per head or per capita performance was much worse as the population rose from 57.46 million in 2000 to 60.66 million at the end of 2015.

It is that economic reality which has weakened the banks (albeit with not a little corruption thrown in) and also led to the problems with the national debt about which we have also learned more today.

Italian General Government Debt (EUR) Nov: 2229.4B (prev 2223.8B) ( h/t @LiveSquawk )

The bond vigilante wolf is being kept from the door by the amount of bond purchases being made by the ECB.

What hope is there? Perhaps that the unofficial or unregulated economy is larger than we think. Let us hope so as Italy is a lovely country. But in contrast to Germany which I analysed on Monday the level of the Euro looks too high for Italy.

 

 

 

The spectre of nationalisation haunts Monte dei Paschi

As we approach Christmas and the New Year we see that there is something of a crossover between popular culture and the banking sector. What I mean by this is the way the TV series The Walking Dead seems to apply to some Italian banks and to Monte dei Paschi di Siena or BMPS in particular. As 2016 has progressed BMPS has looked more dead and less walking and this examination of its value will show us. Back on the 21st of January I used these numbers from Macrocredit as an illustration.

MontePaschi: Total capital raised since 2008: €14bn Market value today: €1.5bn

What is happening this morning well @warburg100 updates us.

UNABLE TO FIX AN OPENING PRICE. – 9.82%…….. new low 14.71 in a short deal with 143k pcs dealt.

This means that Bloomberg tells us this about the value of BMPS this morning.

The shares have dropped 87 percent this year, trimming the bank’s value to 478 million euros.

Actually if we use that latest share price and look at what Bloomberg used the value is now 431 million Euros compared to capital raised of 14 billion Euros. So whilst we should take care using a marginal price for an average concept we see that there has been value destruction on a grand scale here which has hurt ordinary people and investors badly as I will come to in a minute. But as James Mackintosh reminds us we have seen an extraordinary example of what we have labelled Fallin’ Alicia Keys style.

Monte dei Paschi now down 99.84% from all time high. Still holding out for -99.99%, if the suspensions allow it to fall enough

It is getting ever nearer.

Its bonds

As well as having equity capital banks these days increasingly issue bonds to back their capital and some of these are a type of hybrid capital especially if we note that the Euro area has bail in rules for some of them. Put simply if things go wrong you can lose your dough. There are obvious fears in the chart from @fastFT from late yesterday.

https://twitter.com/fastFT/status/811613822628823040

That bounce may seem hopeful but I would like you to note that the previous days closing price was 50.088 and the post bounce price was 47. 813. So it was still heavily down on the day off a closing price where half its value had gone. This is at a time which in general terms could hardly be more favourable for bonds as whilst the ECB does not buy bank bonds (yet) its deposit rate of -0.4% and purchases of well over a trillion Euros of sovereign bonds and some 50.4 billion of corporate bonds mean that it has been quite a bull market overall.

The issue of lower bond prices is where depositors and savers or the ordinary person come particularly into view. Back on the 24th of November I looked at how ordinary savers had been persuaded to invest in the share of banks in the Veneto region well here we are discussing bonds which were aimed at ordinary savers and depositors. With the value of some of these bonds halving and maybe worse to come we see that we are seeing Italy’s own version of a miss selling scandal. These bonds were badged as safe by the salesmen and women whereas they have turned out to be anything but.

This is the crux of the matter. Euro area bail in rules say that the bonds have to be hit whereas in terms of the impact on retail bondholders the Italian government feels that it needs to avoid this. Both out of justice and humanity but also out of simple politics.

What happened to Atlante?

This is the private-sector rescue vehicle. I have pointed out many times that it simply does not have enough money as in spite of it having a second cash call the demands on it are ongoing as this from Reuters yesterday shows.

Veneto Banca said in a statement Quaestio Capital, the manager of the Atlante fund, had pledged to put up 628 million euros ($655 million) by January 5 as part of a future capital increase.

