Moments ago Fitch added some more fuel to the Italian bank fire when it announce it has changed its outlook on Italian banks to negative, a reflection of "its increased vulnerability to shocks following the asset-quality deterioration in legacy portfolios. A step-up in pressure from authorities and market participants on the sector to reduce the very high levels of impaired loans has increased urgency and risks for Italian banks"
From the press release
Italian Banks Outlook Negative as Bad Debts Persist
Fitch Ratings-Milan/London-06 December 2016: The Negative Outlook for the Italian banking sector reflects its increased vulnerability to shocks following the asset-quality deterioration in legacy portfolios, Fitch Ratings says. A step-up in pressure from authorities and market participants on the sector to reduce the very high levels of impaired loans has increased urgency and risks for Italian banks.
Profitability in the sector is frail. Disposals of non-performing loan portfolios could lead to losses that require additional capital. These are some of the factors driving the 2017 Outlook to Negative from Stable. Problems for a small number of distressed banks raising capital have added to these pressures.
The "No" vote at the constitutional referendum has further heightened political uncertainty and possibly reduced the capacity to implement economic reforms. The risks from political instability were one factor that contributed to our revision of the Outlook on Italy's 'BBB+' sovereign rating to Negative in October.
The referendum result could also damage the recapitalisation plans of some Italian banks, most notably Banca Monte dei Paschi di Siena and UniCredit, and have negative implications for the broader banking sector, whose attractiveness with investors has already reduced significantly during 2016. The sector's ability to access the institutional markets for funding and capital, which has become more difficult and expensive this year, could deteriorate further.
Asset-quality ratios in Italy have reached levels that are much worse than averages in other eurozone countries. The gross impaired loan ratio reached above 15% for most rated Italian banks, with the unreserved amount often multiples of their Fitch Core Capital. Provisioning costs are likely to remain high as "unlikely to pay" exposures migrate to the doubtful category.
Banks are stepping up efforts to shrink doubtful loans and have included reduction targets in strategic plans. Several banks are working on portfolio disposals, some of which may be finalised this year. Some may use the government guarantee on senior securitisation transactions. Atlante, the rescue fund that is undertaking its second fundraising, is likely to invest in mezzanine tranches of some of these transactions.
Significant disposals that materially improve asset quality could be positive for ratings. However, the disposals are likely to result in further provisioning and possibly more capital shortfalls for the banks involved. Portfolio sales could also result in risk-weighted assets rising for the remaining loans if the sales affect loss-given-default estimates at banks using internal rating models.
Capitalisation will remain under pressure in 2017 with a weak earnings outlook limiting banks' ability to build capital. Low interest rates, tepid economic growth and fierce competition for healthy borrowers are challenges for earnings. Profitability could also be dented by restructuring costs as banks focus on cost-cutting.
We also believe regulators could require higher capital buffers from Italian banks to compensate for the risk in their large non-performing loan portfolios and for the large portion of Italian sovereign debt held. This could result in additional capital requirements at some banks.
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Of course Italian bank stocks ignored this risk entirely and soared all day (and even BMPS ripped higher after exiting its limit down halt)