Key to the recapitalization of Banca Monte dei Paschi di Siena SpA, now hanging in the balance along with the very future of Italy's third-largest bank, was a plan to off-load €28 billion in bad loans via a securitization that could serve as a model for a much bigger clean-up of the country's financial system.
But whether the Monte dei Paschi nonperforming loan deal goes through or not, data shows that it would be a hard act to follow for many Italian lenders eager to reduce their NPLs, as it would require provisions so large as to wipe out much of their capital.
In order to package its bad credits into bonds and sell them, slashing the ratio of its nonperforming exposure to gross loans to 18% from 34%, Monte dei Paschi aimed to take €1 billion in additional provisions to boost its coverage ratio to 67%. As these provisions detract from common equity Tier 1 capital, standing at €7.85 billion in transitional terms at the end of the third quarter, the securitization itself added to the need for the equity raise, with the bank needing €4 billion after raising €1 billion from a debt swap. However, investors' apparent loss of nerve following former Prime Minister Matteo Renzi's defeat in a Dec. 4 referendum has left the whole transaction up in the air, with the threat of a government bail-out if no private money can be found.
With EU rules on state aid restricting the government's scope to provide support, securitization offers one of the few options for Italian banks to ease the burden of their combined €360 billion in NPLs. It has been tried once before when Banca Popolare di Bari SCpA bundled €471 million of bad loans into a €150 million bond in August.
Many other banks, though, may struggle to structure a similar deal. Banco Popolare Società Cooperativa, with a ratio of nonperforming exposures to gross loans of more than 22%, would have to raise €6.3 billion in additional provisions to increase its coverage ratio to 67%. This would wipe out its CET1 capital, in transitional terms, of €6.11 billion. Banco Popolare is involved in a merger with Banca Popolare di Milano Scarl, which is in a better position, having to raise only €1.44 billion to boost coverage to 67%, although its CET1 capital stock is lower than Monte dei Paschi's, at €4.09 billion.
Veneto Banca SpA's situation is also difficult, with its required capital raise of €3.24 billion exceeding its CET1 capital by almost 50%.
Banca Popolare dell'Emilia Romagna SC, Banca Carige Italia SpA, Unione di Banche Italiane SpA and Credito Valtellinese SpA would all require provisions equivalent to more than half of their CET1 capital.
Among other banks included in the European Banking Authority's recent Transparency Exercise, Banca Popolare di Sondrio SCpA and Credito Emiliano SpA would face hits equivalent to less than a third of CET1, while Banca Popolare di Vicenza SpA already has coverage of well over 67%.
Securitization may eventually have the potential to relieve banks of a significant portion of their NPLs, but the cost of provisions, together with the practical difficulties of bundling the messy collections of bad loans into bonds, mean that the process could take years, according to Sebastiano Pirro, a credit analyst at London-based hedge fund Algebris Investment, one of the biggest buyers of Italian impaired debt.
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