Italy Banks Emerge as Biggest Losers in ECB Health Check

Italian banks showed the largest combined capital shortfall in the European Central Bank’s review of the region’s lenders as the country struggles to emerge from its third recession in six years.

Banca Monte dei Paschi di Siena SpA, Italy’s third-largest lender, emerged with a capital gap of 2.1 billion euros ($2.7 billion) while Banca Carige SpA must replenish 814 million euros of capital after taking into account funds raised this year, the ECB said in a statement today. Of the nine Italian banks that failed a stress test, four still showed holes after measures they took this year, according to the ECB’s report.

“The failed nine Italian banks confirms the country’s banking sector faces significant challenges,” Raj Badiani, an economist at IHS Global Insight wrote in a note. “Italian banks need to address their capital shortfalls by forgoing dividend payouts, selling assets and cutting costs even considering some consolidation across the sector,” he said.

ECB President Mario Draghi is using the yearlong review to restore confidence in the financial system before taking over banking supervision in November. The health check revealed Italian lenders, burdened by bad loans, are lagging behind competitors, posting the highest fail rate in the region even after some of the biggest banks cleaned up their balance sheets in preparation for the review.

Bad Loans

Monte Paschi said it hired UBS AG and Citigroup Inc. to explore strategic options as it considers how to replenish capital, according to a statement.

UniCredit SpA, Italy’s biggest bank, set aside more than 13 billion euros for bad loans last year, leading to one of the largest ever losses in Europe. The bank has excess capital of 8.7 billion euros after the ECB exam, the Bank of Italy said today.

Paschi and Carige are the only two lenders that need funds, according to the Bank of Italy, which includes other capital measures in its own calculations.

Carige plans to raise 500 million euros in a rights offer to fill the gap, the Genoa-based lender said in a statement. The bank, which must submit the plan to the ECB within two weeks, also counts on selling an insurance business and assets in private banking and consumer lending.

Most of the 15 Italian banks in the review have reinforced their capital from private sources by about 11 billion euros since Dec. 31, the Italian Finance Ministry said in a statement. “Other mitigating actions have been put in place for more than 4 billion” euros, it said.

Paschi Merger

The Bank of Italy would favor a potential merger of Monte Paschi, Fabio Panetta, deputy director general at the cental bank told reporters in Rome today.

“We’d be extremely happy” if this type of operation is a market operation, makes the bank stronger, and adds credit to the system, Panetta said. “This is how we feel about any operation that helps finance the economy.”

Finance Minister Pier Carlo Padoan said he “is confident that the residual shortfalls will be covered through further market transactions and that the high transparency guaranteed by the Comprehensive Assessment will allow to easily complete such transactions,” according to the statement.

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