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Italian Banks Tumble; Draghi Says Lenders Will Pass Tests

Bank of Italy Governor Mario Draghi
Bank of Italy Governor Mario Draghi. Photographer: Jock Fistick/Bloomberg

Italian banks, including UniCredit SpA and Intesa Sanpaolo SpA, tumbled in Milan as the contagion from Europe’s debt crisis threatened to spread to the region’s third-biggest economy.

Responding to the market turbulence, Bank of Italy Governor Mario Draghi said he’s certain the country’s lenders will pass European stress tests by a “significant” margin. The austerity measures approved by the government led by Prime Minister Silvio Berlusconi make balancing the country’s budget in 2014 a “realistic” goal, he said in a statement.

UniCredit, Italy’s biggest bank, dropped 7.8 percent to 1.23 euros, the lowest level since April 2009, giving the bank a market value of 23.8 billion euros ($34 billion). Intesa, the country’s No. 2 lender, lost 4.6 percent to 1.65 euros. The FTSE Italia All-Share Banks Index declined 6 percent to the lowest level since March 2009.

“Italian banks are unlikely to de-couple from sovereign,” Bank of America Corp analysts said in a note today. Italian bonds dropped for the fifth day, driving 10-year yields to a nine-year high. The extra yield investors demand to hold the securities instead of benchmark German bunds rose to the highest since before the euro was introduced in 1999.

Stress Tests

Results of the second round of European stress tests will be released July 15, the European Banking Association said today. Banks that fail this year’s tests may need to present plans for making up their capital shortfall by the end of September, according to an internal EU document.

Intesa, Monte dei Paschi di Siena SpA, Unione di Banche Italiane ScpA and Banco Popolare SC have asked investors for a total of 10.5 billion euros this year to strengthen capital before the stress evaluations. UniCredit, which has raised 7 billion euros in the last three years through two securities’ sales, said it will meet stricter rules through organic growth.

“Italian banks have underperformed the European sector by 6 percent in the last month,” analysts at UBS AG wrote in a report today. “We continue to favor large banks which can leverage on strong capital positions,” they said.

Credit growth in Italy has been expanding at an annual rate of 6 percent to 7 percent, “which is the highest in Europe,” Draghi told reporters in Aix-en-Provence, France.

Monte Paschi, which will end its share sale today, fell 3 percent to 51.6 cents. UBI declined 5.8 percent to 3.58 euros and Banco Popolare slumped 6.5 percent to 1.42 euros.

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