Italian Bank NPLs: Montecillo March 2016 News Digest

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  • The ECB has not only required capital increases from Banca Popolare di Vicenza and Veneto Banca, but is also imposing strict deadlines. Vicenza’s is now, and Veneto’s capital increase is set for June. The hurried meetings of banks called by Padoan’s team during February have given birth to atlante, a privately funded vehicle pooling resources to the tune of 4 to 6Bn Euros from all banks (foreign ones present in Italy included), pension funds, and insurers. That should keep the EU off Padoan’s back, but what is going on?


  • The 1.7Bn capital increase of Vicenza, if unsubscribed owing in part to the loss of enthusiasm at the prospect of being “bailed-in”, would leave Unicredit carrying the whole can and possibly having to increase capital itself. In addition, the flotation of Vicenza requires at least a 25% float, spread among a broad shareholder base to ensure liquidity. Should Vicenza’s capital increase and flotation fail, a general loss of confidence could easily set in.


  • The reason is that Vicenza alone is larger than the 4 banks recently rescued by bailing in equity holders, some bondholders and depositors with more than 100 thousand Euros. The domino effect would see Veneto Banca’s capital increase go up in smoke, followed by the hoped-for merger of Banca Popolare with Popolare di Milano, with Banca Carige next followed by Monte dei Paschi, the third largest bank. The healthy banks would suffer collateral damage too.


  • The aim of ATLANTE is to stop the rot: the initial aim of taking 1Bn each from Intesa SaoPaolo and Unicredit with smaller contributions from others, was to ensure that Vicenza and Veneto banks’ capital increases were fully covered, this being the ECB’s key concern. However the discussion quickly turned to the wider issue of the country’s Non-Performing Loan stock of over some 200 Bn Euros, with almost 90Bn in net NPLs. With leverage, ATLANTE could muster up to 50Bn Euros of firepower, but it is to squander its resources over-paying for every bank’s NPLs and losing money?


  • The hope is that IF (and we repeat IF) the Government succeeds in shortening Italy’s notoriously slow foreclosure and bankruptcy processes, NPL prices would rise during the mandate of ATLANTE which is of 5 years with a possible 3 year extension. The 4 banks rescued of late had their NPLs priced around 18% of face value. With an average Italian coverage ratio of 47%, the implied write-down for bank NPL disposals is a major issue. ATLANTE might be able to pay a little more than aggressive distressed debt funds, and crucially, it can buy the system some time.


  • The mere presence of ATLANTE in the NPL market may already push prices up a bit in the short term. But as we said a month ago about the praise-worthy objective of shortening foreclosures and bankruptcy procedures: “seeing is believing”, especially when an army of lawyers, judges, court clerks and collection agencies make a living off the bureaucracy involved. Talk about a Gordian knot…


  • Purists are saying that getting healthy banks to pitch in to help unhealthy ones increases systemic risk; but does anyone have a better idea?

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