Banks: Carige: what it tells us

Carige is the hot (political) potato. In our view, this is a case of all’s well that ends well in that the government took last resort measures and potential acquirers expressed interest . Carige should not be the investors’ nemesis but rather that of the coalition. The problem has been overstated in our view since Carige has many options on the table, some credible, other unrealistic or unfair for taxpayers. What Carige tells us is: even the most anti-bank, populist government dares not running the risk of letting a bank fail. Over the years, Carige managed to raise funds through multiple canals : debt-equity-swap, rights issue and Tier 2 CoCo placed with the deposit guarantee fund. Due to the existence of capital shortfalls and a likely Pillar 2 breach unless CET1 gets a boost, the second-tier bank is now living on the edge. The government set aside funds: €1bn for a recapitalisation, €0.3bn for guaranteed bonds ( Carige can issue up to €3bn of these). In order to shore up confidence in the banking sector and maintain BTP afloat, the government is left with no other choice than tapping public funds . M5S therefore has no alternative but to shelve its plan to replicate ring-fencing and cannot turn a deaf ear to a call for help. Such U-turn by th e coalition is a credit positive in our view . The missing piece in the jigsaw is: how i ) DID Carige stand up to stress tests and ii) WILL meet conditions to be declared solvent, which are preludes to a precautionary recapitalisation. Don’t count your chicken before they hatch! Money was set aside although any state intervention has not yet been cleared by the EU. Public interest must be established before that happens (see end of p.10). Any public solution must be contemplated after and only after a failed attempt to implement a private solution. Money is not an issue, the legal character of using it is. The super state fund gathered more than needed to recapitalise ailing banks (~€20bn initially, now less than €10bn). A game theory leading to … a fundamental debate within the board comprising i ) 3 ECB representatives (first-time ever), ii) a re ference shareholder ( Malacalza ) whose initial investment hundreds of millions is worth less than €25m and who blocked a rights-issue and iii) a government trying to avoid political spill-over, hence not willing to offer the bank on a silver plate to a hostile competitor like it was the case for the Venetos (see Liquidation al taglio ). The government eyes a nationalisation, which other stakeholders oppose. The Malacalza family is searching for a white knight or at worst a sustainable strategic plan to free the bank of its toxic assets. Many outcomes are possible: 1) a right issue; 2) M&A; 3) a precautionary recapitalisation combined with burden-sharing; 4) a resolution; or 5) a liquidation combined with burden-sharing (see opposite chart or p.7). Plan A is a private solution (M&A , rights issue ) – Plan B is a BMPS-like solution i.e. a nationalisation . Most importantly, we have the feeling the probability of a resolution occurring is still low and not yet on the table . P riority is a merger. According to press reports, there have been declarations of interest by competitors. One must also keep in mind that Carige is lacking under our most extreme scenario €1bn (NPL provision at market price + 1% management buffer). If addressed, then the precautionary recapitalisation could be triggered up to a certain amount. The certain amount is the capital shortfall identified under t he adverse stress-test scenario . Only then, can the State proceed with the capital injection if ECB considers the bank is “not failing or likely to fail ”. The condition to qualify as such would likely be fulfilled once NPL are offloaded (transferred to a SPV).