Italian banks under pressure as political crisis looms

Citi sees large political risk from Italy’s upcoming referendum

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The headquarters of Monte dei Paschi di Siena bank in Siena, Italy

Banca Monte dei Paschi di Siena SpA shares were slammed to an all-time low Monday, highlighting the suffering among Italian bank stocks this year as the sector grapples with bad loans on its books and ultralow interest rates.
In Milan, BMPS BMPS, -7.29%  shares were yanked down 14% to close at 0.329 euros (37 U.S. cents), the lowest close on record, FactSet data show. Italy’s third-largest lender and the world’s oldest bank said the European Central Bank wants it to cut the amount of bad loans on its portfolio to €32.6 billion ($36.3 billion) by 2018, from €46.9 billion currently. BMPS has until Friday to respond to the ECB’s correspondence.
BMPS shares are veering toward a 73% slide for 2016, on course for their worst yearly loss on record.

But BMPS is hardly alone in facing sharp share-price declines so far this year. UniCredit SpA UCG, +2.66% Italy’s largest bank by assets, has slid nearly 65%, Banca Popolare di Milano SpA PMI, +2.65% is down about 64%, and Intesa Sanpaolo SpA ISP, -0.18% has given up 47%.

IT:BMPS

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€0.310€0.302€0.305€0.307€0.313€0.315€0.318

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Banks in Italy are weighed by about €360 billion in nonperforming loans, or unpaid debts, according to Italy’s central bank. That represents 18.1% of total loans to consumers. Roughly €210 billion of those loans have been taken out by borrowers now considered to be insolvent.
“Meanwhile, average return on equity has been less than 2% per year during the last five years, neither enough to clear out the NPLs at a decent pace, nor to attract more capital. So something has to give,” said Erik Nielsen, group chief economist, at UniCredit Research, in a July 3 note.
At the same time, concerns about bank margins have mounted as interest rates have been pushed sharply lower. Such moves have come after the ECB last year began buying sovereign debt throughout the eurozone and yanked the deposit rate deeper into negative territory as part of its stimulus efforts to boost economic growth and inflation.
Read: ECB: Italy’s households hit hardest by low rates
The European Commission last week allowed Italy to use government guarantees of up to €150 billion for short-term liquidity support to banks, The Wall Street Journal reported. Italian officials said they wanted to gird banks from the fallout of the U.K.’s Brexit referendum on leaving the European Union.
But other political leaders in the eurozone last week weren’t supportive of Italian Prime Minister Matteo Renzi’s aim to use public funds to inject about €40 billion into the embattled banking system. Rules from the EU require that creditors, not taxpayers, pay for the rescue of troubled banks.
Citibank, in a note dated July 2, said Italy’s upcoming referendum on reforming its constitution is “probably the single biggest risk on the European political landscape this year among non-UK issues,” because the vote outcome could hurt Renzi’s future as Italy’s top leader.
“It raises the risk of Renzi-exit at a time when the upstart 5 Star Movement are riding high in the polls,” in a country that has among the highest levels of euroskeptic sentiment, wrote Citi analysts.
The referendum is expected to held no later than October.