Italy’s Biggest Bank Investors Waver With Basel Capital Shortfall Looming

Italy’s banking foundations, the biggest investors in the country’s lenders, may balk at providing more funds to the industry, an obstacle as banks seek to meet tougher capital requirements.

The foundations, including Fondazione Monte dei Paschi di Siena and Fondazione Cassamarca, spent at least 3 billion euros ($4.2 billion) to buy shares sold by Italian banks and had to forego dividends amid the financial crisis. As new rules are implemented, the lenders face a capital hole of as much as 17 billion euros, according to estimates by research institute Prometeia in Bologna. They may have to turn elsewhere for help.

“If the banks need capital they’ll have to make do,” said Dino De Poli, chairman of Fondazione Cassamarca, which owns 0.8 percent of Milan-based UniCredit SpA. (UCG) Funds “are needed for the foundations and not for the banks, in which they’ve invested far too much already,” he said in a telephone interview.

The Group of 20 nations last year endorsed rules proposed by the Basel Committee on Banking Supervision that would triple the highest-quality capital lenders need to hold. The committee may also apply tougher rules to European banks considered “systemically important financial institutions.”

UniCredit, Italy’s biggest lender, and Intesa Sanpaolo SpA (ISP) would show “meaningful capital deficits” if they were classified as systemically important, Evolution Securities analysts wrote in a March 1 report. The lenders may need 4 billion euros and 5 billion euros, respectively, to meet the stricter requirements, according to the analysts.

Draghi Comments

Bank of Italy Governor Mario Draghi last month urged the country’s lenders to use profits to strengthen their reserves and said he expects banks to raise money ahead of new regulation. A “recourse to the capital market as soon as conditions permit” is “unavoidable,” he said.

Italy’s 88 regional foundations, which oversee 49 billion euros of assets, half of which is invested in banks, use the money generated through their holdings to fund philanthropic programs. Fifteen institutions own majority stakes in banks, while 55 have holdings of less than 50 percent.

“Banking foundations have been squeezed to subscribe to banks’ issues of capital and hybrids,” Evolution Securities wrote in its report. “So even if a bank needs to raise capital this might be delayed for ‘governance’ reasons.”

UniCredit raised 7 billion euros in the last three years through two capital increases, while Banca Monte dei Paschi di Siena SpA (BMPS) got 5 billion euros from investors in 2008, half of which was provided by its foundation. Banco Popolare SC (BP) last month concluded a 2 billion-euro share sale to repay state aid received during the crisis. Intesa, which hasn’t asked investors for money, is selling assets to strengthen its finances.

‘Most in Need’

Monte Paschi, which showed the weakest result among Italian banks in European banking stress test in July 2010, again faces a capital shortfall, according to analysts at Bank of America Merrill Lynch Global Research and Nomura Holdings Inc.

“Monte Paschi is the bank most in need of a capital injection,” Merrill’s Alberto Cordara wrote in a March 3 note. The Siena, Italy-based lender, which has to repay 1.9 billion euros of state aid, may have to raise about 1 billion euros, Domenico Santoro of Nomura estimated.

“In recent months, Monte Paschi reiterated that they don’t need a capital increase,” said Gabriello Mancini, chairman of Fondazione Monte dei Paschi di Siena, which owns a 46 percent stake in Italy’s third-largest bank. “For the moment, I can’t do anything more than take note of what they said,” he said in an interview, declining to comment on whether the foundation would subscribe to a possible rights issue.

Dividend Policy

Monte Paschi Chairman Giuseppe Mussari said Feb. 18 that the bank isn’t studying a capital increase. Similar comments were made by UniCredit Chief Executive Officer Federico Ghizzoni on Feb. 26 and Intesa CEO Corrado Passera last November. Banking foundations hold more than 11 percent of UniCredit, which also counts war-wracked Libya among its biggest investors, and about 25 percent of Intesa.

A reduction of lenders’ payouts, urged by Draghi to preserve the capital, may add pressure on foundations, which use dividends to finance their projects. In 2009, the institutions’ revenue fell 6.4 percent to 2.5 billion euros, said ACRI, the association of the Italian banking foundations. Dividend income from holdings in lenders dropped 80 percent to 480 million euros, as UniCredit and Intesa canceled payouts.

“Our allocation to charity depends on dividends we get,” Fondazione Cassamarca’s De Poli said.

‘Unique System’

UniCredit and Intesa, the country’s second-biggest bank, resumed their cash dividends last year, with a payout ratio below the average of the last five years, while Monte Paschi didn’t distribute a dividend.

Monte Paschi’s managers are considering making payouts again, Mancini said. “As shareholders we should aim at dividends. Still, we are sensible to the capitalization needs that the crisis and Basel III require. Last year, we agreed to the bank’s decision not to pay dividends.”

“The regulatory environment for banks is changing and this means that the dividend yield will be reduced to rebuild capital,” said Angelo Manca, a portfolio manager at Ockham Capital Partners in London. “We also expect the Italian banks to tap the capital markets for more equity.”

Fondazione di Venezia, which owns 0.6 percent of Milan- based Intesa, wouldn’t participate in a potential share sale by the lender, according to Chairman Giuliano Segre, who said he plans to keep cutting the stake in Intesa.

‘Good Occasion’

“Banks’ rights issues would be a good occasion for foundations to dilute their holdings,” he said. “They should diversify their investments, reducing their presence in the banks’ capital.”

Italy’s foundations, partially run by local politicians, were created twenty years ago when the philanthropic arms of savings banks were split from their lending operations to pave the way for the industry’s privatization.

“This is a unique system in Europe,” said Carlo Alberto Carnevale-Maffe, a professor of business strategy at Milan’s Bocconi University. “Foundations played and will continue to play a crucial role in the Italian banking system. For better or for worse.”

To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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