Italian Banks on Losing Streak After Bad-Loan Deal Disappoints

  • Monte dei Paschi shares down more than 40 percent this year
  • Plan seen making little impact in short term, mergers key

Pedestrians pass a Banca Monte dei Paschi di Siena SpA bank branch in Rome.

Photographer: Alessia Pierdomenico/Bloomberg

Banca Monte dei Paschi di Siena SpA led a slump in Italian banking shares after Italy’s long-sought deal on bad debts with the European Union disappointed investors.

Monte dei Paschi, bailed out twice since 2009, fell 10 percent by 1:48 p.m. in Milan trading, bringing losses this year to 45 percent. The eight biggest decliners among the 46 members of the Stoxx Europe 600 Banks Index were Italian lenders on Thursday.

The agreement struck with the EU, which allows banks to offload soured loans after buying a state guarantee, is unlikely to clean up the financial system as fast as some in the markets had hoped, investors said. The plan stops well short of the cleanups organized in Spain and Ireland during the financial crisis.

“The uncertainty in the Italian banking system will persist,” said Emanuele Vizzini, who manages 3.5 billion euros ($3.8 billion) as chief investment officer at Investitori Sgr in Milan. “The deal may help banks to offload part of their bad debt, but for sure doesn’t solve the problem, in particular for the weakest banks, which may need recapitalization.”

The ills of the banking sector may jeopardize bank lending and support for the fledgling economic recovery after a record-long recession. Pressure to reach an agreement on bad loans escalated last week when shares of Monte Paschi and Banco Popolare SC plunged more than 20 percent on concern over their doubtful loans and capital levels.

‘Less Dramatic’

The deal on the mechanism to help banks dispose of their troubled debt was sealed after a five-hour session late into Tuesday night involving Finance Minister Pier Carlo Padoan and EU Competition Commissioner Margrethe Vestager which capped months of talks.

Banks will be able to bundle their bad loans into securities for sale, while purchasing a state guarantee for the least-risky portion to make the debt more appealing to investors, the Italian Treasury said Wednesday. The pricing of the state guarantee on senior notes will be on market terms, to ensure the scheme is aid-free, the Treasury said in an e-mailed statement Thursday. The pricing will vary depending on the risks taken on by the state and the maturity of the notes.

“The price of the guarantee looks rather costly and we doubt many Italian banks will be interested in using it,” said Luigi Tramontana, an analyst at Banca Akros in Milan.

Booking Losses

The arrangement may induce banks to dispose of their higher-quality troubled loans, while keeping the lowest-quality bad debt, said Gianluca Ziglio, a strategist at Sunrise Brokers LLP in London. The sale is likely to force them to recognize losses because the loans will probably be sold at lower prices than the value recorded in banks’ accounts.

It will take time to get the program up and running, delaying the benefits to the banks and the economy. “It could take a year to get somewhere on bad loans, and various moving parts could make it go sour," said Wolfango Piccoli, co-president of Teneo Intelligence in London. 

“The deal will help free up lending and boost growth, but not in the short term," Piccoli said. “Short term, the only way to improve things is to move on the consolidation front, and to present a reform of cooperative banks which has been a long time coming."

Italian banks have put aside money to cover less than half of the nominal value of their bad loans, so asset disposals at even lower levels imply losses. Bad loans at Italian banks, hit by record-low interest rates and a struggling economy, reached a high of 201 billion euros in November, according to the Bank of Italy. Doubtful loans which Italy’s five largest banks haven’t provisioned for exceed 120 billion euros.

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