Will Italy’s Banking Crisis Spawn a New Frankenbank?

“Operation Overlord.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

There are rumors currently doing the rounds that Italy’s banking problems have finally been put to rest. The FTSE Italia All-Share Banks Index has soared about 40% over the last 12 months, about double the advance by the Euro Stoxx Banks Index. Six of the top seven gainers in the latter index this year are Italian.

The story of Italy’s non-performing loans, which just a year ago terrified global investors and posed a systemic threat to the entire Eurozone economy, “is over,” according to Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance. Pagani believes that now that the banking sector is well and truly on the mend, work should begin to take consolidation of the sector to a new level.

“There are too many banks,” Pagani told Bloomberg. “And in this sense, Monte dei Paschi could play a role. I think this could start this year.”

There’s clearly lots of room for consolidation in Italy, home to roughly 500 banks, many of which are small local or regional savings banks with tens or hundreds of millions of euros in assets. At the top end of the scale, Italy’s ten biggest banks control roughly 50% of the industry. The goal is to increase that to 70-75% to bring it more in line with the levels of banking concentration in other EU countries. In Spain, for example, the five biggest banks — Santander, BBVA, CaixaBank, Bankia and Sabadell — control 72% of the market.

The problem is that, while last year’s bail out of Monte dei Paschi di Siena may have restored a certain amount of investor confidence to Italy’s banking sector, many of the largest banking groups are still extremely fragile, with stubbornly high non-performing loan (NPL) ratios. Even Intesa Sanpaolo, which is widely regarded as Italy’s most stable large bank, had a bad-loan ratio of 13% at the end of September, compared to a European average of 4.5%.

As such, trying to find suitable merger partners that are not going to drag each other further down is not going to be an easy task. Intesa is still trying to digest tens of billions of euros in assets from Banca Popolare di Vicenza and Veneto Banca, the two mid-size collapsed banks it gobbled up at the government’s insistence in June last year. As for Unicredit, Italy’s only global systemically important bank (G-SIB), it’s barely back on its own two feet after successfully completing the biggest ever capital expansion in Italian history last year.

So, if the two biggest banks are most likely out of the equation for now, who could Pagani be thinking about? For the moment he says it’s too early to say.

But while Pagani keeps mum, Giovanni Razzoli, an analyst at Equita SIM, has identified five potential suitors — Monte dei Paschi di Siena (now majority owned by the State), Banco BPM, BPER Banca, Credito Valtellinese and Banca Carige — that could be merged into one mega-bank. He’s even given his masterplan a name, with suitably dark undertones: Project Overlord.

Three of the banks have one obvious thing in common: they have all been, or are in the process of being, rescued, either by taxpayers or shareholders, or a combination of both.

Despite being bailed out with €8.5 billion of taxpayer funds last year, in contravention of new EU rules on banking resolution, Monte dei Paschi is still far from out of the woods. In early February the bank reported total losses in 2017 of €3.5 billion, as a result of falling revenue, loan write-downs, and one-off charges. Since then its stock, which resumed trading on Oct. 25 after a 10-month hiatus, has tumbled over 15%. Now valued at €3.18, the shares are 51% below the €6.49 that Italian taxpayers paid during the latest rescue.

Then there’s mid-sized lender Carige, with assets of €26 billion. In December it completed a €500 million share issue that very nearly flopped. Together with a completed exchange of subordinated bonds into senior bonds and ongoing asset disposals, the capital increase is expected to raise about €1 billion of capital, according to rating agency Moody’s. The proceeds will largely be used to write down and then dispose of €1.9 billion of problem loans.

Credito Valtellinese (or Creval) is in a similar situation having reported a €332 million loss for 2017 in preparation for its own €700 million rights issue. Since then its shares have tumbled from €0.16 to €0.11 cents.

In other words, Operation Overload would involve joining at the hip three banks that are barely capable of standing on their own two feet, even with all the public and/or private support they’ve received, with two other banks — one of which (Banco BPM) is barely a year old after being spawned from the merger last year of two large cooperative banks, Banco Popolare and BPM.

For an indication of what could ensue one need only recall what happened to Spain’s very own frankenbank, Bankia, which was created in 2010 by melding together six failing regional savings banks with a larger and seemingly healthier lender, Caja Madrid. Less than a year after its public launch, in 2011, Bankia collapsed in such emphatic style that, to be reanimated, it needed the biggest ever public bailout in Spanish history.

One can only hope that Italy’s incoming policymakers and Europe’s central bankers have learnt enough from recent history to consign Project Overlord to the dustbin. But if recent history has taught us anything, it’s that policymakers, whether in government or central banking, rarely learn from history. By Don Quijones.

There’s a new plan to deal with the problems of Spanish banks, but there’s a problem with the plan. Read…  A New Cunning Plan to Allay Banking Jitters is Hatched in Spain

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  19 comments for “Will Italy’s Banking Crisis Spawn a New Frankenbank?

