trending Market Intelligence /marketintelligence/en/news-insights/trending/IV2ZZyyymkM60C8Zzly7MQ2 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Contact Us

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List

With €220B NPL problem, Italy's banks face glare of stress test spotlight

Street Talk Episode 68 - As many investors zig away from bank stocks, 2 vets in the space zag toward them

Street Talk Episode 66 - Community banks tap the debt markets while the getting is good

Street Talk Episode 67 - Veteran investor tabs Mick Mulvaney to help with latest financial stock-focused fund

Street Talk Episode 65 - Deferral practices trap US bank portfolios in purgatory


With €220B NPL problem, Italy's banks face glare of stress test spotlight

Europe'supcoming stress test results look set to emphasize differences in bank assetquality between Spain and Ireland, where the state has been able to intervene,and Italy, which is still trying to solve an enormous NPL problem.

SNL Image

Theresults of the European Banking Authority's test, due July 29, will indicatehow bank balance sheets would fare under an adverse scenario of long-terminterest rate shocks, equity and property price declines, and a drop in EU GDP.

Analystsat Societe Generale, writing in a July 19 research note, said this could provesevere, with fallout from Brexit, the drop in bank equity prices, a weakermacro outlook and recent developments in Italy potentially leading to negativesurprises involving Banca Montedei Paschi di Siena SpA as well as German, Austrian and Nordicbanks. The EBA's 2015 transparency exercise found that EU banks hadstrengthened their capital but that nonperforming loans remained a cause forconcern.

The2016 stress test has been mitigated by the exclusion of Portuguese and Greekbanks, apparently because of their smaller size. An EBA spokesperson said in aninterview that the chosen criteria "are designed to keep the focus on abroad coverage of EU banking assets and to capture the largest banks … The aimof the stress test is to evaluate the EU market as a whole."

Thus, among the so-called European periphery, only the banksof Italy, Spain and Ireland will feature.

The Italian problem

Thereare big differences in asset quality in these three countries. In bothSpain and , the government, underEU supervision, intervened to help the struggling financial sector, creatingbad banks to manage NPLs and taking measures to recapitalize and restructurelenders. The result is that the ratio of NPLs to tangible common equity andreserves — often known as the Texas ratio — is significantly lower, andcoverage ratios significantly higher, in these countries than it is in Italy.There, the state is struggling to clean up bank balance sheets amid fears thatprivate investors in subordinated debt could be bailed in under the newEuropean Bank Recovery and Resolution Directive.

Thefive Italian banks being stress tested have, in aggregate, tens of billionsmore in NPLs than the six Spanish companies — a total of more than €220billion. The Italian lenders would need €68.88 billion in additional capital toreach a coverage ratio of 80%, compared to €39.64 billion for the Spanish banksand €21.85 billion for the two Irish banks.

"TheRome government sees a considerable problem in the banking system," saidRalph Solveen, an economist at Commerzbank, in an interview. "If one looksat the NPLs, that is, for sure, one of the factors that is currently impedingeconomic growth."

Italyis now striving to address its systemic weakness without breaching the EUmoratorium on state aid. There is a distinct danger that private investorscould face losses under European bail-in rules, threatening the government ofPrime Minister Matteo Renzi.

Commerzbankexpects Italy to show GDP growth of about 1% this year and next, while Spain couldsee growth of 2.9% in 2015 and 2.5% in 2016. Ireland might experience growth of3.4% and 3.6%.

Ireland'sbanks are noticeably benefiting from a recovery. achievedprovision writebacks in 2015, boosting profits. booked low creditcosts, equivalent to just a fifth of operating profits. Both banks achieveddouble-digit returns; none of the 11 Spanish and Italian banks in the stresstest sample managed this.

Banksin Spain and Italy, apart from Valencia-based , were impeded bysignificantly higher credit costs in 2015, typically paying out more than halfof their pre-impairment operating profits to cover loan losses. Returns werenot impressive either in Spain or Italy, but were generally higher for theSpanish banks — a trend that continued into the first quarter of 2016.

Spanishbanks' figures are somewhat flattered by the exclusion of foreclosed andrestructured loans and othernoncore assets from the strict NPL ratio. According to PwC'sPortfolio Advisory Group report for the first quarter, Spain had €134 billionin NPLs and €240 billion of noncore assets. In terms of the Texas ratio,Italian banks are significantly worse off than their Spanish or Irish peers,with Unione di Banche ItalianeSpA, Banco PopolareSocietà Cooperativa and Banca Monte dei Paschi di Siena SpA all registeringhigher NPLs than tangible common equity and reserves at the end of 2015. Thisis also true of Banco PopularEspañol SA which has since launched a rights issue and announced aplan to aggressively reduce its nonperforming assets during the next threeyears.

Giventhat the impending EBA stress test underlined the need for Popular to act,these three Italian banks look exposed and might be required to raise capital.

Capital needs

Thestress test should reveal more. Morgan Stanley analysts have Banco Popolare and Monte dei Paschimight see their capital fall below the regulatory minimum of 5.5% whenstressed, although this could be mitigated at Banco Popolare by its and plannedmerger  with Banca Popolare di Milano Scarl.

Accordingto Credit Suisse analysts cited in MilanoFinanza, Intesa SanpaoloSpA and UBI should retain sufficient capital when stressed underthe adverse scenario. UniCreditSpA, by contrast, was thought by the analysts to have a capitalneed between €4 billion and €9 billion, while Monte dei Paschi has a possiblerequirement between €600 million and €3.5 billion.

"Montedei Paschi needs state aid or in the worst case scenario has to be resolved bya bail-in," the analysts said.

UniCredit, under its new CEO Jean-Pierre Mustier, hasalready moved to strengthen equity through asset sales. Monte dei Paschi isstriving to comply with a demand from the ECB to €27.7 billion gross NPLs, or €9.7billion net of provisions, from its balance sheet by 2018, Il Sole 24 Ore reported. This would take its NPLs to €20 billionwhich should prove sufficient if its current level of capital is sustained.Securitization of the debt is being considered through the Atlante bank rescuefund, while Monte dei Paschi might need between €3 billion and €4 billion toabsorb both NPLs and other soured or "unlikely to pay" loans. Thiscapital need could rise to €5 billion and €6 billion, and would be difficult toobtain from private investors given the bank's market capitalization, which iscurrently below €1 billion.

State aid could still be needed.

SNL Image 

Click here to access the SNL worldwide bank ranking template and view key balance sheet figures, performance and capital adequacy ratios for individual European banks.

Click here to view SNL's profile of individual European banks and view key information in both tabular and graphical format for your selected company.