Italian financial institutions have agreed to set up a €5 billion fund to shore up weaker banks, in a state-orchestrated plan to avoid a crisis in the eurozone’s fourth-biggest banking sector.
One of the new fund’s first actions will be to intervene in the recapitalisation of the Banca Popolare di Vicenza to the tune of €1.75 billion from next week, ahead of a similar intervention in the Veneto Banca in June, according to Radiocor, a news agency.
The decision came after a meeting Monday (11 April) between finance ministry officials and representatives of major banks and financial institutions.
The Italian government is anxious to ease concerns about its banking system, which is groaning under the weight of €360 billion in bad loans, a third of the eurozone total, and has fared badly in EU-wide stress tests.
State aid concerns
Rome has been keen to portray the fund as an industry initiative to ensure it does not fall foul of European rules against unfair state aid, and it left the announcement on Monday to a private fund manager, Quaestio Capital Management.
“Following meetings with a vast number of institutional investors, banks, insurers, banking foundations and (state lender) Cassa Depositi e Prestiti, Quaestio has gathered many subscribers to launch the Atlante Fund,” the fund manager said.
Quaestio did not give an overall size for the fund, but earlier on Monday Alessandro Vandelli, chief executive of mid-tier lender Banca Popolare dell’Emilia Romagna, put it at €5 billion.
Quaestio said the fund would help buy shares in upcoming stock issues at distressed lenders and purchase non-performing loans, focusing on junior debt, where investor demand is weakest.
It did not say how many investors had committed to the fund, whose name refers to Atlas, the god of Greek mythology who bore the heavens upon his shoulders.
Renzi hails fund creation
Prime Minister Matteo Renzi, who has made strengthening Italy’s banking industry a priority, hailed the fund’s creation and said the government would in the next few days pass measures to speed up bankruptcy procedures and loan recovery.
Rome, struggling under a public debt equivalent to 132% of GDP, wants the fund to be majority-owned by private investors to comply with European rules limiting state aid.
The European Union and Italy reached an agreement in January on creating a guarantee vehicle to help Italian banks sell bad loans, after the two sides spent more than a year trying to thrash out a solution that did not contravene EU rules on state aid.
Under the plan, the guarantees will be established at market prices and will therefore not be regarded as state aid.
Shares in Italian banks ― which have lost around a third of their value this year amid concerns over the solidity of the system ― rose for a second straight session on Monday as investors anticipated the announcement.
The two banks with the biggest bad loan mountain relative to their loan book ― Monte dei Paschi di Siena and Banco Popolare ― both soared 10%. UniCredit was up 2.4%.
Even larger banks like Intesa Sanpaolo and Unicredit climbed higher, gaining 3.1% and 5.1%, as the reported plans would ease their burden in guaranteeing the operations in buying shares in smaller banks.
The gains came in marked contrast to the repeated heavy losses suffered by banking stocks since the start of the year.
A backstop, not a cure
But investors and banking analysts warned the scheme would be no panacea for Italy’s banking sector, which is crowded with weaker lenders and has difficulty recovering bad debts.
Weeks of talks over setting up the fund took on added urgency due to a €1.76 billion cash call at Banca Popolare di Vicenza, to be completed by May 10.
UniCredit is sole guarantor for the capital increase and its own capital ratios could suffer if it was left with a lot of unsold shares. Two other rights issues totalling €2 billion loom: one at Veneto Banca and one at Banco Popolare.
“We struggle to see there being demand for the three Italian banks looking to raise capital,” Berenberg said in a note.
“We worry that a bail-in of an Italian bank may cause a chain reaction with the ripple effects felt across the European banking system.”
Analysts said Italy’s top banks appeared to be willing to put money in the fund out of fear that a bank collapse could trigger a run on deposits and drag down the whole industry.
But they said the scheme was a backstop, not a cure-all for Italy’s banking sector, which has long suffered from low profitability, weak governance and an excess of branches.
“In the long term, Italian banks need to consolidate, restructure and change their business models,” said Luigi Tramontana at broker Banca Akros.
Italy and the European Union reached agreement on 26 January to help Italian banks sell bad loans, averting a major banking crisis which had been brewing for over a year.
With its debt-laden economy struggling to recover from a deep recession, Italy was keen to reach a solution to aid a banking system forced to set aside capital to cover bad loan losses, limiting lending to households and firms.
According to the Bank of Italy, at the end of 2014, €237.5 billion worth of domestic bank debt was held by Italian households.
However, new EU rules, which came into effect on 1 January impose losses upon shareholders and large depositors before recourse is given to public money, scaring off potential investors.
Rome had spend more than a year thrashing out a solution with Brussels, having to drop the idea of a “bad bank” in the process which would have contravened EU rules on state aid.
The EU's Competition Commissioner Margrethe Vestager confirmed the deal reached in January would not constitute state aid.