The Italian government on Wednesday approved a series of measures aimed at helping the country’s banking sector recover from the latest market shocks.
The new scheme agreed with the European Union replaces the ‘bad-bank’ Matteo Renzi had hoped to put in place to absorb non-performing loans. Instead it is a guarantee scheme, which will allow domestic banks to offload part of their non-performing loans.
The move comes after weeks of concerns over the impact of these bad loans on Italy’s overall banking sector, as shares continued to plummet shedding 40% of their value since the beginning of the year.
Commenting on these concerns at the end of January, Lemanik’s Citywire AA-rated Stefano Adreani told Citywire Selector: ‘The procedure for the disposal of NPLs in Italy is slower than in other countries and this coupled with the ratio of NPLs being higher than in other countries justifies the massive share plunge.’
However, Andreani, who is currently underweight banks, also said Italy’s major lenders could even benefit from a fly-to safety dynamic.
New scheme not a game changer
This is while Schroders' Citywire AA-rated Hannah Piper said the agreement between Italy and the EU on NPLs is not the game-changing solution most market players had hoped for.
‘The good news is that it is a voluntary scheme which will help each bank offload some of their NPLs over time, which open for 18 months subject to renewal, via a very selective process,’ she said.
‘The bad news is that we believe this will only be helpful at the margin. It does not appear to be a proper clean-up that will restore full confidence and profitability to the Italian banking system – as current market prices do not make it worthwhile to dispose all of their NPLs.’
Piper also said Schroders had only made minor adjustments to portfolios with exposure to Italian banks following the recent news flow, as they are still confident the sector can benefit from a number of other factors.
‘These include any recovery in the Italian economy, consolidation between popolari (co-operative) banks, and Prime Minister Matteo Renzi’s reforms, for example the reform of the foreclosure law to speed up the process on NPLs.’
Political deadlock unlocked
Piper’s comments echo Carmignac’s head of European equities, Muhammed Yesilhark who told Citywire Selector that Italy’s new political environment is highly encouraging in the long-term, regardless of single stocks and sectors.
‘The political deadlock of the past 60 plus years has been eliminated with the reforms Renzi has implemented including the electoral reform,’ he said. ‘This eliminates the biggest issue we had in Italy and other low growth countries, which is that of a coalition government whereby no changes or reforms can be implemented.’
‘This change is highly positive and has the potential to open up a complete new era for economic growth in Italy.’