On The Unsustainable Losses Of The Italian Banking System

Tyler Durden's picture

While not in the throes of a real estate crash, Italian banks are seeing a sharp deterioration in the quality of their assets. And while Italy's bond spreads head back to pre-crisis lows, as BofAML's Alberto Cordara notes, the ongoing pace and depth of asset quality deterioration further erodes the banks' ability to help Italy on the way back to growth. Critically, the lack of demand for banks' NPLs suggests that asset valuations may be overstated, thereby posing doubts on the real solvency status of Italian banks (i.e. they are not being totally truthful about their balance sheet assets); which explicitly means more capital is needed and soon. The rate of acceleration in newly impaired loans is staggering as it appears the current recession, driven by falling internal demand, is more insidious than the export-led crisis in 2009. And no matter how the Italian banks try to differentiate their bad loan composition, it is an ugly picture. The Italian House Price Index (IPAB) decreased 4.6% yoy as a result of tightening credit conditions, new property taxes and a difficult macro environment; and is unlikely to provide any assistance any time soon. Based on losses and capital, ISP appears best positioned, and BMPS worst - and do not expect a new LTRO to help as this is "not a normal economic downswing."

Via BofAML,

Our analysis shows that ISP has the highest equity buffer and is the only bank that could withstand a write-down of its current exposure without falling below the 7% B3 common equity ratio. Meanwhile, BMPS looks to be in a comparatively worse state.

When looking at the aggregate balance sheet of Italian banks it appears that the LTRO was predominantly used to replace the run-off of pre-existing short-term funding facilities and fund the purchase of government bonds. The shift in the asset portfolio at Italian banks spurred by the LTRO means that banks’ profitability is drifting further away from commercial lending and deposit-gathering activities.

A sustainable business model cannot be based indefinitely on central bank support. However, the current framework of low rates and rampant credit losses suggest to us that additional liquidity measures are desirable.

Italy's industrial base has one important particularity: 95% of companies have under nine employees. In fact the average is four. They are micro companies and have such, their balance sheet is modest and so is their ability to withstand prolonged contraction in demand (external or domestic depending on the line of business). The chart below shows the development in profits in the last ten years and how far we are relative to the average of 2002-2012 (we choose this period to include a meaningful period ahead of the 2008 crisis).

Italy has a second important peculiarity. It has significant household financial wealth and an aging population, including a high average age of entrepreneurs. This implies that on the margin more entrepreneurs are likely to decide to scale back operations as expected profitability has diminished due to weak turnover, high red tape and growing fiscal burden. On the margin, opting for early retirement looks like an increasingly appealing option. Be it because of severe balance sheet pressures or because of less attractive future returns, the economy is losing productive capacity at a disturbingly high pace.

Normalisation is not in sight: need of continued support So far, additional liquidity provided by the ECB has not resulted in a reactivation of the lending cycle but it has enabled banks to sustain revenues (NII, trading) through the purchase of sovereign bonds. We think banks may need strong support measures for longer than the LTRO term (early 2015) in order to absorb further credit losses. Alternatively, the system could undergo an immediate extensive clean-up, but this might require further capital injections at the weakest banks.

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zorba THE GREEK's picture

Anyone who keeps any money in a southern European bank

is either very stupid or extremely stupid.

Dr. Engali's picture

"Anyone who keeps any money in a bank is either very stupid or extremely stupid"

There fixed it for you.

Croesus's picture

"Anyone who doesn't keep any money in Gold or Silver is either very stupid or extremely stupid"

There fixed it for you.



Notarocketscientist's picture

Anyone who keeps any significant amount of cash anywhere (instead of buying gold) is a fool

LetThemEatRand's picture

Does this article mean to suggest that there is a major bank somewhere that isn't undercapitalized (by which I mean insolvent but for free money flowing from a tax payer backed central bank as needed)?

Dr. Engali's picture

" We think banks may need strong support measures for longer than the LTRO term (early 2015) in order to absorb further credit losses. Alternatively, the system could undergo an immediate extensive clean-up, but this might require further capital injections at the weakest banks."

Or you could just let the fucker die and the system purge itself. But that would make to much sense and rob you theives of the pleasure you recieve through inflicting misery on others.

