Italy Bank Rescue Won’t Fill $54 Billion Hole on Their Books

  • Lenders need to augment provisions to make debt sales possible
  • Government readying bailout as Monte Paschi struggles

The Lingering Problem of Monte Paschi and Italian Banks

Italian banks need at least 52 billion euros ($54 billion) to clean up their balance sheets, much more than the rescue package proposed Monday by the government.

The shortfall is an estimate of how much lenders would have to increase loan-loss provisions to allow for the sale of bad debt, according to data compiled by Bloomberg. It includes the 8 billion euros of provisions UniCredit SpA has said it will add before selling 18 billion euros of its worst loans and uses that ratio as a proxy for the gap at other banks. The total also includes the 5 billion euros Banca Monte dei Paschi di Siena SpA has been struggling to raise in recent months.

The Italian government asked parliament this week to increase the public borrowing limit by as much as 20 billion euros to potentially backstop Monte Paschi and other lenders. The rescue package needs to be closer to 30 billion euros to solve Italy’s bad-debt crisis, according to Paola Sabbione, a Milan-based analyst at Deutsche Bank AG. That conclusion assumes UniCredit and some other lenders can raise about 20 billion euros through capital markets, asset sales and profit retention -- leaving the government to fill the rest of the 52-billion-euro hole.

“Some of the publicly traded banks can probably raise some of the funds needed for a cleanup, including Monte Paschi,” said Sabbione, who has covered Italian banks for the past decade. “So the government would have to plug in the rest. But still, at this level, it won’t do the full job.”

Monte Paschi shares fell as much as 19 percent Wednesday as prospects for finding the necessary funds from the market dimmed and the bank said cash resources were dwindling. The stock recouped some of the losses after the Italian parliament approved the government’s request to increase the debt limit in preparation for a potential bailout.

UniCredit Provisions

UniCredit, the nation’s largest lender, plans to increase loan-loss provisions to 75 percent for nonperforming loans with the lowest chances of recovery and 40 percent for two other categories considered less dire. The increased writedowns will help the Milan-based lender sell about a third of its bad loans to asset manager Fortress Investment Group.

UniCredit is planning to raise 13 billion euros of new equity funding to cover the increased provisions as well as other restructuring costs and to improve its capital ratio. The company’s shares have jumped 15 percent since the Dec. 13 announcement, giving analysts confidence the bank will have little trouble tapping investors for the funds.

Italian banks had 356 billion euros of bad loans at the end of June and 165 billion euros of provisions against them, according to the latest Bank of Italy data. To get the worst category to 75 percent provisioning and the rest to 40 percent, as UniCredit is doing, would take 52 billion euros.

The ECB has been pushing for reduction of bad loans at the 14 large Italian banks it directly supervises, which include UniCredit and Monte Paschi, Italy’s No. 3 lender. The 75 percent writedown on the worst type brings the value in line with what outside investors are paying for such distressed debt in recent sales, making the disposals more likely. While some bad-debt portfolios have been sold for about 25 percent of face value in recent years, some have gone for as low as 16 percent as Italy’s slow bankruptcy process makes recovery arduous, lowering the price investors are willing to pay.

Worst Shape

Four banks supervised by the ECB are in the worst shape, according to Nicolas Veron, a senior fellow with Bruegel, a Brussels-based research group. They are Monte Paschi, Banca Carige SpA, Banca Popolare di Vicenza and Veneto Banca SpA. The government may have to put up money to help those with their capitalization and debt disposals, while other large banks will probably be able to access capital markets for the needed resources, Veron said.

“Nationalization is better than denial,” he said.

Once larger banks meet their capital shortfalls and sell some bad loans, the ECB probably will pressure the Bank of Italy, which supervises the rest of the nation’s lenders, to do the same with smaller firms, Veron said. The government would have to contribute capital to small banks that aren’t publicly traded, according to Veron and Sabbione.

Italy has shied away from intervention in its banks because new European Union rules require losses on junior bonds, which are widely held by retail investors, when government money is injected. Spain, which cleaned up its banks in 2012 by funding an asset-management company to take over bad loans, imposed losses on junior creditors as a condition for the EU funds it tapped. The country then reimbursed retail investors who’d bought the bonds without realizing their risk.

Italy has pressed healthier banks and insurance companies to fund an asset-management company for bad loans. The firm, Atlante, has fallen short of raising enough money to tackle all of the worst debt sitting on balance sheets.

Italy could follow Spain’s example by setting up a government-backed fund, bail in junior debt as new rules require and refund retail investors. That could speed an Italian cleanup, according to an EU official who asked not to be identified. A new government next year would be more likely to carry out such a plan, the official said. Former Prime Minister Matteo Renzi, who stepped down this month, has said he favors elections as soon as April.

(Updates with Monte Paschi shares in fifth paragraph.)
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