By Giovanni Legorano
ROME--A nationalization of troubled Banca Monte dei Paschi di
Siena SpA appears increasingly likely. But a rescue of the Tuscan
lender--expected as soon as next week--will do little to resolve
broader woes of Italian banks.
Some are urging Rome to seize the moment to initiate a broader
cleanup of a banking system that has EUR360 billion in bad loans
and is among Europe's least-profitable. "The problems of certain
specific banks may be solved," said Giovanni Bossi, chief executive
of Banca Ifis SpA. "But a complete overhaul of Italian banks'
business model is needed."
But with the exception of some possible support for a clutch of
small, critically ill lenders, broad sector-wide intervention is
unlikely. To stay afloat, Monte dei Paschi is making a last-ditch
attempt to raise EUR5 billion by the end of the year. To this end,
it plans to launch a debt-to-equity swap and a share sale this
week. according to people familiar with the situation. Both
transactions are likely to last no more than a few days, the people
said.
If the bank fails to raise the money it needs from private
investors, the Italian government will step in and bail out the
bank, a Treasury official said earlier this week.
But according to European rules, this rescue or any broader such
effort to shore up the local banking system can't happen without
imposing losses on shareholders and some bondholders. This choice
is unpalatable for any government in Italy, where around EUR30
billion of banks' junior, or riskier bonds, are in the hands of
mom-and-pop investors.
The prospect of elections in Italy next year and a surge in
populist parties ready to oppose any government attempt to help the
banks leaves little chance of bold action beyond Monte dei Paschi
at this stage, including by Italy's new caretaker government. It
took over after a failed constitutional referendum backed by the
prime minister.
Meanwhile, a raft of policies promulgated by the last Italian
government to bolster the sector have yet to gain much
traction.
Italian banks face troubles on multiple fronts. An economy that
is at a near standstill--Italy's economy isn't expected to grow by
more than 1% in the coming years--and Italian banks'
ultratraditional business model offers little escape from the pain
inflicted by low rates on much of Europe's financial sector.
In Italy, most rates have remained fairly stable despite the
recent rise in U.S. rates.
That stasis has squeezed the banks' net interest margin, or the
difference between what they pay on deposits and receive on loans.
Fierce competition for healthy borrowers is pushing down lending
rates. Meanwhile, moribund business investment is sapping an
overall weak demand for loans, totals of which haven't budged in
more than two years. Italian banks have seen revenue from lending
activity fall by a third from 2008, according to consultancy
Prometeia SpA.
At the same time, deposit rates in Italy don't change much, with
banks paying a full percentage point on top of the one-year
benchmark rate, according to Barclays.
Last year, customers at Banco Popolare SpA began receiving
letters from other banks offering them loans at as little as 1%
interest--effectively cutting in half the spread the banks charged
to lend. Meanwhile, other rivals were offering to pay as much as 2%
on deposits, a rich return for depositors who had been receiving
nothing on their accounts. As a result, Banco Popolare's net
interest margin declined to 1.6%, from 1.92% over the last two
years.
Banco Popolare tried to offset declining revenue from lending by
pushing asset management and insurance products to customers,
tapping the country's private wealth. But while such a strategy has
worked for a select few healthy lenders, it didn't for most. Banco
Popolare's fees and commissions revenue have dropped 7% in the last
two years.
"The market has been hit by a landslide," Banco Popolare Chief
Executive Pier Francesco Saviotti said this summer.
Meanwhile, costs remain high. Italian banks--which employ
350,000 people--spend 64% of their revenue on operational expenses,
compared with 50% for Spanish banks and 60% for Greek banks. Costly
severance packages and rigid employment contracts slow efforts to
reduce banks' costs, which are down 2% in the past year.
The result: Italian banks' return on equity, a measure of
profitability of banks, was 4.8% last year, compared with 14% for
Irish banks and 8.3% for French banks.
Meanwhile, bad loans have continued to pile up, as Italy's
protracted economic problems send more companies to default. But
the banks' paper-thin profits are too little to cover the losses
that write-downs would create.
That has meant that banks have been reluctant to unload the
loans to investors willing to buy them at cut-rate prices. While
EUR20 billion in sales of bad loans have occurred this year, that
represented just 6% of all problematic loans.
According to the European Banking Authority, more than 16% of
all loans in Italy are nonperforming, triple the EU average.
Efforts by UniCredit SpA, Italy's largest bank and holder of
more bad loans than any bank in Europe, to draw a line under its
problems expose the capital shortfall Italian banks are suffering.
On Tuesday, the bank--which has EUR77 billion in bad loans--said it
would write down its worst loans by 75% and those classified as
"unlikely to pay" by 40%. The bank now must raise EUR13 billion in
part to cover the losses created by the write-downs.
Write to Giovanni Legorano at giovanni.legorano@wsj.com
(END) Dow Jones Newswires
December 15, 2016 05:44 ET (10:44 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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