Analysis-Risk of the public debt of Italian banks: real or just deja vu?
By Valentina Za
MILAN (Reuters) – A fall in Italian bank stocks, triggered by rising government bond yields, has reawakened memories of the 2011-2012 debt crisis and rekindled concerns about lenders’ vulnerability to shocks. sovereign risks.
The sovereign-bank nexus, which became a ‘catastrophic loop’ of mutually reinforcing risks a decade ago, is compounding the problems for Italian lenders, which have shrunk by a fifth this year, nearly double the loss of the European sector in the broad sense, affected by the fallout from the Ukrainian crisis.
Many analysts and bankers, including UniCredit boss Andrea Orcel, point out that the situation has changed and attribute the decline in shares to an unwarranted knee-jerk reaction by investors.
“It’s a matter of deja vu,” Orcel told a conference in Milan last week. “It’s a difficult situation but it’s not the same.”
Italian banks became a proxy for sovereign risk when Rome’s debt costs threatened to spin out of control, before the ECB, led by current Italian Prime Minister Mario Draghi, pledged to save the euro in 2012 and is only mopping up a fifth of Italian bonds.
A decade on, progress towards a Europe-wide banking union has stalled and Italian banks are still halfway through a consolidation process aimed at strengthening mid-sized players and solving the puzzle. eternal head of Monte dei Paschi di Siena.
The ECB’s latest promise to devise a new anti-spread tool last week halted the rout for Rome bonds and bank stocks, but investors are wondering if the respite is temporary.
Speaking at the Milan conference, Carlo Messina, CEO of Italy’s biggest bank Intesa Sanpaolo, said a wealthy state like Italy should not rely on the ECB to maintain its debt and believes its ” problems will be solved from the outside”.
“There are certainly differences from the past, but I also see elements that worry me,” said Ignazio Angeloni, a researcher at Harvard Kennedy School.
“I think the restructuring of the Italian banking system is incomplete,” added Angeloni, who previously served on the ECB’s supervisory board and headed the central bank’s financial stability department.
“The two major lenders are safe at any speed, so to speak, but there are four or five medium-sized banks that haven’t made it all the way.”
When bond prices fall, banks experience a direct impact on capital reserves and see the cost of their debt and equity funding increase.
Pushed by regulators to diversify sovereign risk, Intesa and UniCredit have cut domestic bond holdings to 70%-80% as a proportion of their capital base.
Also including smaller peers, that ratio rises to 148% for Italy’s top five banks, according to JPMorgan, though that’s still a long way from 2017’s 261% level.
As a share of total assets, domestic bonds of major listed Italian banks fell to 6.6%, Citi said, from previous levels of more than 10%, a threshold that still applies to the banking system. at large.
To protect themselves from market fluctuations, Italian banks have reserved 72% of their domestic bond portfolio among held-to-maturity assets that do not require “mark to market”, according to the Bank of Italy.
As a result, a 100 basis point widening of the yield spread between Italian and German 10-year bonds would cost banks 20 to 25 basis points in terms of aggregate Tier 1 capital, which is well above the thresholds. minimal.
The Bank of Italy calculates that Italian banks held excess capital equivalent to almost 4% of their risk-weighted assets at the end of 2021, after increasing their reserves in recent years.
The ECB, which became the euro zone’s banking supervisor at the end of 2014, also heavily armed Italian banks to reduce gross bad loans to 4% of total loans, from a peak of 18% in 2015.
Investors fear problem lending could rise again as companies face higher lending costs, record energy and commodity prices and disrupted supply chains and the phasing out of COVID support measures.
Sebastiano Pirro, chief investment officer at London-based Algebris Investments, said tougher lending criteria and state guarantees provided by Italy during the pandemic – which cover 40% of all corporate loans – would allow control troubled loans.
“Italian banks have changed their approach to lending over the last decade. Personal relationships used to play a key role, it’s not like that anymore, banks pay huge attention to credit risk,” he said. declared.
Incorporating time-series data based on much looser past lending practices, banks’ risk assessment models tend to overestimate potential loan losses, Pirro said.
“None of the COVID-related loan loss provisions that banks made in the first half of 2020 were used to write down loans,” he added.
Angeloni, however, warned it was too early to assess the extent of the damage caused by COVID.
“It looks like things aren’t that bad, but we’re not sure,” he said.
Italian companies have only just started repaying capital from state-guaranteed COVID loans.
Pandemic-related support measures have pushed Italy’s debt to 151% of domestic output in 2021. Rome is now hoping that 200 billion euros in EU recovery funds will help it grow enough to reduce its debt.
“The problem is that Italy has no fiscal space,” Angeloni said, adding that Rome failed to take advantage of low rates in a timely manner to reduce debt.
“I wouldn’t say the catastrophic loop of banking and sovereign risk is behind us.”
(Reporting by Valentina Za, editing by Louise Heavens)