MILAN – Italian banking shares are getting battered this year as the government tries to bundle and dispose of billions of euros in bad loans while attempting to reform and consolidate the ailing sector.
Since the start of the year, Italian banks have lost more than 35 billion euros ($39 billion) in market capitalization as investors sold their shares amid concern about some 300 billion euros in soured loans, more than 30 per cent of the eurozone’s total.
Economy Minister Pier Carlo Padoan told the Senate on Thursday that the banks had been caught up in “volatility hitting the global markets,” with high level of bad loans on Italian banks’ balance sheets attracting investors’ wrath. He argued that the reaction doesn’t reflect “the economic reality of Italian credit institutes.”
“The Italian banking system is solid,” Padoan concluded.
Still, analysts and experts say there are multiple reasons that Italian banks have become the object of a sell-off.
“There’s a feeling that the government is struggling to do anything at all in terms of the banking sector,” said Wolfango Piccoli, managing director of the Teneo Intelligence think-tank .
While the government last year pushed through a reform of the mutual banking sector, its implementation has been delayed, and hoped-for mergers among the banks have so far not materialized. Only one is in discussion, and the terms become less attractive as long as banking shares are under assault.
Piccoli argued that the market reaction, meanwhile, put necessary pressure on the government to finally reach agreement with Brussels on a way to clean up non-performing loans. Still, the government was supposed to enact this week a decree on implementing the clean-up, along with a reform of the co-operative banking sector, but postponed it until next week.
“There is a sense of paralysis. The government is struggling and the market decided to test it,” Piccoli said.
Andrea Resti, a banking expert at Milan’s Bocconi University, said external factors are also at play, noting that the situation of bad loans at Italian banks has actually improved in the last year.
Weakness in China may be prompting investors to also off-load Italian bank shares as they seek safer investments, like German bonds, to increase the average quality of their portfolios. And he said the transfer of banking supervisory mechanisms last year to the European Central Bank in Frankfurt, Germany, may have increased scrutiny of the Italian sector, with officials pushing for banks to get the bad loans off their balance sheets.
“The ECB is growing nervous,” Resti said. “They very much would like to see banks offload those bad loans into separate vehicles to make sure that any losses won’t hit the banks. Instead, they will hit third-party investors.”