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Italian state's U-turn on Carige support positive for struggling bank: analysts

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Italian state's U-turn on Carige support positive for struggling bank: analysts

The Italian populist government's change of heart about using state funding to support the ailing Banca Carige SpA is a positive development for the bank, analysts said.

The 5-Star Movement, which rules in coalition with the rightwing League party, has previously been vehemently against the use of taxpayers money to prop up struggling banks, but signed off a decree on Jan. 7 that will give mid-sized lender Carige access to a number of state-backed options, including recapitalization.

Carige will be able to avail itself of state supported guarantees of up to €3 billion for new senior bond issues under the decree. It would also be able to apply for a precautionary recapitalization. The decree also permits the Italian Ministry of Economy and Finance to underwrite new shares issued by Banca Carige to the tune of €1 billion.

This came after the ECB put Carige under temporary administration on Jan. 2 as an emergency measure to stabilize the bank after most of its board members resigned. The bank has been under duress as the result of its weak capital position and growing losses, which had widened to €168.4 million in the third quarter of 2018 compared with €55.5 million loss a year previously.

'The greater good'

"The U-turn shows that when it comes to threats to financial stability, populist arguments are set aside for the greater good. This is good news," Marco Troiano, executive director in the banks team of Scope Ratings, said in a Jan. 9 note.

S&P Global Ratings' Milan-based analysts were upbeat about the development, saying in a Jan. 9 note that it offers two main benefits: firstly, it will give some comfort to Carige's senior bondholders and depositors, since it buys the bank's administrators time to push ahead with existing plans for a balance sheet cleanup, and secondly, it will limit potential fallout to the rest of the Italian banking sector. Large Italian banks may otherwise have stepped in to bail out Carige if the regulator had deemed the bank to be un-viable, but following the decree it looks unlikely that heavyweight lenders would get involved in this capacity, the note said.

Analysts at DBRS also welcomed the decree:

"The government actions are a positive development for the sector as they diminish systemic risk, and a positive development for Carige, as it will help the bank execute some strategic measures and could reduce the prospects of resolution," a Jan. 9 note said.

Nationalization

While the Carige decree is an U-turn for the 5 Star Movement, it is by no means uncharted territory for Italy. Similar government interventions have been used to deal with Italian banking crises in recent memory, the DBRS note pointed out. Banca Monte dei Paschi di Siena SpA, Banca Popolare di Vicenza SpA and Veneto Banca SpA were all able to access state guarantees of senior unsecured bonds in 2017, although Monte dei Paschi alone was granted a precautionary recapitalization.

While the decree is welcome, it won't change much in terms of the Italian government's overall support for the banking sector, which S&P Global Ratings still assesses as "uncertain," according to the Jan. 9 note.

While analysts agree that while it is a positive development, the future of Carige still hangs in the balance. Deputy prime minister Matteo Salvini, a member of the League, said Jan. 9 that the government would go a step further and consider taking control of of Carige, but one of the commissioners running the bank poured cold water on his comments, saying that nationalization was neither necessary nor under consideration, a Jan. 9 Reuters report said.

Economy Minister Giovanni Tria also said on the same day that a market solution rather than a state intervention would be the preferable choice for Carige.

A number of larger European banks are reportedly sizing Carige up as a potential takeover target, including UniCredit SpA and BNP Paribas SA.