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

by Shaun Richards

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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