Banco Popolare SC led a decline in Italian bank shares after announcing an unexpected loss and plans for a capital increase, fueling doubts about the quality of assets at the country’s lenders.
Banco Popolare, Italy’s fourth-biggest bank, dropped as much as 16 percent, the most since December 2008, and was 13 percent lower at 1.31 euros by 12:23 p.m. in Milan. Banca Popolare dell’Emilia Romagna SC, Italy’s No. 7 bank by assets, declined 9 percent, while Banca Popolare di Milano Scarl, the eighth-biggest lender, fell 8 percent.
“Banco Popolare’s capital hike raises additional questions over Italian banks’ asset quality,” analysts at Goldman Sachs Group Inc., including Jean-Francois Neuez, wrote in a note to clients today. “Our mid-point estimate of aggregate capital shortfall stands at 17 billion euros,” with smaller banks more affected than larger ones, they said.
The nation’s banks are bolstering finances after Italy’s longest recession in two decades and low interest rates squeezed profit margins. The European Central Bank’s asset quality review and higher capital requirements are also forcing banks to trim balance sheets, pare lending and set aside more money to cover risky loans.
Banco Popolare’s 1.5 billion-euro ($2.1 billion) rights offer will help repay 1 billion euros in convertible bonds and boost the bank’s common equity Tier 1 ratio under Basel III rules to about 10 percent, the Verona-based bank said after markets closed on Jan. 24.
Additional Share Sales
Banca Monte dei Paschi di Siena SpA, Italy’s third-largest bank, plans a 3 billion-euros rights offer as soon as May. Banca Popolare di Milano intends to raise 500 million euros this year selling stock, while Banca Carige has to eliminate a capital shortfall of 800 million euros.
An increasing number of stock sales may lead to “an overhang in the sector,” Giovanni Razzoli, an analyst at Equita SIM SpA, wrote in a note to clients. At the same time, fourth-quarter results are likely to “show higher bad loans and impairments,” he said.
Bad loans at Italian banks climbed to the highest in almost 14 years in November, with non-performing loans accounting for 7.8 percent of total lending, up from 6.1 percent a year earlier, according to data published by the Italian Banking Association today.
Banco Popolare said it will report a 2013 loss of about 600 million euros because of impairments and the higher cost of credit. Fourteen analysts surveyed by Bloomberg, on average, had estimated the bank would post a 144 million-euro net profit.
“Half of the capital hike goes to cover the losses and the banks’ fees, and the rest should hardly generate returns in excess of cost of capital,” Annamaria Benassi, an analyst at Kepler Cheuvreux who cut the stock to reduce from hold today, said in an e-mailed report to clients from Milan.
HSBC Holdings Plc also reduced its rating on the stock to underweight from neutral.
Chief Executive Officer Pier Francesco Saviotti is selling assets and cutting costs before an ECB balance sheet review. Banco Popolare, one of 15 Italian banks that will be evaluated in the ECB assessment this year, plans to present a new business plan next month.