Italian banking: Squaring the circle


Published on:

Italy’s banks cannot deal with their NPLs unless they have capital, but they are not being allowed to recapitalize until they have dealt with their NPLs.

As Euromoney went to press shares in troubled Italian lender Monte dei Paschi di Siena (MPS) were trading at 25 cents – a staggering 77% drop in its share price so far this year. It is not hard to see why; net NPLs stand at €24 billion, 21% of its €112 billion loans outstanding. Even if it manages to securitize the €10 billion of bad debt that the ECB has asked it to, it still faces a €5 billion capital hole that its rescue plan needs to fill. 

But Italy’s problems do not begin and end with MPS, UniCredit also needs a capital boost of up to €10 billion. The NPL problem is now so acute and the capital hit to banks of selling so severe that a radical rethink is required

By focusing on shedding NPLs the ECB is masking the real problem: these banks’ desperate need for capital. The Italian banking system needs equity in order to run its huge pile of NPLs down. Once banks are properly capitalized, they themselves can manage the reduction of NPLs. Private investors are always going to demand internal rates of return in excess of what this market can offer to buy these loans, and the banks themselves can run them at as low as 9% IRR and this would still be accretive, given where returns on equity are. 

The MPS loans earmarked for securitization are understood to have been marked at 36c on the euro by the bank and to be transferred at around 27c to the securitization SPV. The large US funds that are the likely candidates to buy NPLs may, therefore, be better off acquiring Italian banks themselves. 

Indeed, in July it emerged that a group of buyers led by Bob Diamond’s Atlas Merchant Capital and including Warburg Pincus, Baupost Group and Centerbridge Partners may be negotiating to buy the two rescued banks now held by Fondo Atlante: Banca Popolare de Vicenza and Veneto Banca. 

Bankers close to the turmoil believe that the banks are best placed to manage their own NPLs if they are able to recapitalize now. This would certainly be the preferable route, but would require big capital injections into MPS and UniCredit. That is the circle that everyone involved is finding so difficult to square.