At last, good news on Italy's banks: Banca Monte dei Paschi announced a 200 million euro ($218 million) loss for the fourth quarter Thursday. That was better than the 250 million-euro loss most analysts had expected, and the bank's shares are making gains.
Still, it's way too early to crack open the prosecco. There was little in Monte Paschi's announcement to signal a broad turnaround in Italy's book of bad loans -- the focal point of the sector's recent crisis. Even after Friday's rebound, Monte Paschi's shares are still down about 45 percent for the year.
Indeed, the better-than-expected earnings only reinforce the sense that no real shift in fortunes is imminent. That became clear earlier this week with the Italian government's underwhelming plan for dealing with the bad loan problem, which only sent share prices across the industry tumbling.
To recap, the amount of bad loans at Italian banks has ballooned in recent months to about 360 billion euros. The ratio of non-performing loans at Italian banks was 16.7 percent at the end of June -- compared to 5.6 percent for Europe as a whole -- and it is growing at more than 10 percent a year. This was a concern that blew up into a panic in recent weeks.
First, the Italian government ushered through a bail-out of four relatively small Italian lenders in November that involved bailing in -- and wiping out -- some retail bondholders. Then, European authorities began probing how Italian banks accounted for and processed bad loans. Shares have plunged, and Monte Paschi, whose loan book is one of the most troubled in the industry, has fared worse than others.
This week, Italy suggested a guarantee plan under which the government will provide insurance, at market rates, on securitized parcels of non-performing loans from the banks. Instead of soothing the market, the proposal had the opposite effect, and with good reason. The Italian government had effectively sent a signal that it really doesn't have a plan for dealing with the bad loan problem any time soon.
It's simply not clear how the guarantee work in practice. What is the market price of insurance on a bunch of bad loans? How will the government price the guarantees without breaching state-aid rules?
Perhaps most importantly -- even if Italy puts up the for sale sign, will potential buyers show up in meaningful numbers to make a difference any time soon? International investors -- especially major U.S. asset managers -- have hoovered up non-performing loan books in Ireland, the U.K. and Spain in particular. But it's a relatively small group of firms -- a dozen or so -- with a handful of people on the ground in the region. They're backed by a framework of advisers -- bankers, lawyers, accountants -- that isn't huge either. Their capacity to plough through Italy's large and growing portfolio of bad loans is limited.
The guarantee plan is "no game changer," according to JPMorgan analyst Delphine Lee, who notes that "macro and structural reforms, further improvement for bankruptcy procedures in particular," would be a better driver of bank stocks.
Meanwhile, at Monte Paschi, the loan book continues to deteriorate, even if overall performance beat expectations. Loan loss provisions were 10 percent worse than consensus expectations, notes Barclays' analyst Marta Bastoni. After a week of big announcements, we're nowhere near the final act in the drama at Italy's banks.
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