GCT's picture

Ziggy thanks fo rrthe link.  Good read.  Rate will not be going anywhere soon in my mind.  What is everyone elses thoughts on this?


ziggy59's picture

They are plotting something... Similar to their ridiculous stress tests..
Maybe when Uncle Ben leaves, rates will climb...he has a legacy to maintain..ugh

Seer's picture

It's totally un-fixable.

Next question?

Seer's picture

Beppe Grillo was warning about this back in 1998:


And when he was running:


disabledvet's picture

the first thing any "dexpert" would look at is the size of the State. the irony that Germany has one of the lighter State footprints should be lost on NO investor. (same is true for Sweden in my book.) i'm still confused vis a vis Spain but France, Great Britain and Italy all have VERY large States...and this must be factored in in any investors "lending program." in other words if the bulk of bank lending goes towards the Government doesn't that just mean higher taxes? i do agree "Mr. LTRO has figured out a way to keep the State's financing costs in line"...but it's a long way from low interest rates to high growth (as Japan has known for decades, the USA is only now becoming aware of though not that bad and "Europe" is now realizing in this "it's all uphill from here" world.) liquidity is ALWAYS at a premium...that why you never mess with your Italian Bank (going back 800 years.) you can have all the capital in the world but it don't mean squat if it ain't being lent out "profitably." and it that's all the skilled labor "leaving for the Center and beyond"...well, let's just say there was a lot to said for ye olde City State days. Machiavelli, Michelangelo, Da Vinci...they might have been complaining about a lack of money but it wasn't because there wasn't any. indeed these were some of the richest places...if not THE richest places... on earth. http://en.wikipedia.org/wiki/Italian_Renaissance needless to say the beauty is still there for all to see. whoever screwed this one up...well, let's just say "firing them" isn't the word i'm looking for. still...maybe this is just the dawn of Anglo Saxon banking "for the world." who could have seen that one coming. (seriously.)

Seer's picture

Germany's fucked (how many times need I say this?).  All that seems so great with Germany is a mirage generated by giving all these other countries cheap loan rate in which to buy stuff from Germany.  Well guess what? when that credit dries up so too does Germany's exports (what, US market is going to hold them up- ha ha!).

I think it was Beppe Grillo that said that the rest of the EU was helping to fund the reunification of Germany.  I can kind of see this.

"but it's a long way from low interest rates to high growth"

As in might as well be on the moon.  There is NO MORE GROWTH- PERIOD!  Anyone promoting "high growth" has a death wish: it either means a rapid consumption of resources and or a credit bubble.

W T F II's picture



You really are a "seer".. Germany is f,d..!! The Target II balances are immense and basically a revolving credit line to the non-payers. How many s550s got delivered in Madrid or Athens last month..?? Methinks but a few...

Interestingly, Herr Weidmann has somewhat reduced the Target II balances in a last gasp before the s#!t hits the fan...

Canucklehead's picture

A Target II imbalance can be fixed with a bank holiday.

Yen Cross's picture

 Italian curve trading '20-40' basis points, (short end) above Italy?  No comment

TNTARG's picture

Non ti preoccupare. Ora c'è Enrico Letta, membro dell'Aspen Institute, la Trilateral Commission, il Bilderberg Group.

He and his associates would fix banks even at the cost of starving people and selling the Peninsola to the Qatar's Emir and whoever stands above him. Italy already is a huge NATO base.

W T F II's picture

xcept that Silvio would stiff folks in a hearbeat, like John Gotti did with his bookies when his losses mounted. Bunga-Bunga is STILL the power there...

asteroids's picture

It goes back to demographics. . This is what all QE lovers fail to understand. All that fucking money printing has to be paid back by someone working. For the next 20 years or so the old and the young will vastly outnumber workers. They will be supporting the non-workers as well as paying off this insane debt. I don't see it happening. I see collapse.

W T F II's picture

Ultimately...it's the MATH problem you describe...It can only end ONE WAY...

NEOSERF's picture

Given the complete disconnect between sovereign bond rates and their underlying risk, especially in light of Greece and Cyprus (soon to be Spain and Portugal), one wonders why there is a "market" for bonds at all.  Essentially governments have just fixed the rate and then let chips fall where they may...either bond holders make money or wake up one day and lose everything...this game of musical chairs in the bond markets is not healthy.