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European Banks Fall as Italy Vote Revives Debt Concern

The UniCredit SpA logo sits on a flag, left, as it flies alongside the national flag of Italy, center, and the Eropean Union flag outside the company's headquarters in Rome. Photographer: Alessia Pierdomenico/Bloomberg
The UniCredit SpA logo sits on a flag, left, as it flies alongside the national flag of Italy, center, and the Eropean Union flag outside the company's headquarters in Rome. Photographer: Alessia Pierdomenico/Bloomberg

European bank stocks fell, led by Milan-based Intesa Sanpaolo SpA and UniCredit SpA, after inconclusive election results in Italy threatened to reignite the euro region’s sovereign-debt crisis.

UniCredit, Italy’s biggest bank, slumped as much as 10 percent to 3.76 euros in Milan, its largest intraday drop since Jan. 9, 2012, while Intesa declined as much as 12 percent. France’s Credit Agricole SA, which has a branch network in Italy, slid as much as 6.6 percent.

A political stalemate in Italy is weighing on banks, among the biggest holders of Italian government bonds, as the gridlock threatens to derail 15 months of austerity under Prime Minister Mario Monti’s technocrat government and revive speculation the country will struggle to pay its debt.

“We should expect the market to price a tail risk of a euro zone break-up back into the bank stocks,” Dirk Hoffmann-Becking, an analyst at Societe Generale SA, wrote in a note today.

The Euro Stoxx Banks Index fell as much as 5.5 percent, the most since Sept. 26, as lenders from Portugal to Germany tumbled and the cost of insuring against default on European bank debt reached the highest in three months.

Banco Espirito Santo SA, Portugal’s biggest publicly traded bank, dropped as much as 6.6 percent, and was 4.6 percent lower at 94.3 cents by 4:21 p.m. in Lisbon. Deutsche Bank AG, Germany’s largest bank, fell 3.9 percent to 34.78 euros in Frankfurt.

‘Sovereign Spreads’

The results from Italy’s election, which concluded yesterday, suggest a hung Parliament and may lead to another vote. Democratic Party leader Pier Luigi Bersani, who campaigned to maintain budget rigor, won control of the lower house but failed to capture the Senate, where rival Silvio Berlusconi won a blocking minority.

Bond yields jumped in Italy, Spain and Portugal following the vote, threatening to raise banks’ funding costs.

Italy’s 10-year yield climbed 32 basis points, or 0.32 percentage point, to 4.81 percent as of 12:57 p.m. in London, after reaching 4.93 percent, the highest level since Nov. 20. The gap in yield, or spread, between 10-year Italian bonds and German bunds widened 41 basis points to 334 basis points.

“The potential negative effect, volatility on sovereign spreads and lack of potential pro-growth reforms will likely continue to negatively impact Italian banks,” analysts including Azzurra Guelfi and Giada Giani at Citigroup Inc. wrote in a note. “This is due to their high gearing to sovereign exposure and asset quality, both of which are negatively affected by weak macro conditions.”

The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers rose as much as 12 basis points to 163.

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