Italy’s weak banks are under the gun as the European Central Bank (ECB) loses patience.
The ECB sent letters to two lenders in the past two weeks, telling Banca Carige on February 19 to submit a new funding plan after its losses widened and deposits shrank. Ten days later, it threatened to wind down Banca Popolare di Vicenza if it doesn’t implement all steps of a reorganisation plan.
They’re just the most recent of the country’s lenders to draw special attention from the ECB, which has pushed to shore up the euro-region’s banking system since taking over as supervisor in late 2014. The central bank has told Banca Monte dei Paschi di Siena, Italy’s third-largest lender, its future may depend on finding a buyer, and earlier this year asked at least six banks - including UniCredit, the biggest - to submit more data on bad loans.
“Italian banks are on the ECB’s radar right now, considering there are plenty of weaknesses,” said Giuseppe Sersale, a partner of Anthilia Capital Partners Sgr in Milan. “News of the ECB’s recent actions revived concerns over the fragility of the country’s banking industry.”
An ECB spokesman declined to comment on issues at individual banks.
Some Italian banks are struggling to boost profitability and capital after bad loans climbed to €360bn ($397bn), a mountain of doubtful debt that’s hindering lenders from making fresh loans and holding back an economic recovery. The situation for weaker banks deteriorated in recent months after the bailout of four regional lenders imposed losses on bondholders, causing fright among banking customers - traditionally among the largest holders of such debt - and spurring a flight of deposits.
“Problems with Italian banks are of a confidence nature,” said Gianluca Ziglio, a strategist at Sunrise Brokers in London. “On the domestic side, there is a growing concern about the safety of banks after the implementation of bail-in rules, while on the international side investors are looking with concern at the sector given the performance of the loans Italian banks have given.”
Banca Carige, in a statement on Thursday, said it, “like other comparable Italian institutions, has faced unexpected tensions,” including an impact on its direct funding. The shares dropped 10% on Friday, bringing the decline this year to 53%.
The statement echoes comments from Monte dei Paschi Chief Executive Officer Fabrizio Viola, who said in January the bank had suffered “limited” deposit withdrawals during a stock-market rout that erased more than half the lender’s market value. The Siena-based bank has the most bad loans relative to tangible equity among Italian lenders.
The worst-performing banking stocks, including Monte dei Paschi, Banco Popolare and Unione di Banche Italiane, are trading at less than half of their tangible book value. That means they are worth less than investors would expect to receive if the firms liquidated assets.
Carige was one of the two Italian lenders forced to plug a capital deficit that came to light during the ECB’s health check in 2014. Almost two years later, the bank is still struggling to strengthen its balance sheet and restore confidence, while the Malacalza family, Carige’s main investor with an 18% stake, is proposing to replace the bank’s top management, including CEO Piero Luigi Montani, whose term expires in March.
The ECB instructed Carige to submit a new funding plan by the end of the month and a strategic review by the end of May to restore compliance with supervisory requirements, the company said on Thursday. The Genoa-based lender restated its 2015 net loss to €102mn from €45mn.
Banca Popolare di Vicenza will ask shareholders to approve a survival plan that depends on finding investors willing to buy as much as €1.8bn of stock. Failure to carry out an initial public offering to raise capital by the end of April may lead to supervisory measures, including the bank’s resolution, the ECB said. The lender is the country’s 10th largest, with about €40bn of assets.
Popolare di Vicenza will have to tap investors for the third time in three years, after raising €1.2bn between 2013 and 2014. Those cash calls are under investigation after an ECB inspection revealed that the bank lent money to customers to buy the shares, artificially boosting reserves.
A cooperative bank, Popolare di Vicenza employs 5,500 people at more than 600 branches. Its current shareholders are mainly customers who already lost most of their investment on write-downs that have shaved about 90% from the book value in recent years.
A sweeping reform of the Italy’s banks a year ago is forcing the biggest cooperative lenders to become joint-stock companies. Restrictions on ownership and voting rights for these community-oriented banks have contributed to lax lending policies and stood in the way of consolidation.