With bank shares in Italy down by roughly 40% in the first six weeks of 2016, the government would have had to do something spectacular to turn around sentiment. From that perspective, prime minister Matteo Renzi’s decree on February 11, containing “urgent measures” to fix the banks, could hardly be seen as a success, even if it brought what would be, in calmer times, encouraging changes.
The decree contains provisions for a government guarantee over senior tranches of securitizations of non-performing loans, adding details to a plan first outlined in late January. It also contains measures to consolidate 370 Italian cooperatives, known as banche di credito cooperativo (BCC) and enacts better tax incentives for foreclosures.
|Bulky items: percentage of Italian bad loans within size buckets|
The hope for Italy’s banks, firstly, is that the guarantee could narrow the wide bid-offer spreads prevailing in sales of NPLs, speeding up efforts to reduce Italy’s huge NPL pile. The banks can benefit from the guarantee and deconsolidate the loans if they sell at least half of a securitization’s junior tranche.
“If banks receive financing for the senior tranche at a lower rate on the open market, they could offer a better price for the whole portfolio,” says Matteo Bigarelli, head of equity, investments and special projects at mid-sized lender Banca Popolare dell’Emilia Romagna (BPER). According to research from Mediobanca, investors could bid higher too if there is an agreement for them to service the underlying assets, as the law requires issuers to employ an external debt manager.
Bank of Italy
Yet the state will only back a securitization’s senior tranche if it has an investment grade rating before the application of the guarantee. That requires a sufficiently diverse portfolio, something smaller banks like BPER will find harder given their more concentrated loan books, according to Bigarelli.
“We are analysing our NPL portfolio to see if we can make use of the guarantee […] but this may be more useful for bigger banks,” he says.
Bigger banks like Intesa Sanpaolo, UBI and UniCredit, on the other hand, have also hesitated to say they will definitely make use of the guarantee. By mid-February, the only big bank to say it was setting up a platform for the guarantee scheme was the lender with the highest NPL ratio: Monte dei Paschi di Siena, which mentioned a new partnership with a specialised bad-debt manager in its annual results.
According to Moody’s, banks will only use the guarantee to securitize up to €40 billion of Italy’s €350 billion of NPLs. That is an estimate based on the concentration of credit, and the reticence of banks to take upfront losses on insufficiently provisioned debt. Almost half of total NPLs are in excess of €2.5 million, and only 28% are below €500,000, the agency notes.
Meanwhile, the reform to the BCC banks would, ordinarily, be seen as another advance. The law will require hundreds of tiny local lenders to join a banking group with equity of at least €1 billion, and as in the French mutual sector, banks within the group will be legally obliged to support each other. It follows a reform last year (which did not affect the BCC) requiring the handful of big cooperatives known as popolari to convert to joint-stock status by the end of 2016, hopefully spurring mergers in the process.
There is now a debate over 15 BCC with equity of more than €200 million: whether they should be allowed to opt out of the holding bank by converting to joint-stock status. But if all 370 join together – most likely under the biggest of the existing looser central institutions, Iccrea Holding – they would create a bank with around €250 billion in assets, says Alain Laurin, banks analyst at Moody’s. It would overtake Monte dei Paschi as Italy’s third biggest lender, and be bigger than the biggest popolari.
“Italy’s BCC sector today reminds me of Crédit Agricole, or Caisse d’Epargne 25 years ago,” says Laurin. “This reform is the first step in that direction.”
Fusing BCC banks like this will make lending decisions less vulnerable to local interests, hopes Marcello Messori, economics professor at Rome’s Guido Carli University in Rome. However, Laurin warns it will take years to create a more cohesive bank along the lines of the French cooperatives, with a common strategy, risk management and IT systems, and a much smaller number of individual banks within the group.
As for the guarantee scheme, it will leave a bid-offer spread that banks may struggle to cover without endangering their solvency. Banks have NPLs on their balance sheet at around 40% of face value. According to Moody’s, their market value, based on the 17.5% transfer price in a state resolution process late last year, would only be 25%, at most. Mediobanca estimates the guarantee scheme will only reduce the bid-offer spread by around six percentage points of face value, roughly in line with other analysts’ estimates.
For Rossi, the most important part of the decree was therefore the measure to improve bid prices in the NPL market, following bankruptcy law reform last year, by encouraging foreclosure. “I would expect that a true market will start once the government has implemented the other measures [around bankruptcy and collateral],” says the deputy governor. “If investors can be more confident that they can get their money back more quickly, they’ll be able to pay a higher price.”