Italian lenders are cheap for a good reason
Sovereign debt sell-off leaves lenders with paper losses that have hurt stock
The Italian banking system has been cleaning house for some time — lenders have consolidated, bad loans are being sold and bond markets are still providing fresh funding.
Nonetheless, the FTSE Italia All-Share Banks index is down 17 per cent this year. Why? Because on lenders’ balance sheets is Italian sovereign debt, an asset that has proven somewhat toxic.
According to the Bank of Italy, Italian government bonds accounted for about a 10th of the assets at Italian banks at the end of 2017.
Intesa Sanpaolo held €76bn worth of Italian sovereign bonds at the end of last year while UniCredit had €54.5bn. Shares in the former are down 21 per cent on the year; the latter are off 19 per cent.
Following this year’s sell-off of government paper, banks have been left with paper losses, denting investor confidence and hurting their stock value. The first major move in May was triggered by politics. The Eurosceptic leanings of a new coalition, comprising the League and Five Star Movement, unnerved investors.
Yet investor demand for Italian government paper was healthy in yesterday’s bond sale with €7.75bn of debt sold. But yields were much higher than the previous time it tapped the market.
How likely is another sell-off in Italian bonds? Political risk looms large in the coming weeks with a Fitch decision on ratings today and budget talks in September. The coalition government looks set to embark on a bigger spending programme.
However, some analysts think the doom and gloom is overdone. Collectively, the FTSE Italia All-Shares banks are trading on a price-to-book value of 0.65. In the US, the S&P 500 banks index trades at 1.34. Brave investors might see this as a buying opportunity for cheap Italian lenders.
Italy’s story may not be la dolce vita but there are signs that could encourage banks. Its debt-to-GDP ratio had been trending downwards and fiscal expansion could help kick-start the economy.
But like many of the eurozone’s financiers, Italian banks are struggling to achieve top-line growth. With low negative central bank interest rates, any real rebound for banks is hard to see. Some things are cheap for a reason.