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Italy’s banking blues: top managers on the NPL time bomb

Italy’s banking blues: top managers on the NPL time bomb

Italy has been warned that it must abide by strict EU laws with regards to its non-performing loans, which limits the country’s ability to bolster the financials sector with public money.

The Italian banking sector has come under increased scrutiny with concerns over how to address its high levels of NPLs. The Italian government had sought to form a so-called ‘bad bank’ but instead opted to launch the Atlante Fund – which is a €5 billion support mechanism.

With pressure being applied to industry leading names, such as Unicredit and Monte Paschi di Siena, there are growing concerns that banking problems in Italy could lead to wider concerns for Europe as a whole.

Deleverage drama

Financials veteran Guy de Blonay, who manages the Jupiter Financial Opportunities fund, said the banks could start to delever, which would badly impact the economy. He, therefore, has no exposure to Italian banks at present.

‘This year, the EU banking supervisor has taken a more active role in encouraging an accelerated reduction in NLPs and an increase in capital. This policy risks pushing banks to deleverage, thus hurting the real economy and, paradoxically, reigniting NPL growth.'

'It also appears that the market is very unwilling to support cash calls if future returns are uncertain,’ de Blonay told Citywire Selector.

The UK vote to leave the European Union saw a sell-off in Italian banks as investors fled risk assets and De Blonay said the Brexit referendum has created a weaker environment for Italy’s financial sector.

‘Brexit marks a pivotal point in history and places a question mark over the political future and economic trajectory of Europe, especially Renzi’s Italy. On lower market revenues and a protracted low rate environment, banks earnings may have to come down, naturally raising concerns over the solvency of the system.'

Political issues

Meanwhile, Citywire + rated Paul Vrouwes believes the problems are mainly political and will have to be resolved at this level rather than through support measures. Vrouwes, who manages several funds at NNIP including the NN Financials fund, has not held Italian banks for a couple of years.

‘Italian banks are 0.7% of the global financial index, so not important at all. What’s happening over there is a lot of politics. In general we can say that Italian banks have less capital compared to peers and have also an above average amount of NPLs,’ Vrouwes said.

‘It looks as if the Italian banking system cannot deal with addressing these NPLs without hurting its already low capital numbers. So our conclusion is that they have to deal with this, that this will hurt them, but a solution is likely very political.’

Vrouwes added, although the chance of contagion is small, there are small areas in Portugal or Greece that could suffer. Spanish and other European banks would not be affected, however, he said.

Environmental problem

Away from Italy’s NPLs, German banking giant Deutsche Bank has been called the most important net contributor to systemic risks of all the world’s banks by the International Monetary Fund leading to a fall in share price. De Blonay, who also has no allocation to this bank, echoed Hans-Peter Schupp in his belief that these problems are overblown.

‘I believe that Deutsche Bank faces an environment problem rather than anything systemic: lower revenues, an inflexible cost base that is too high and capital ratios below future minimums. Litigation risks are well-flagged; a settlement of key cases at levels within existing (large) provisions would be positive,’ he said.

‘The opposite is also true. Shares are looking attractively valued if planned disposals are successful in boosting capital. If not, a dilutive share issue at today's levels implies shares are not attractively valued. Outcomes are extreme for shareholders, but this is not true for counterparties or creditors.’

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