Italy's big­gest banks brush off sov­er­eign debt shock

The Pak Banker - - COMPANIES/BOSS -

For a change, vast hold­ings of gov­ern­ment bonds didn't hurt Italy's big­gest banks dur­ing the worst mar­ket sell­off since 2012.

Against the pre­dic­tions of some an­a­lysts that UniCredit SpA, In­tesa San­paolo SpA and Banca Monte dei Paschi di Siena SpA would suf­fer a cap­i­tal hit in the sec­ond quar­ter be­cause of a plunge in Ital­ian debt, buf­fers grew. Lower loan losses, declines in risky as­sets and hedg­ing helped strengthen fi­nances.

"The re­sults were a pos­i­tive sur­prise, with the best news com­ing from cap­i­tal," said Karim Ber­toni, who helps man­age more than $6 bil­lion at Belle­vue As­set Man­age­ment in Switzer­land. "Past fi­nan­cial crises and tougher rules by reg­u­la­tors forced lenders to re­duce lever­age and re­turn on eq­uity, but at the same time con­trib­uted to re­in­forc­ing cap­i­tal."

Im­prov­ing prof­its cush­ioned the im­pact of the bond-mar­ket rout as Greece teetered on the brink of ex­it­ing the eu­rore­gion. Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi's un­prece­dented eco­nomic stim­u­lus is help­ing to nudge Italy out of re­ces­sion af­ter lenders cleaned up their books and some banks in­creased lend­ing.

The pickup let In­tesa and Monte Paschi re­duce funds put aside for bad loans by 29 per­cent in the quar­ter, while UniCredit cut pro­vi­sions by 9 per­cent. All three also trimmed their as­sets weighted by risk.

"Higher earn­ings, in­tense de-risk­ing and bal­ance-sheet shrink­age are the main fac­tors push­ing cap­i­tal up," said Fabrizio Bernardi, a Mi­lan-based an­a­lyst at Fi­den­tiis Eq­ui­ties. "These trends will con­tinue." The three largest Ital­ian banks im­proved their com­mon eq­uity tier 1 ra­tioa key mea­sure of fi­nan­cial strength-by 0.3 per­cent­age points on av­er­age in the quar­ter ended in June. Their shares jumped af­ter earn­ings beat es­ti­mates, with UniCredit ris­ing the most in al­most three years. Ital­ian lenders have led the Euro­pean Stoxx 600 Banks In­dex higher this year, with Banca Popo­lare di Mi­lano Scarl gain­ing 72 per­cent and In­tesa 40 per­cent.

The im­prove­ments in cap­i­tal over­shad­owed the chal­lenges Italy's banks still face from slug­gish eco­nomic growth, nar­row lend­ing mar­gins and prof­itabil­ity that's be­low lev­els com­mon be­fore the fi­nan­cial cri­sis.

UniCredit may be forced to book fresh losses from the sale of its Ukrainian unit, ac­cord­ing to the first-half re­port pub­lished on the len­der's web­site this week, although its cap­i­tal ra­tios wouldn't be af­fected. UniCredit is in ex­clu­sive talks to sell JSCB Ukr­sots­bank to ABH Hold­ings SA.

The ECB pushed Italy's lenders to set aside more funds for bad loans and pad cap­i­tal buf­fers as it took over su­per­vi­sion of euro-area banks last year. Reg­u­la­tors also sought, with­out much suc­cess, to re­duce the co-de­pen­dency be­tween south­ern Euro­pean gov­ern­ments and their banks that threat­ened to spread con­ta­gion dur­ing the sov­er­eign-debt cri­sis.

Ital­ian banks were seen as vul­ner­a­ble to the bond sell­off be­cause they held about 405 bil­lion eu­ros of the na­tion's debt in June. They must re­flect price swings on se­cu­ri­ties in their trad­ing books each quar­ter. While that doesn't af­fect profit, it can erode cap­i­tal.

Ital­ian banks hedged their risks by us­ing as­set and in­ter­est-rate swaps to make their bond hold­ings less sen­si­tive to price swings. In­tesa said it low­ered the du­ra­tion of its Ital­ian bond port­fo­lio to about 10 weeks from four years. That lim­its the risk of declines, but also re­duces any prof­its should bond prices re­bound.

Carlo Messina, In­tesa's chief ex­ec­u­tive of­fi­cer, said the bank holds Ital­ian debt pri­mar­ily as a ready source of cash. "In past years, it was also a main con­trib­u­tor to the rev­enues of the group," he said on a July 31 con­fer­ence call. "Now, our view is that the main pur­pose is only to have a liq­uid­ity re­serve."

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