  1. Bruce
    Feb 28, 2018 at 9:32 pm

    Italy banking problems are far from over just kick the can down the road and create a begger problem later that will fix it. LIKE HE’LL IT WILL. .The DEBT is getting bigger by the day with no way of paying it back keep that up Europe you are in trouble

  2. raxadian
    Feb 28, 2018 at 11:04 pm

    And of course such a big Megabank would be too big to fall…

    Only it would fall anyway because Italy can’t print money due to using the Euro currency.

    And such catastrophic fall might turn Italy into such a disaster that it might force regulations changes in the Eurozone.

    • Robert T
      Mar 9, 2018 at 9:01 am

      “Only it would fall anyway because Italy can’t print money due to using the Euro currency.” You would think not, but that is how the entire Eurozone crisis occurred: they all agreed at the outset that no participant was to run a deficit exceeding 3%, but the serial violations amounted to running a printing press. (which helps explain why a gold standard ever existed.)

  3. disc_writes
    Mar 1, 2018 at 3:57 am

    Intesa San Paolo has been making noises of wanting to acquire Generali. This would effectively turn it into a systemic bank, i.e. it would be above all rules and would have to be recapitalized by the ECB, bypassing the Italian government.

    I am not surprised that the government is thinking up similar plans for other banks, too. I am more surprised that they did not think of it before.

    In this fantasy world where capital costs nothing, bad companies do not go bankrupt, bonds of bankrupt countries offer little yield, and Italian bank stocks “recover”… why not, let us add another Italian systemically important bank or two.

  4. JR
    Mar 1, 2018 at 4:09 am

    It is all OK, German taxpaying donkeys will bear the load, while they are still alive anyway. Hans Werner Sinn in a recent editorial: “The decade ahead will be a particularly opportune time to create a transfer union, owing to the looming demographic crisis that is threatening most European countries, with the exception of France. After the baby boomers retire, government coffers will run out between 2028 and 2038. That means anybody looking to tap the resources of Northern European taxpayers will need to do so soon, before it is too late.”

  5. MC01
    Mar 1, 2018 at 4:15 am

    The big problem with that mass of bad loans (which will start growing like mushrooms again as soon as EURIBOR starts ticking upward and the mini-real estate bubble in the North bursts) is that nobody has any idea on how to deal with them.

    Distressed asset management firms arrived in Italy advertising that somehow they are able to recover “between 50 and 75%” of a bad loan. Their bluster soon turned into nothing more than hot air, as the recovery rate in Italy is usually closer to 25% than to 50% and these firms surely cannot bend the space-time continuum to live up to their absolutely unrealistic promises.
    The big problem is loans in Italy are overwhelmingly backed by real estate and, as the Pier Carlo Padoan, Ministry of Finance, so wisely said Italy is drowning in unsold and abandoned real estate: auctioning off the real estate backing those festering loans would put even more downward pressure on prices after so many resources were expended for years to artificially prop up prices, both to make RE-backed loans look better than they are and to goose GDP figures.

    Italy’s bad loan problem hasn’t gone away merely because newspapers (as sycophantic in Italy as in any other country) have stopped printing stories about it. It’s still there, and revolves more than ever on both artificially high real estate prices and artificially low interest rates. Neither can be maintained for much longer.
    And the causes haven’t been removed: “Construction and real estate” accounts for a massive 64% of officially recognized bad loans, and those same banks which should know better are hellbent on helping inflating yet another real estate bubble which rests on even shakier ground than those which came before it.

    This is neither the time nor the place to open a discussion on real estate in Italy: suffice to say if the country doesn’t cut short its love affair with RE speculation its banks will always be the most fragile in Europe, and there won’t always be a sugar daddy in Frankfurt or a banker’s daughter in Rome making sure they get bailed out and the executives aren’t indicted.
    In spite of a smear campaign over two years long it appears M5S will force the ruling PD into a humiliating coalition government with Mr Berlusconi after the Sunday general election and may even come tantalizing close to have enough votes to form a government.
    Enragés do not get a big pile of votes when everything is as awesome as the mainstream media say, and how banks (or to be more specific, banking executives) have so far not merely escaped even the most minute shred of accountability but have been richly rewarded has had more than a hand in how a “fringe movement” such as M5S has become the kingmaker and, should things continue on the present path, the kingslayer as well.

  6. TJ Martin
    Mar 1, 2018 at 9:54 am

    To hell with Italy’s banking woes : that is the least of Italy’s problems . The real problems is … burgeoning blatant outright political instability on the horizon and about to blow up in everyone’s faces … almost regardless of who wins this years elections .

