Banca Carige SpA's only real option for survival is to find a strong partner, according to Banca Akros analyst Luigi Tramontana.
The struggling Italian lender's troubles took a new turn on Jan. 2 when the European Central Bank appointed temporary administrators and a surveillance committee to run the firm. The ECB's intervention came as most of Banca Carige's board resigned Jan. 2 after its biggest shareholder, the Malacalza family, which owns a 27.55% stake, blocked a €400 million share sale in a Dec. 22, 2018, vote.
The share sale was intended to replace a €320 million Tier 2 subordinated bond that Carige issued on Dec. 3. to boost capital to the required level. The bulk of the issue — €318.2 million — was underwritten by the voluntary intervention scheme of Italy's interbank deposit protection fund. The bond will convert to equity through a rights issue in the first half of 2019 if Carige is unable to raise €400 million from other sources.
Carige is weighed down by bad loans that comprise more than a quarter of its total loan book, and, like other Italian banks, has been affected by a recent spike in Italian sovereign bond yields. Such yields serve as benchmark for other bonds and mean Italy's lenders must pay dearly to issue their own bonds.
Carige's shares have lost more than 80% of their value since September 2018, and trading in them has been suspended since Jan. 2.
Preparing for sale
One of Carige's ECB-appointed administrators, ex-CEO Fabio Innocenzi, told Italian television channel Class CNBC on Jan. 3 that the company was examining ways to use the subordinated bond to boost capital and avoid a government rescue, Reuters reported.
Akros' Tramontana said in an interview that the "only option remaining" was to convert some of the subordinated debt to equity to boost the equity ratio and find a buyer among the Italian banks backing the deposit protection fund "for a symbolic price."
He recalled the rescue of three smaller Italian savings banks — Cassa di Risparmio di Rimini SpA, Cassa di Risparmio di Cesena SpA and Cassa di Risparmio di San Miniato SpA — when Crédit Agricole SA's Italian unit Crédit Agricole Cariparma SpA bought a 95.3% stake in each from the protection fund's voluntary intervention scheme for a total of €130 million in December 2017.
"I think the same scheme will likely be repeated with Carige," he said.
"Clearly the bank cannot stand on its own," Tramontana added, noting that Carige's cost-to-income ratio was around the 90% mark. Carige reported a cost-to-income ratio of 90.2% for the first nine months of 2018, and is targeting 89.5% for the full year.
He added that the bigger the buyer, the better, "in order to absorb the capital hole, potential losses and restructuring costs attached to Carige."
Carige did not reply to a request for comment from S&P Global Market Intelligence.
The Italian government seems to be taking steps to smarten the bank up for a sale. The Italian treasury's bad bank is in discussions to buy €3.7 billion of Carige's bad loans, Reuters reported Jan. 4, citing Il Messaggero.
'High probability' of outside help
It is far from clear who would be interested in buying the bank, however. There is reportedly little interest from potential suitors. Tramontana said a key question about Carige's attractiveness as an acquisition target was how much negative goodwill — which arises when an acquirer pays less for the target company than it is worth on paper — that Carige's eventual buyer would be able to recognize upfront. Negative goodwill typically results in a one-off boost to a buyer's profit.
Tramontana said the decision would lie with the ECB. Because it is understood that the ECB is keen for Carige to join a stronger group, the supervisor is likely to take decisions that will allow a potential acquirer to get the benefit upfront as much as possible, he said.
Whether or nor Carige can find a buyer, the recent capital raising is unlikely to be enough on its own to secure Carige's future.
The €320 million subordinated bond allowed Carige to meet its 13.125% capital requirement by the end of the year. It had reported a capital ratio of 10.9% at the end of September 2018. But rating agency Moody's said in a Dec. 19 report that the capital plan "may not be sufficient to ensure its longer-term viability, necessitating further external support." It added that the bank's pursuit of strategic alliances was evidence of this.
Even so, Moody's said in the report that it believes there is "a high probability of further external support", prompting it to affirm Carige's long-term deposit and issuer ratings at Caa1 and Caa3 respectively.