The results of the constitutional referendum in Italy, and the subsequent statement by the Prime Minister Matteo Renzi about the intention to resign threaten to derail the plan of recapitalization of the Bank Monte dei Paschi di Siena — Bank systemically significant holding in the Italian banking sector and third place in terms of assets and is the world’s oldest Bank, according to sources of the Financial Times. The interviewed officials and market participants said this scenario is the worst scenario for the Italian banking system and expressed concern that this could result in a crisis in the sector and the collapse of at least eight banks.
The troubled Bank
The banking sector in Italy is experiencing difficulty more than five years. By December 2016, the banks have accumulated bad loans of more than €360 billion — about a third of the bad debts of the entire Eurozone. The debt of the Italian Central Bank before the ECB is a record among the Eurozone countries is €354 billion for the First time since the Greek crisis of 2011, the yield on ten-year government bonds in Italy during the trading day on Monday was less than 2%. For comparison, the yield of German bonds is stable to 0.3%.
Many banks, including UniCredit and Monte dei Paschi di Siena, require additional capitalization in the billions of dollars, but due to a serious fall in the value of their shares are finding it difficult to attract funds of investors. The results of the referendum can undermine the confidence of investors even more, say market participants. In question and government assistance: the EU forbids States to restructure banks and to infuse in them the budget money before the part loss will not take care of shareholders and holders of Bank bonds (millions of Italians invested in subordinated bonds of banks, including Monte dei Paschi, and if they will be converted to depreciating stocks, the people will lose money).
Among all banks in Monte dei Paschi are the most serious problems with capital. Since the beginning of the year, the Bank lost almost 90% of capitalization. Since 2012, its annual losses have exceeded €6 billion In the third quarter of 2016, the Bank reported a loss of €1.2 billion In 2016 he was the only one of the largest European banks who failed the stress tests of the ECB.
After Monte dei Paschi failed the stress test, the ECB had advised him to carry out the recapitalization at €5 billion (today, this amount exceeds the capitalization of the Bank, almost nine times) and to restructure non-performing loans by €28 billion in the Bank must fulfill the requirements of the regulator before the end of the year.
In late November, the shareholders of Monte dei Paschi approved the plan of recapitalization. Under this plan, up to €1.5 billion was planned to attract through the exchange of the bonds for shares, and the remainder by selling shares of anchor investors, which are considered sovereign Fund of Qatar, and a public offering on the stock exchange. As argued by senior bankers interviewed by the FT, Qatar may invest in Monte dei Paschi €1 billion in the framework of cooperation with the Italian government. The plan was approved, but Monte dei Paschi have yet to announce major investors and any agreement with the banks that acted as underwriters in the sale of the shares.
On 28 November, the Bank began the conversion of subordinated bonds and, says Bloomberg, has attracted the expected amount. Placement on the exchange is scheduled for December 7. But, according to sources FT and Il Sole 24 Ore, because of the results of the referendum the plan was in jeopardy. According to them, Monday, December 5, the management of the Monte dei Paschi will meet with advisers for the sale of shares of “anchor” investors such as JP Morgan and Mediobanka and with the representatives of the sovereign Fund of Qatar to decide whether to continue to act under the plan or to abandon it due to unfavorable market conditions.
The doubts of investors
A new political storm could trigger a surge in volatility in the financial markets in a time when banks need to raise capital to cover losses from the recent fall in the value of shares and the planned debt restructuring, said a senior expert of the Italian economy IHS Insight economist Raj, Badiani. In his opinion, this could undermine investor confidence. The maximum fall of Monte dei Paschi’s shares during the trading day on 5 December in relation to the closing of the previous auction was 7.5%.
Polled by Reuters, the head of one European hedge Fund believes that the plan is likely to fail. “I had a doubt, even if the Italians voted for reform. I think the choice is “against” will be the best excuse of care [potential investors]”, he explained to the Agency.
If the plan is interrupted, it is expected that the Italian government will acquire the stake in the Bank to prevent its bankruptcy, saying the FT interviewed a senior bankers. The state’s involvement in the rescue of the Bank requires approval by the ECB. “The chances that Monte dei Paschi successfully completes a plan of capitalization at period (up to the end of the year), small, — say the analysts of BNP Paribas of Geoffroy du Illegal and Miguel Hernandez. — If the ECB decides that the Bank needs to capitalize immediately, he approved the participation of the state, which would entail losses for bondholders. In the short term, it completely depends entirely on the ECB”. The meeting of the regulator held on 8 December.
Way the healing process Monte dei Paschi, the participants of the market estimate prospects of the entire Italian banking system, says the analyst of “Finam” Bogdan Zvarich. “This transaction is very important for the market. It shows the interest of foreign investors to the Italian Bank sector, that investors are now ready to invest in it, you see the growth prospects. If the deal is cancelled, it will be a serious blow for the shares of this Bank, and shares of other Italian banks”, — he explained .
Last week, the FT interviewed officials and bankers expressed fears that if the Bank is not able to fulfill the plan of capitalization on the background of the failure for Renzi outcome of the referendum, it could lead to the collapse of Monte dei Paschi and seven other local banks: three banks of medium size (Popolare di Vicenza, Veneto and Banca Carige) and four small regional banks (Banca Etruria, CariChieti, Banca delle Marche and CariFerrara).
Problems can be faced and the largest by assets Bank is UniCredit, expects to bring to market €13 billion to bolster capital because of the deteriorating General situation in the banking market of the country, burdened with bad debts. At the moment the total amount of bad debts to UniCredit amounted to €50 billion to host the Bank have to declare December 13.