Italian banks under pressure following referendum result
Investors have turned their attention to Italy’s struggling banking sector following the resignation of prime minister Matteo Renzi.
Renzi quit after losing decisively a referendum on a proposed overhaul of the Italian constitution, with 60% voting against his measures.
President Sergio Mattarella is expected to appoint Renzi’s successor this week, bringing in a “caretaker” government that will attempt to force through political reform.
However, the setback has brought uncertainty over the recapitalisation of Italy’s banking sector.
Banco Monte dei Paschi – one of the country’s biggest banks – requires €5bn of fresh capital to meet stringent European rules, and is in talks with private-sector backers today in an effort to hammer out a rescue deal.
Azad Zangana, senior European economist and strategist at Schroders, said a “bail-in” of the predominantly retail Monte dei Paschi could be difficult, “especially if a lack of [political] leadership persists for too long”.
Alberto Chiandetti, fund manager at Fidelity, said: “Monte dei Paschi last week obtained less Tier 2 debt conversion than expected (€1bn versus the expected €1.5bn-2bn), but now the focus is on whether an anchor investor will materialise or not. If not, Monte dei Paschi needs a plan B, and, in that scenario, bank shares are likely to suffer most.”
UniCredit has also struggled to maintain the required capital buffers this year due to non-performing loans, and is due to raise more capital next week.
Chiandetti said the post-referendum environment would “no doubt weigh on this upcoming deal and put pressure on UniCredit shares”.
However, Roelof Salomons, senior strategist at Kempen Capital Management, said the banking sector’s problems were “only a matter of a fraction of the Italian economy and of the overall Italian government debt”.
Darren Ruane, head of fixed interest at Investec Wealth & Investment, added: “In general, the major Italian banks are less threatened by the referendum result because they already hold reasonable levels of capital and have been working through their asset quality problems.”
However, shares in UniCredit and Monte dei Paschi were down by 5.8% and 3.7%, respectively, at 1:40pm GMT versus their closing price on Friday.
FTSE MIB, the main Italian stock market, was up by 0.36%, having initially spiked by more than 3% in the first hour of trading this morning.
Italian government bonds have traded roughly flat today after an initial bout of volatility in early trading.
The euro weakened slightly against the dollar and the pound, but most commentators pointed out that markets had already priced in a rejection of Renzi’s proposals.
Away from the banking sector, investors voiced concern about Italy’s low growth, which would be exacerbated by political stagnation.
“[Italy’s] gross debt is the highest in Europe at 133% of GDP, and the debt servicing stands at 4% of GDP per annum,” said Zangana.
“Should interest rates rise in the future, the government will have little choice but to implement more austerity, hurting growth further.”
Jon Jonsson, a fixed income manager at Neuberger Berman, said: “From a market perspective, the ‘No’ vote will reduce confidence in the recovery of the Italian economy. It will also likely increase uncertainty stemming from rising euroscepticism across the euro area. Indeed, it will likely negatively impact Italian government bonds and risky assets in Europe.”
However, he added that markets “could fully price these developments sooner than expected and reach oversold levels”.
He said: “Patience is key, and there may be opportunities to use any substantial sell-off to buy attractively priced assets.”
In some corners, the referendum – which for many Italians had become a vote of confidence in Renzi rather than a vote on political reform – has been seen as the first of a string of important political events taking place over the next 12 months.
In the wake of Brexit and the election of Donald Trump in the US, commentators had warned of a wave of populism and anti-establishment voting across Europe.
However, Eoin Fahy, chief economist and investment strategist at KBI Global Investors, said: “I do not believe this is the start of contagion in Europe. People wouldn’t normally be focused on this kind of referendum.”
He added that the European Central Bank – expected to announce changes to its quantitative-easing programme on Thursday – would be able to step in as a buyer if bond markets were affected.