Italian Bank Shares Rise on Bad Loans Deal
January 27 2016 - 6:40AM
Dow Jones News
MILAN—The Italian government announced Wednesday the details of
the deal it struck with the European Commission to help Italian
banks manage their large portfolios of bad loans, pushing the
shares in some Italian lenders higher in early trading in
Milan.
Under the agreement, the Italian government will provide
guarantees based on credit default swap prices on Italian bonds
that are considered as risky as the bad loans themselves.
The government will help banks to bundle bad loans into bonds,
thus securitizing them, by selling guarantees to banks that will
make some tranches of bad loans less risky.
The details of the plan come after the European Commission and
the Italian government reached an agreement late Tuesday after
months of protracted negotiations on a plan for Rome to help
Italian banks lighten their load of nonperforming loans.
The economy ministry in a statement said the guarantees will
make it easier for banks to finance deals and shed some of their
bad loans. Italy will guarantee only the safest loans, and banks
can request a guarantee by paying a fee to the government.
The price of the guarantee will be calculated by considering CDS
prices of banks that carry a risk level equal to that of the loans
guaranteed. The price rises with the duration of the notes. The
government will provide a guarantee only if the notes have a rating
of investment grade or higher
The price of the guarantees was the most contentious part of the
negotiations, as the European Commission wanted to ensure they were
priced at market terms, so that they didn't violate the bloc's
state aid rules. Were the price of the guarantee to be lower than
what the market charges to insure comparable risk, then it would
have been constituted as state aid.
The Italian government has been eager to find a solution to a
problem that weighs heavily on Italian banks and the economy at
large, which has shrunk 10% since 2009, a deep contraction that has
hit local lenders hard. Years of poor management at the banks have
combined with Italy's poor economic performance to push the level
of bad loans higher.
Italian banks' gross bad loans, measured at their face value,
stood at €201 billion ($217 billion) in November, 11% higher than
the year-earlier period, according to the Italian banking
association, ABI. This amount considers only the worst quality of
bad loans, where the debtor is considered insolvent.
Gross bad loans were 10.4% of total loans in November, according
to ABI, the highest percentage figure since 1996.
Concerns about the bad loans have soared recently, helping to
send Italian stocks tumbling. An index of Italian banks has slumped
nearly 25% since the start of the year, although it partly
rebounded this week in anticipation of a deal with the commission
on the bad loans.
Italian banking stocks rose early Wednesday on the news of the
deal. Banca Monte dei Paschi di Siena SpA—the troubled bank that
has among the heaviest nonperforming loan portfolios—failed to
start trading on the Milan stock market for the first minutes of
the session due to excessive gains. The stock jumped 7% once it did
start trading.
While the FTSE MIB, the main Italian index, was slightly lower,
most banking stocks gained. Banca Carige rose more than 5%, while
UniCredit SpA and Intesa Sanpaolo, seen as stronger lenders, traded
just slightly over parity.
Write to Manuela Mesco at manuela.mesco@wsj.com and Giovanni
Legorano at giovanni.legorano@wsj.com
(END) Dow Jones Newswires
January 27, 2016 06:25 ET (11:25 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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