The Next Italian Bank Threatens to Topple

by Don Quijones, Wolf Street:

Sharp Dose of Deja Vu for Italy’s Teetering Banks.

In a speech that did little to calm investors’ nerves, Italy’s finance minister said yesterday that he was “strangely optimistic” about Italy’s economic outlook. Senior eurocrats in Brussels are far from convinced. “Italy’s accounts are not improving,” blasted European Commission Vice-President Jyrki Katainen at a press conference yesterday.

The financial situation in Italy, according to Katainen, is due to get worse with Italy’s deficit in 2018 now predicted to be €3.5 billion more than previously stated by Paolo Gentiloni’s administration in the spring. “The only thing I can say in my name is that all Italians should know what the real economic situation in Italy is,” he said.

That real economic situation includes the fragile health of the nation’s banking system which continues to teeter on the edge despite the controversial rescue last summer of Monte dei Paschi di Siena (MPS) and the resolution of the Popolare di Vicenza and Veneto Banca, which left over 40,000 businesses in Italy’s wealthy Veneto region starved of credit.

It’s pretty clear that investor concerns about the health of Italy’s toxic debt-laden banking system have not been put to rest. Today’s developments will hardly have helped steady nerves after mid-sized lender Carige, with assets of €26 billion, scuttled a capital increase demanded by European authorities when it failed to get the backing of a banking consortium led by Credit Suisse, Deutsche Bank, and Barclays to underwrite the deal.

In a statement, Carige said it had called a board meeting on Thursday morning to discuss “the next steps.” The shares of Genoa-based Carige, which had already lost roughly half its value over the past year, were suspended on Milan’s stock exchange. They closed on Wednesday at €0.17 a piece. The board had fixed a price of €0.10 euro per share for a capital hike of €560 million demanded by regulators.

The proposed cash call is over four times the bank’s current market value. What’s more, Carige has already gone through a capital expansion worth €800 million in 2014 and another one worth €850 million just a year later. Just as happened with MPS last year, investors appear to have finally cottoned on to the fact that pouring money into a bank saddled with huge amounts of suspect assets and non-performing loans in a country gripped by a systemic banking crisis is unlikely to pay off.

Now, just months after Italy’s government bent EU bank resolution rules out of all recognition to bail out MPS, it seems that another resolution could be in the offing.

“Given current market conditions, we do not rule out Banca Carige will be put under resolution,” Milan broker Akros said. There are, it seems, other options such as the postponement of its expansion, the sale of the group, or the segregation of a ‘bad bank’ with the support of the Italian Government.

The prospect of another bank resolution triggered a panicked sell-off of other mid-sized banking shares. Rival Creval, which has just announced plans to raise €700 million — or 4.4 times its market value — via a share issue, closed down 19%. MPS saw its shares extend a seven-day losing streak after tumbling 4.1% today. In the last five days alone the stock is down over 20%.

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