Serious Yet Another Angmo Cuntry Banking Crisis

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In charts: Italy’s banking crisis - FT.com
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Italy’s banks are at the centre of a storm. After the drama of Britain’s vote to leave the EU, the Italian banking sector’s travails threaten to become the bloc’s next big headache.

Banking shares have fallen more than 30 per cent following the referendum, which stoked fears about the cohesion of the EU. They are also suffering ahead of July 29 stress tests that many fear will shine an unforgiving light on the sector’s weaknesses and recapitalisation needs.

Matteo Renzi, the Italian prime minister, is seeking to convince Brussels to soften new rules that require investors to take a hit if banks are bailed out. He has yet to be successful.

But some of the facts behind Italy’s banking crisis are still not sufficiently known. These include the leading role of the country’s prolonged property slump, the interplay between the stagnant economy and loans gone bad, and a recent slowdown in the pace of the accumulation of bad debt.

Here is a breakdown of Italy’s banking problem, and its causes and consequences — in charts.

Bad debt build-up
After the financial crisis Italy’s banks incurred more bad debts than their counterparts did in other countries, as companies and households found it hard to repay their loans.

The amount of gross non-performing loans held by the banks increased 85 per cent to €360bn in the five years to 2015, to reach some 18 per cent of total loans (see above). The total stock of bad debts — the most distressed part of the pile — more than doubled over the same period.

Bad debt soared as a proportion of all loans, as the chart below shows. That eight-year long climb was finally halted and reversed this year, but the proportion of bad debts edged up again in May.

The brief improvement was due to a pick-up in Italy’s economic recovery: Italian gross domestic produce expanded 1.3 per cent since the final quarter of 2014, having shrunk in the 14 months before that.

Pressure from the property sector

Construction and real estate have played a huge — and under-appreciated role — in Italy’s banking problems. The sectors make up most of the country’s bad debt and more than 40 per cent of corporate non-performing loans — a proportion that is rising in the most recent data.

Alberto Gallo, head of global macro strategies at Algebris Investments, argues that the sheer length of Italy’s property slump has played a key role. Although the problems afflicting the country’s housing market may have been less acute than the busts that led Spain and Ireland to consolidate their banking systems, the drop in property prices was more prolonged. That resulted in more accumulation of bad debt.

By 2015, house prices had declined 14 per cent since 2010. Data released this week showed a further annual drop of 1.2 per cent in 2016 — just about the only fall in a EU country. (The Cyprus market is also failing and there are no data for Greece.)

The impact on the bank sector has been grave. On average two-thirds of Italian bank loans are secured by personal guarantees or real estate collateral. In smaller banks, the proportion can be as much as three-quarters.

Lorenzo Codogno, former director-general at the Italian treasury, warns: “The Italian property market is unlikely to show any strong recovery until there is a significant uplift in household real disposable income and business investments.”

Economic activity
The corporate sector has been severely affected by Italy’s weak growth. Companies hold the majority of non-performing loans, worth €287bn in December compared with €61bn held by consumer households.

At the end of last year, only 70 per cent of companies’ loans were performing compared with 90 per cent of consumer households loans.

But a rebound in the manufacturing sector since 2015 helped reduce corporate bad debts by €1bn in the six months to May.

Bank exposure
Not all Italian banks are the same, and nor are their exposures to non-performing loans. The latest market panic is focused mainly on Monte dei Paschi di Siena, the country’s third-biggest bank — and the world’s oldest. But the effects have rippled across the whole sector all the same.

More than one-third of all of Monte dei Paschi’s loans are non-performing. Its share price has dropped more than 50 per cent since Britain’s EU referendum and its five-year credit default swap spread, the cost of insuring against a debt default, is nearly 600 basis points compared with an average of 270 for all western banks.

Other big banks, such as UniCredit, Mediobanca and Intesa San Paolo, are in much better shape. These banks all have CDS five-year spreads of below 225 basis points — below the average for western banks.

Economic growth and bank restructuring have helped improve Italian banks’ overall profitability and reforms are likely to continue to ease pressure on the sector. In June Italy committed to speeding up insolvency procedures for non-performing loans, for example.

Further economic recovery is crucial to improving Italian banks’ outlook, but also vice versa. Repairing bank balance sheets remains a priority “to facilitate new lending and support the incipient economic recovery”, according to a recent IMF report.

According to Mr Codogno, the sharp decline in Italian banks’ stock after the Brexit vote will make it “even more difficult for banks to raise capital” — rendering it more difficult for them to write-off bad loans in the near future.

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