Morningstar | Italian Banks: A Greek Tragedy Unfolding?
"'We are not scared of the markets, we are not scared of the spread,' said the Five Star senator Stefano Patuelli outside the meeting." (Financial Times, Sept. 28, 2018). Hubris. Italian sovereign debt yields increased by 0.3% to 3.2%, and Italian banks' share prices declined by 8% on average in morning trade. Nemesis. Future governments having to make painful spending cuts. Catharsis (possible).In May we highlighted the risk to the Italian banking sector posed by the policies of the newly elected Five Star/Lega populist coalition government. Late on Sept. 27, the coalition government presented a draft budget in which it budgets for a 2.4% deficit over the next three years. This is still below the 3% deficit ceiling demanded by the European Central Bank, or ECB, but the market needs to see Italy moderating its spending. We are also not sure how realistic the estimates for GDP growth in the budget will be. All three of the coalition's most controversial policies are mentioned in the budget: lowering the retirement age, implementing a universal basic income, and cutting taxes. The budget also marks a clear defeat for the more centrist members of the coalition that argued for a more "ECB-friendly" budget.
However, new NPL formation is the major threat, in our view. We believe that Italian banks will have to increase their lending rates to Italian firms. Our major concern has consistently been an increase in new NPL formation. For the past two or three years, a relatively benign economic environment has enabled the Italian banks, especially Intesa and UniCredit, to unwind and dispose of significant portions of their vast NPL books. With new NPL formation picking up, the ability of Italian banks to absorb the write-downs required against the NPL books will diminish. The active secondary market for Italian NPLs will also become less liquid.
We maintain our no-moat ratings and our fair value estimates on Italian banks we cover: Intesa, UniCredit, and Mediobanca.
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