Italian bank bailout is no magic bullet

Italy’s banking bailout has disappointed the market but we feel the sector can draw support from other factors such as economic recovery and potential consolidation.

3 February 2016

Hannah Piper

Fund Manager, European Equities

Margin call

The Italian government last week reached a deal with the EU that aims to resolve the problem of high levels of non-performing loans (NPLs) in the banking sector.

However, the bailout has not been well received by the market as the details which have been disclosed so far suggest that this is not the game changing solution to NPLs that most had hoped for.

Bluntly, it is not a bad bank, but rather a scheme to allow banks to dispose of some of their NPLs to private investors.

It is important to note that we are just at the beginning of this process, and crucial details are still scarce, so a significant degree of uncertainty remains.

The good news is that it is a voluntary scheme which will help each bank offload some of their NPLs over time (open for 18 months subject to renewal) via a very selective process.

The bad news is that we believe this will only be helpful at the margin.

Binary play

It does not appear to be a proper clean-up that will restore full confidence and profitability to the Italian banking system – as current market prices do not make it worthwhile to dispose all of their NPLs.

We already had exposure to Italian banks in certain of our portfolios, as we believe that they could benefit from a number of other factors.

These include any recovery in the Italian economy, consolidation between popolari (co-operative) banks, and Prime Minister Matteo Renzi’s reforms (for example the reform of the foreclosure law to speed up the process on NPLs).

We have therefore made only minor adjustments in relation to the recent newsflow, especially given the lack of detail around how this will be implemented.

Unless we see some significant divergence in valuation we try not to take such binary bets.

We have also not felt the need to play the distressed end of the Italian banking spectrum, which would benefit most from a bad bank, as we feel there is enough value elsewhere in the sector.

Author

Hannah Piper

Fund Manager, European Equities