Western Europe: Portugal bank risk spikes as Italy turns corner
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Western Europe: Portugal bank risk spikes as Italy turns corner

Italy could be clawing itself out of a pit of worry about its banks, according to the latest Euromoney Bank Risk results.


The country’s two biggest lenders, Intesa Sanpaolo and UniCredit, both saw improvements in their overall risk scores in the fourth quarter. UniCredit, the biggest bank – and a persistent focus for investor concern over bank capital levels in Europe – saw the biggest rise, gaining another 1.5 points to 5.6 out of 10.

This Italian recovery, however, is in stark contrast to Portugal, where doubts about the success of a private-sector sale of Novo Banco kept optimism in Lisbon low. More scores fell than rose in the Portuguese section of the survey, which asks credit and equity analysts to award banks scores across 14 categories, covering management and governance, finances and capital.

Wider declines in Portugal came despite a marked improvement in the perception of the capital strength at Banco Comercial Portugues (BCP). It is carrying out a €1.3 billion capital increase, including up to €531 million from Fosun International. 


The Chinese investment group is increasing its stake to 30% after buying 17% in late 2016. Fosun will become the biggest shareholder, but is highly leveraged and has no experience of owning commercial banks. BCP’s scores fell for the depth and quality of its management, corporate strategy, strategy execution, quality and strength of board oversight, and operational risk controls.

Novo Banco, the successor to the failed Banco Espírito Santo, retains a dismal overall score of just 2.5, low even by Portuguese standards. It suffered a series of falls in the fourth quarter in its scores for management and governance. This is at a time when its new CEO, Antonio Ramalho, has just stepped up, following the August return of Eduardo Stock da Cunha to Lloyds Banking Group in the UK.


In Italy there is evidence that UniCredit CEO Jean Pierre Mustier is making progress on work to rebuild confidence in his bank. Respondents pushed UniCredit a particularly large step higher in the score for its capital position, up three points to 5.5. Mustier oversaw more asset sales in the fourth quarter – including selling a 20% stake in online lender Finecobank and exiting its Polish, Ukrainian and asset management subsidiaries – before announcing in mid-December a new strategic plan and a pending €13 billion rights issue.

“The market has realized that Mustier is very strongly committed to restoring UniCredit’s capital position,” says Luigi Tramontana at Banca Akros. Tramontana also approves of moves by Mustier to bolster asset quality and reduce operating costs, while keeping realistic revenue growth expectations. “The presentation of the business plan was well-received and it’s highly credible,” he says.

The second part of 2016 saw the gradual confirmation of fears in Italy that Banca Monte dei Paschi di Siena would be unable to rely on market sources for a recapitalization, with knock-on effects for the system. Yet the creation of a €20 billion bail-out fund at the end of December brought some visibility, at least. “The creation by the Italian government of a backstop for the weaker banks has improved the overall risk profile,” says Tramontana. 

Healthier Italian banks provided billions of euros in 2016 to support weaker peers. On the other hand, analysts note, one of the problems in Portugal is the absence of bigger and healthier lenders to rely on. For example, Intesa Sanpaolo scores a relatively high 7.5 overall in the survey. UniCredit, despite its problems, also scores higher than the top three private-sector Portuguese banks. 

The creation of the latest government fund in Italy eases the burden on Intesa Sanpaolo and UniCredit, Atlante’s biggest backers. But analysts say this is something the Italian government can better afford than Portugal, whose public debt burden is even heavier. Portugal’s sovereign debt premium has increased much more than its Spanish and Italian equivalents over the past year due to disappointing growth, a continued rise in public debt, and the country’s nearing limits to the ECB’s bond-buying programme. Portugal’s spread over 10-year bunds is now around 345 basis points, compared with 160bp for Italy.

Novo Banco

Meanwhile, analysts point to deteriorating asset quality throughout most of 2016 in Portugal, while in Italy bad debt began to decline. Scores for risks in asset quality and risk controls consequently improved in the fourth quarter at Intesa Sanpaolo and UniCredit but were mostly flat or deteriorated at the Portuguese lenders. Despite progress elsewhere – like the sale of BPI to CaixaBank and the Fosun investment in BCP – analysts still express doubts over Portuguese banks’ scope to write off bad loans.

Looming over everything else in Portugal in late 2016 and into early 2017 is an acute lack of faith that the central bank could carry out a private-sector sale of Novo Banco in a way that might leave the state and the other banks free of further costs. Analysts say this has overshadowed more positive developments.

“The sale of Novo Banco remains key to restore the confidence in the Portuguese banking sector,” says Maria Rivas Escrigas, financial institutions analyst at DBRS.

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