In a separate statement Banca Popolare di Vicenza said the fund would pay 310 million euros into its coffers by the same date, also as part of a future capital increase.

So something of a dash for its cash seems to have been going on. Thus it could put some money into BMPS but not a lot

A run on the bank

Banks rarely survive such a thing and we have seen signs of this. Back in November the Financial Times reported this.

Monte Paschi, the world’s oldest lender, has lost €14bn — or 11 per cent — of its deposits since January, with an acceleration in July and August

Yesterday BMPS reported that it only had 4 months of liquidity left which is the sort of statement likely to make it 4 weeks or even 4 days! Some care is needed amongst the scaremongering as there is deposit protection up to 100,000 Euros and the Bank of Italy will be watching this like a hawk but larger depositors if there are any left are likely to move on.

Nationalisation

Italy has had a parliamentary vote to raise “up to” 20 billion Euros which means that we will have to update the meaning of “up to” in my financial lexicon for these times. So the cash is ready and the deadline for the private-sector plans is 2 pm today. Christmas is a convenient time for such things as the public holidays can be used and it seems to be after Banif and Novo Banco a time that the Euro area prefers for such things. Or as @Swedes2Turnips1 put it.

Jingle bails.

The private rescue has failed to find anyone silly enough to back the 4 billion Euros of financial engineering with 1 billion Euros of equity. So the state is revving up although there are odd stories about the 4% stake of the state being raised to 70%. That is the sort of mistake the UK made with Royal Bank of Scotland when it is much better, if you have to invest, to also have the complete control that 100% provides. For example it is not a nice thing to happen but after a nationalisation the share price should be zero.

Spanish banks

The good day to bury bad news klaxon was in operation yesterday as this was announced.

Spanish banks, including Banco Popular Espanol SA and Banco Bilbao Vizcaya Argentaria SA, may have to give back billions of euros to mortgage customers after a final ruling by the European Union’s top court. Bank shares tumbled by as much as 10 percent. (Bloomberg)

How much?

The Bank of Spain estimates the maximum amount of mortgage floors affected by the ruling is slightly above 4 billion euros, an official said.

So we see new rules for tossing a coin where heads means the banks win and tails mean we lose. Meanwhile more disinformation is provided.

The ruling doesn’t affect Banco Popular’s solvency or strength, a spokeswoman for the lender said. The total impact of the ruling for the bank is 639 million euros and the bank has already provisioned to cover 305 million euros, she said.

Comment

This looks set to be the latest example of privatisation of profits and socialisation of losses from the banking sector otherwise known as the precious. Also the delay and dithering means that those responsible continue to collect their pay cheques and sometimes bonuses for as long as possible. The official time line has been provided for us by @Darlington_Dick

*PADOAN: ITALIAN BANKS ARE NOT WEAK (January)

*PADOAN: PERCEPTION OF ITALIAN BANKING SYSTEM HEALTH `DISTORTED’ (July)

Oh and he was on CNBC in September.

Bailout for Italian banks has been ‘absolutely’ ruled out

Meanwhile please never take investment advice from former Prime Minister Matteo Renzi as he was to be found stating back in January that BMPS was a good investment. Also let me remind you that the President of the ECB Mario Draghi has been intimately involved in all of this over time via his past roles as Governor of the Bank of Italy and more as I pointed out on January 21st.

If we look further back in time we see that the law covering Italian financial markets is often called the Draghi Law and we note that around the turn of the century he was Director General of the Italian Treasury. Then he went to Goldman Sachs which was busy designing derivatives for Italy and Monte Paschi as well as Greece before returning to head the Bank of Italy. So if there is a crime his fingerprints are all over it.

Meanwhile for Italy itself there is the issue of its national debt which is already 2.22 trillion Euros and seems set to rise which reminds me of point 11 of my time line for a bank collapse.

11. It is announced that due to difficult financial times public spending needs to be trimmed and taxes such as Value Added Tax need to be raised. It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.