Faced with the possible collapse of Italy's troubled Banca Popolare di Vicenza SpA and Veneto Banca SpA — followed by a costly windup process — Italy's two biggest banks, UniCredit SpA and Intesa Sanpaolo SpA, have started working with regulators on a recapitalization plan.
UniCredit is in negotiations with the Italian government, which wants the big banks to contribute €1.2 billion to rescue Vicenza and Veneto, a source at UniCredit said June 9.
European authorities have said the €6.4 billion capital shortfall at the two Venetian lenders can only be filled by the state after the private sector chips in to make up losses. The alternative to a government bailout would be declaring the banks insolvent and shuttering them, at great cost to the other financial institutions in Italy.
"UniCredit Group is actively working with the government to find the least bad, disruptive [and] less costly solution for the system. €1.2 billion spread pro rata between all the banks' exposures to the deposit guarantee fund is clearly better," said the person, requesting anonymity due to the sensitivity of the matter.
A full winding-up of the ailing banks would cost the banking sector €11 billion in secured deposit compensations and other liabilities, the source added, emphasizing that UniCredit would not take over Veneto-Vicenza on its own, instead hoping other banks would join the talks.
Intesa, Italy's second-largest bank, is also reluctant to take over Veneto-Vicenza, a source at Intesa told S&P Global Market Intelligence. "Intesa Sanpaolo has no plan to realize a deal like the one closed in Spain concerning Banco Popular," the source said. Intesa is in separate talks with the government over how it might contribute to the recapitalization of the two banks, S&P Global Market Intelligence understands.
Marco Troiano, a banks analyst for Scope Ratings in London, said Italian banks might in the end have little choice but to rescue Popolare di Vicenza and Veneto Banca. "Clearly they would resist that as they have already lost money on Atlante [fund] contributions but if there is no other option, it may well be in their interest to avoid a full blown resolution."
In 2015, 67 financial companies in Italy pooled €4.25 billion to fund a backstop fund called Atlante, and UniCredit and Intesa forked out the lion's share — €700 million and €845 million, respectively. Both banks have since written down their stakes in the fund.
Spanish test case
Banco Popular Español SA's June 7 takeover by Banco Santander SA, at a nominal price of €1 but with a commitment to supply €7 billion to the failing Popular, has injected a renewed sense of urgency into saving the Veneto banks. The event was a test case for European bank regulations, said Troiano.
Where there were lingering doubts over Brussels' willingness to put a bank through so-called resolution proceedings, there are now none after Popular's takeover by Santander, Troiano said. "I think the Santander-Popular deal has shown that resolution is a real possibility — hence the pressure on Italy to find a solution."
Under EU rules, a precautionary state recapitalization can only happen to prevent a bank from failure in hypothetical downturn scenarios set out by the ECB's stress tests. The Italian government has set aside €20 billion to bail out its troubled banks, including Vicenza-Veneto and Banca Monte dei Paschi di Siena SpA. The European Commission and the Italian government agreed on the terms of a precautionary recapitalization of Monte dei Paschi at the end of May. Veneto and Vicenza applied for state aid in early 2017.
However, one obstacle to resolving Popolare di Vicenza and Veneto Banca remains the large amount of risky debt that retail investors in Italy were allegedly missold by banks and for which they will expect to be compensated.
"The problem is still that a full resolution may entail the use of the bail-in tool, potentially impacting senior bondholders, which would include retail clients. The potential for contagion is there, so I think everyone wants to avoid that," said Troiano.
ABN Amro estimated that individual investors have sunk €31 billion of their savings in subordinated debt issued by Italian banks, or 46% of the total asset class, and €200 billion in senior paper, or 40% of the entire amount in existence.
UniCredit carried out a €13 billion capital increase in February 2017.