UniCredit SpA and Intesa Sanpaolo SpA, Italy’s biggest banks, may struggle to boost profit as political gridlock threatens to increase borrowing costs, worsen an economic contraction and drive up bad loans.
The Italian benchmark 10-year bond yield climbed as much as 0.44 percentage point and an index of the country’s financial shares dropped as much as 11 percent after last week’s general election left Italy’s largest political parties groping to form a government amid a four-way parliamentary split.
The disarray may impede economic growth as the longest recession in 20 years and tougher rules from regulators, including the Bank of Italy, are already forcing banks to set aside more money against doubtful loans, said Jacopo Ceccatelli, a partner at JC & Associati SIM, a Milan-based financial advisory firm. Banco Popolare SC, Italy’s No. 4 bank by assets, said March 4 it will report a bigger loss for 2012 than analysts estimated because of higher losses at its consumer credit unit.
“Given the worsening of the economic environment and the pressure from the Bank of Italy to raise bad-loan coverage, I expect Italian banks’ profitability and capital generation to continue to deteriorate,” Ceccatelli said. “The political uncertainty may add further pressure on banks as the increasing spreads affect the lenders’ funding costs and the value of their sovereign-debt holdings.”
UniCredit may post a fourth-quarter net loss of 173 million euros ($227 million) when the Milan-based bank publishes results on March 15, according to the average of 25 analysts surveyed by the bank, after a profit of 114 million euros in the year-earlier period. Loan-loss provisions are seen rising 48 percent to 2.2 billion euros, the survey found.
Intesa, also based in Milan, will probably report a quarterly loss of 70.3 million euros on March 12, according to a Bloomberg News survey of seven analysts. The lender posted a 10.1 billion-euro loss in the final three months of 2011, after writing down goodwill on acquisitions.
Officials at UniCredit and Intesa declined to comment.
The Italian economy contracted 2.2 percent in 2012 and is expected to shrink 1 percent this year, the Bank of Italy estimates. Italian firms and families are struggling to repay debts and find new credit as unemployment rises and austerity measures put in place by the caretaker government of Mario Monti curb economic activity.
The jobless rate reached the highest in more than 13 years in December and consumer confidence fell in January to the lowest level since at least 1996.
Italian corporate and household non-performing loans rose to a record in December, reaching 125 billion euros, according to data from the Italian Banking Association. Banks’ gross non-performing loans as a proportion of total lending increased to 6.3 percent from 5.4 percent a year earlier.
France’s BNP Paribas SA, which owns a retail bank and consumer credit unit in Italy, and Credit Agricole SA reported higher bad-loan provisions from their Italian branch networks in the fourth quarter.
Italy’s central bank has increased inspections and is urging banks to take more provisions. “In periods of market tension, the intensity of supervision cannot be relaxed,” Governor Ignazio Visco said in a speech on Feb. 9.
“The Bank of Italy review of the top 25 banks likely means an increase in non-performing loans coverage” in the fourth quarter, Francesca Tondi, an analyst at Morgan Stanley, wrote in a report March 6. “We think 2013 accounts will also be affected by still-growing NPLs and the need for more coverage.”
UniCredit shares as much as doubled in Milan trading, and Intesa surged as much as 73 percent, after European Central Bank President Mario Draghi’s July pledge to do “whatever it takes” to defend the euro. Those gains began to erode over the past month as Italian government borrowing costs increased in the run-up to the elections.
“Any renewed rise in funding costs would be the equivalent of a tightening in monetary conditions, with the potential to slow the economy,” Credit Suisse Group AG analysts including Yiagos Alexopoulos and Christel Aranda-Hassel said in a note last week.
Italian banks tied their fortunes more closely to the financial strength of the state in 2012, increasing holdings of the country’s sovereign debt by 58 percent to 331 billion euros. Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan.
Following last week’s elections, Pier Luigi Bersani is struggling to create the consensus needed to form a government after efforts to draw Beppe Grillo’s Five Star Movement into an alliance with his Democratic Party were rebuffed. Grillo’s upstart, anti-austerity campaign took votes from both Bersani and three-time premier Silvio Berlusconi, leaving no single force in a position to govern and raising speculation a new vote will be needed to break the deadlock.
In 2011, euro break-up risks and frozen bank funding forced then Prime Minister Berlusconi to resign in favor of Mario Monti’s unelected government.
The events in Italy have affected borrowing costs beyond Italy. Relative yields on bonds sold by financial companies from Greece, Spain, Italy, Portugal and Ireland jumped 11 percent since Feb. 25 to an average 357 basis points on March 4, according to Bank of America Merrill Lynch’s Euro Periphery Financial index. The spread over benchmark government bonds fell to 348 basis points on March 6.
The difference between their funding costs and those of financial firms in the region’s so-called core nations, including Germany and France, is holding near the widest since Dec. 28, according to Bank of America Merrill Lynch’s Euro Non-Periphery Financial index. A basis point is a hundredth of a percentage point.