    Why ? Take a look at what options they have . A) The return of Berlusconi .. B) A young maverick who doesn’t have a clue … C) a loud mouthed comedian with neofascist tendencies …. D) The return of the PM they recently ousted ( probably the closest thing to a reasonable option ) or E) A genuine bonafide dyed in the wool card carrying neofascist

    This … mi amicos … is a gonna getta real ugly

    Va bene ..eco .. basta .. ciao

  7. Tom
    Mar 1, 2018 at 10:43 am

    It seems to me the more prudent operation would be to bust up these banks into many small banks that would closer to the pulse of there customers. This would lessen the problem of TBTF.

    • Mar 1, 2018 at 2:34 pm

      their customers have no pulse

    • Ensign Nemo
      Mar 1, 2018 at 4:34 pm

      I think that the goal of the owners of these banks is to MAKE them too big to fail.

      If they are left alone then they will most likely fail separately.

      The only option that the bankers have is to deliberately turn a series of smaller collapses that might be absorbed by the system, into one huge collapse that would destroy the system.

      They want to force the government to bail them out, and the government doesn’t really care about the taxpayers, so it will probably go along with this and then pretend to be surprised when the Frankenbank needs a massive bailout.

      It also pushes the solution to the problem back a bit, so the current gang of politicos can safely retire and pass the bill to the next government.

  8. Mar 1, 2018 at 10:54 am

    Nationalize the banks, the taxpayers paid for them, let taxpayers take ownership. Isn’t that what the Japanese did with their zombie banks?

    • Javert Chip
      Mar 1, 2018 at 3:54 pm

      Unfortunately, the only thing worse for Italian banks, other than Italian bank managers, would be Italian politicians.

  9. Nick Kelly
    Mar 1, 2018 at 12:52 pm

    It’s not a good sign that the system is so stressed already, with the record stimulus only just beginning to taper.

  10. Steve clayton
    Mar 1, 2018 at 2:15 pm

    Sad but Carige, Monte Dei Paschi, Creval are all basket cases. Anyone from another bank would question what still needs to be provided for ref sofferenze bad debts. They’ve been trickling out the bad news for the last ten years. Incomes going down 10-15% a year, big redundancy costs to get rid of thousands of staff. It’s a race to the bottom.

  11. cdr
    Mar 1, 2018 at 3:10 pm

    Just curious.

    What would that debt be worth as an investment if ECB rate shenanigans were not in full force, or even existed? For example, if the US 10yr cost 4% and the Frankendebt was priced with respect to this in a world market with no central bank subsidies?

    Along those lines … what about the cost of ALL of the ECB supported debt if the ECB were no longer in the picture buying it down and everyday commercial buyers and sellers of debt were the only people financing Eurodebt of all forms?

    Hence my belief that kick the can will exist until it can’t and the entire social structure of the EU will bend to support the financial needs of kick the can, as time passes.

    • cdr
      Mar 1, 2018 at 3:17 pm

      Re ‘only everyday buyers supporting Eurodebt someday’:

      Since forced low rates have destroyed capital formation for nearly a decade, how might the shortage of available real capital affect the availability of capital – as opposed to printed money replacing capital as it is today – and thus the cost of capital if QE suddenly went away?

  12. Javert Chip
    Mar 1, 2018 at 3:44 pm

    The fact that Monte de Peschi, bailed out 3 times by the taxpayers (including about a year ago to the tune of $10B), and now viewed as as a “suitor” to purchase other Italian banks tells you everything you need to know about Italian banking.

  13. Nick Kelly
    Mar 3, 2018 at 4:30 pm

    There is a good bit by Eric Reguly in Mar. 3 Globe and Mail

    ‘How Italy shows Draghi that no good deed goes unpunished’

    In 2011 with Italian bonds creeping up to over 5 % over German ones i.e. with the Italian debt not affordable, Draghi rolled out his ‘whatever it takes’ big gun.
    Just the threat was enough for a while but then (2014?) the ECB began buying ‘any’ sovereign bonds ‘any’ country couldn’t sell.

    The ‘any’ was meant to obscure the reality that this was a bailout of Italy.
    A default would be Greece times 20.

    Here is the prob. The bailout prevented a reform of Italy’s unproductive economy and bloated inefficient public sector.
    And by lending it more money Draghi became its captive.

    “If I owe a million I am lost but if I owe a hundred million the bank is lost”

    In this context the numbers need to be multiplied by up to a thousand but the principal is the same.

    One irony is that immigration is the big issue in Italy’s election but it has bigger problems, like going broke.

    Not that it is alone in this preoccupation.

  14. Robert T
    Mar 9, 2018 at 8:58 am

    “ten biggest banks control roughly 50% of the industry. The goal is to increase that to 70-75% “. Well, not exactly: the goal of an oligopolist is to become a monopolist- and it helps to have a deaf, dumb and blind MSM (one notable exception: Pam and Russ Martens Wall Street on Parade (free on line), reading which obviates any need to waste time looking for the truth at FT, the WSJ or a host of others)

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