FT LEx : Italian banks: popular uprising
A frenetic political news cycle leaves lenders vulnerable
Italian bankers would be forgiven for swapping a double espresso for a quadruple, as they make their way in to work.
A slide in the price of government bonds, in which the country’s banks are heavily invested, would be bad enough. But note the rising cost of credit default swaps, the price of insuring the banks’ own debt against default. The populist government’s decision to run a higher than expected deficit has shaken markets, pushing up the banks’ cost of funding.
A quick glance at Europe’s widest CDS spreads shows that only Turkish banks have deteriorated more rapidly over the past six months, in terms of creditworthiness. Among the Italians with the biggest jumps in default risk are Banca Monte dei Paschi di Siena and UBI Banca, two of the mid-sized banks. But there are risks for the biggest too.
Take UniCredit. As of July this year, the Milan-based bank had completed just one-third of its funding schedule for the year. The bank says it has not been back to the capital markets since then, deploying other resources instead. Months spent waiting for the market to improve have been in vain. If anything, conditions have worsened.
How bad could things get? Since the height of the eurozone crisis, capital ratios across the Italian banking sector have improved. Banks are also trimming vast portfolios of bad loans. UniCredit’s non-core gross non-performing exposures were down 25 per cent on the year at the end of the second quarter.
This de-risking is not over yet and market uncertainty will not help it. Then as now, a frenetic political news cycle leaves banks vulnerable.
At the half way point this year, UniCredit said falls in Italian bonds had hurt its core tier 1 equity ratio by 30 basis points. Spreads over German Bunds have further widened since then. Every 10bp movement in the spread has a 2.6bp impact on UniCredit’s CET1 ratio.
For now, Italian banks remain stuck in a doom loop: instability of the banks and instability of the government, perpetually feeding off each other. The Five Star-League coalition appears to be at war with itself and the economy ministry. In response to the market sell off, Rome has said it would cut its deficit target from 2020. A small concession.
The government will submit its formal spending plan to the European Commission for approval this month. Bank investors should buckle up.