Italian bank shares came under pressure on Monday after Goldman Sachs downgraded some of Italy’s largest lenders and ahead of a meeting of the Eurogroup to discuss the 2019 budgets of eurozone members.
The FTSE MIB index of Italian lenders dropped 1.7 per cent on Monday, a substantially worse perforformance than the broad FTSE MIB index which fell 0.3 per cent.
The biggest faller was BPER Banca, formerly known as Banca Popolare dell’Emilia Romagna, which slid more than 5 per cent in the morning. Intesa San Paolo fell by 1.8 per cent while the Banca Popolare di Milano fell by more than 1 per cent.
The first two banks were singled out by Goldman Sachs which downgraded them to “sell” on the back of lower loan growth and higher funding costs.
Goldman’s Jean-Francois Neuez said:
The rise in Italian top-down risks has been plain for all to see – following the budget announcements bond yields have risen, credit ratings were lowered, and Italian shares fell. Italian banks’ shares were particularly hard hit…Since the Italian election, Italian bank share prices have fallen 30-50 per cent.
Mr Neuez also said Intesa’s valuation looks “vulnerable” and that UniCredit “is now the only Italian bank we rate buy”.
Italian bank shares were also stung by the rise in government bond yields.
The yield on Italian two-year debt rose by as much as 15 basis points to a high 1.228 per cent, while the equivalent yield on 10-year paper hit 3.388 per cent, a rise of 8 basis points. Yields rise when prices fall.
The spread between 10-year German and Italian debt — a widely watched indicator of the risk premium demanded to hold Italian debt — touched a high of 296.70 basis points on Monday before settling at a softer 291.60 bps. Last month it reached a five-and-a-half year high of 340.20 bps.
Italy has been in the EU’s crosshairs since the League and Five Star formed a coalition government in early June, with promises to increase public spending, cut taxes and reverse unpopular pension reforms.
According to Unicredit’s senior economist Daniel Vernazza, markets in Italy may remain volatile ahead of the November 13 deadline for the Italian government to resubmit a revised budgetary plan to the EU Commission.
In an interview with the FT at the weekend, Italian deputy prime minister Luigi di Maio said Rome was leading way for Europe to ditch austerity and embrace Trump’s expansive fiscal policies.