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Carige back from brink, but analysts cautious about its long-term outlook

Banca Carige SpA avoided being wound up when investors signed up to its recent €510 million debt swap offer, but analysts are divided over the Italian lender's long-term prospects due to profitability and regulatory pressures.

To the backdrop of a precarious financial situation exacerbated by high levels of toxic assets, Carige experienced board-level conflict in the spring but pulled itself back from the brink by overhauling its top management, launching a new business plan that envisages a return to profitability in 2018, and by starting the process of raising capital.

Italy's 11th-largest listed lender by assets convinced investors to offer €455 million of the total up for conversion, according to an Oct. 12 statement, and is going to raise another €700 million before the end of the year via a cash call and asset sales. Unipol Gruppo SpA, Intesa Sanpaolo SpA and Generali, were the most influential forces behind the success of the swap, according to Reuters.

Additionally, the bank — which posted a second-quarter net loss of €113.8 million — is set to cut €1.2 billion in soured loans through direct sales and securitization, as it aims to reach an NPL ratio of 8.1% in 2020. Gross nonperforming loans amounted to roughly €7.2 billion at the end of June, or 33.7% of its portfolio. It also wants to increase its common equity Tier 1 ratio to 11.6% in 2020 from 10.3% at the end of June.

'Healthier than a year ago'

The entire Italian banking sector is now enjoying brighter prospects, and Carige's last-minute turnaround can be seen as yet another example of recovery in an improving environment, said Marco Troiano, a London-based banks analyst at Scope Ratings.

"There is no question that the Italian banking sector is healthier than a year ago," he said. "Material amounts of capital have been raised privately [by] UniCredit SpA or injected by the state [into] Banca Monte dei Paschi di Siena SpA, and the worst headline risks have been removed — Banca Popolare di Vicenza SpA and Veneto Banca SpA."

Monte Paschi is now majority-owned by the state, while Popolare di Vicenza and Veneto Banca have been taken over by Intesa, with substantial contributions from the government.

Add to that the concerted efforts banks and politicians are making to get rid of bad loans, and the picture becomes even better, Troiano added, although the ECB's recent proposal for eurozone banks to set aside more cash to cover bad loans represents a potential regulatory risk.

"The NPL numbers are all moving in the right direction, and unless the ECB goes in too heavy-handed, asking for immediate upfront cleanup, the situation is very manageable," he said.

Potential pressure

However, Carige is not quite safe yet, according to other analysts.

"Potential additional regulatory pressure to further reduce these ratios is a key risk, especially because we do not forecast large capital buffers, contrary to plan targets," UBS analysts said in an Oct. 3 research note, adding that the bank is likely to break even only in 2019 and turn profitable in 2020. "Revenue growth is particularly uncertain as it depends on the commercial momentum (loan growth, AUM sales) that the franchise will be able to generate following a prolonged period of stress."

Meanwhile, Fitch Ratings said Oct. 9, as it downgraded the bank's viability ratings: "If the capital strengthening is completed successfully, the bank's still weak capitalisation in relation to its risks and asset quality, its unprofitable business model and franchise, and its limited earnings potential are likely to constrain its VR at 'b-' following the completion of the transactions."

Carige is currently subject to close scrutiny from the ECB, which reportedly would not hesitate to take it over if its projects falter.