Eurozone: Italy's Banking Sector Wobbles Just as the Economy Looks to have Entered Recession


Banca Carige

Image (C) Gruppo Banca Carige

- Italy's 10th largest bank in 'temporary administration’

- ECB takes over running of Bank

- Italian economy likely suffered recession end-2018

News of another crisis in the Italian banking sector will keep investors wary of Eurozone risk in 2019 after Genoese lender, Banca Carige, went into ‘temporary administration’.

In the current jittery market environment, investors could be forgiven for seeing the lender as the next potential ‘Lehman Bros’, yet in reality, Carige is a small regional player, which isn't likely to destabilise the Euro system on its own.

Nevertheless, it is still Italy's 10th largest bank, and news out on Thursday that another small-midsized regional player, Banka Popolare di Bari, is also in trouble, added to concerns.

Although Popolare di Bari is still at the ‘refinancing’ stage, the start of a succession of bankruptcies - even of minor banking entities - could trigger broader fears about Italy which would almost certainly affect the Euro.

“Italy's Popolare di Bari will try to raise up to €500 million ($577 million) from investors to shore up its balance sheet,” report Valentina Za and Stefano Bernabei, correspondents for Euronews. “The latest move by the unlisted cooperative bank, which competes with several local rivals in the poorer southeastern Apulia region, comes after it identified a "significant and objective difficulty" in tapping markets in 2017.”

The chances of contagion from Carige on its own are probably low.

The bank’s market capitalisation, for example, is only €84m, compared to Intesa Sanpaolo, Italy’s largest lender's market cap of €49bn, over 500 times bigger. Carige's assets amount to €25bn; Intesa's €797bn; staff 4.3k vs 97k respectively.

The term ‘temporary administration’ was coined by the European Central Bank (ECB) to describe the step before banking ‘failure’. It involves the ECB using new supervisory powers to step in and take over the day-to-day running of the bank which is now run by a triumvirate of administrators.

It’s likely the ECB will steer the vessel to safety, probably into the arms of the larger buyer. Two Venetian banks which also ran into trouble recently ended up being bought by Intesa Sanpaolo for a mere symbolic Euro each.

Further financial support of circa €1.4bn appears to have been offered by the Italian government, if required. This comes despite La Liga and 5 Star's savage criticism of prior bank bailouts, when they were in opposition, an irony not lost on some commentators.

Maybe because of this deputy PM Matteo Salvini has been reported as suggesting a modified approach of the state taking over the running of the bank instead.


Carige’s Collapse, Italian Recession

The last straw for Carige was the failure to get the go-ahead for a complex refinancing deal involving the Italian interbank deposit protection fund (FITD) and existing shareholders.

FITD was going to underwrite a new bond issuance which would raise the 320m capital needed to save the bank. The bonds, however, were convertible, a gimmick which means they can later be exchanged for shares.

The largest existing shareholder, the Malacalza family, however, didn’t like the word “convertible”, fearing dilution of their holdings, and they vetoed the proposal.

It was Carige’s last hope - after the scheme collapsed the ECB sent in their boys to take over the reins. The most recent reports specify the hunt for a buyer.

Part of the reason Carige ran into problems was the sovereign debt crisis in Italy caused by EU-Italy wrangles over the 2019 budget. This saw the value of Italian government bonds fall massively. Since Italian banks are major holders of Italian bonds they saw the value of their assets slump in value almost overnight, Carige included. The result was increased balance sheet stress. The other reason for Carige’s failure was the banks huge +20% high stock of non-performing loans (NPLs).

The news of fresh woes in Italy's banking sector is followed by economic statistics that suggest the country's economy entered recession in the final quarter of 2018.

Italian industrial production data fell sharply in November, adding to a string of data releases that show economic activity in the Eurozone has slowed sharply with Italy now joining Germany as being likely to record a technical recession at the turn of the year.

Italian industrial production for November read at -2.6% in the year to November, and -1.6% month-on-month in November. Growth of 0.2% was forecast by markets for the annualised figure and a slight drop at -0.3% was forecast for the monthly figure.

Paolo Pizzoli, Senior Economist with ING Bank N.V. says Italy is likely to record a technical recession.

"The November production reading adds serious doubt about GDP growth over 4Q18. Over the Sep-Nov quarter, industry data on a seasonally-adjusted basis, contracted 0.1% QoQ and confidence data has deteriorated further overall. On past form, both the ESI and our computed PMI composite measure for Italy for 4Q18 are consistent with a contraction of Italian GDP in 4Q18. We are now pencilling in a second consecutive 0.1% QoQ GDP contraction in 4Q18, which would mark the start of a technical recession," says Pizzoli.

A slowdown in the Italian economy might only add to woes in the country's sensitive banking sector. 

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