The latest indication that Italian banks are still in trouble is to come on Tuesday, when UniCredit, Italy’s biggest bank and one of Europe’s top lenders, is set announce the ouster of its CEO.GIUSEPPE CACACE/AFP / Getty Images
Eight years after the start of the financial crisis, the Italian bank bloodbath continues unabated even as other European banks are returning to health.
The latest indication that the Italian banks are still in trouble is to come on Tuesday, when UniCredit, Italy's biggest bank and one of Europe's top lenders, is set announce the ouster of its CEO, Federico Ghizzoni, according to several published local and international reports.
Mr. Ghizzoni has been working hard to shore up the bank's capital, cut costs and boost profits, but apparently not hard enough to satisfy investors. UniCredit's shares are down more 40 per cent since the start of the year, making them the fourth-worst performer in the Bloomberg Europe Banks index. A weak core capital ratio means it will soon have to raise about €6-billion ($8.8-billion) through a rights offering and asset sales in Italy and across its European network – no easy feat for a bank mired in a weak financial services market.
Italy, the euro zone's third-largest economy, is no longer in recession but the economic downturn that preceded the recovery was so long and nasty, and the bank rescue efforts so inadequate, that the Italian banks as a whole have yet to shed their zombie status. Their fragile state is dampening the revival in both Italy and the wider European economy. In a recent report, analysts at the German bank Berenberg said Italy's bank repair job "will shape not just the future of the Italian banking system but that of the European one as well."
The deep Italian recession, lack of productivity and slow-motion bank fix-it job – the banking crisis was mostly ignored until Matteo Renzi became Prime Minister in early 2014 – have left the industry with deep wounds. The collective non-performing loan tally is €360-billion, equivalent to about 20 per cent of gross domestic product, the highest among the Group of 20 countries. About €200-billion of the loans were made to debtors that are now insolvent.
Italy is also vastly overbanked, with greatest number of branches per person in the G20. While all European banks have lost ground this year, the Italian banks are down about 50 per cent more than the European average. More than a few Italian banks are in dire shape. The endlessly restructured Banca Monte dei Paschi di Siena, Italy's third-largest bank and the lender that has operated since the time of Leonardo da Vinci, has lost more than 70 per cent of its value over a year.
Late last year, a €3.6-billion rescue of four small banks made headlines across Europe when a pensioner customer of one of the banks, Tuscany's Banca Etruria, committed suicide after his life savings of €110,000 were wiped out. In order to spare depositors, the rescue had made Etruria's junior subordinated bank bonds, which the pensioner had held, worthless.
The rescue of the small banks highlighted the potentially devastating effect Italian bank "bail-ins" would have on society, since many Italian banks stuffed their clients with risky subordinated debt whose value would evaporate in any rescue under the new European Union bank resolution scheme. It is estimated that retail customers hold about half of the banks' €67-billion in subordinated bonds.
Italy is getting into the bank clean-up game far later than most of its euro zone neighbours. Unlike Spain, it never set up a credible, government-sponsored "bad bank" to soak up dud loans, partly because Italy's soaring national debt gave it little financial flexibility. A law passed to encourage bank consolidation accomplished essentially nothing.
A mostly private solution finally came last month, when Pier Carlo Padoan, the well-regarded Italian Finance Minister, knocked bank boss heads together, essentially forcing them to back a new bank repair fund. Called Atlante (Atlas), it is to be capitalized by the country's largest banks, including Cassa Depositi e Prestiti, the state-controlled bank that manages Italy's enormous postal savings accounts. With initial capital set at about €5-billion, which could be leveraged up, Atlante's goal is to buy slices of bad loans from banks and to backstop any bank's cash calls.
The plan is risky in that it will force weak big banks, such as UniCredit, to use Atlante to prop up weak small banks. Fitch, the ratings agency, noted that Italy's big banks are under more pressure than they should be because "they are continuously being called upon to prop up the country's weaker banks and preserve financial stability."
Atlante is also considered too small to tackle the Italian bank system's burgeoning non-performing loan portfolio. Pricing the bad loans is also a problem. If they're too low, the banks would take huge losses; too high and Atlante would take huge losses.
Atlante's first test, early this month, was a mess. The €1.5-billion cash call of Popolare di Vicenza, Italy's eighth-largest lender, was largely shunned by investors, meaning Atlante had to pick up most of the tab.
The International Monetary Fund recently said the Italian banks face big bills for external capital "as market pricing has reflected investor confidence that some banks may face difficulties in growing out of their substantial non-performing loan overhang."
If Atlante runs out of firepower quickly, the Italian banking system will stay in the sick ward longer than expected. The Italian economy is bigger than Canada's and dominates the southern European economy. Until the Italian banks are healthy and pumping out loans, a sustained European economy cannot be assured. Mario Draghi, president of the European Central Bank, called Atlante's launch merely a "first step" in fixing the Italian banking system, suggesting he is not entirely confident the worst is over.
Editor's note: Due to an editing error, an earlier version of this story said Italy is the euro zone's fourth-largest economy. In fact, it is the third-largest, behind Germany and France, as Britain is not in the euro zone.