Italian Banks: An unsolved Problem

Since the beginning of 2014 the ECB is monitoring closely the European banking system. We have lent too much money to those who are not able to return them and even if the Bank of Italy governor minimizes, the credits held by the Italian banks are of “red code”. The most affected banks above all are: Monte dei Paschi, Veneto banca, Popolare di Vicenza.

The ECB is using the following standard ratio to monitor the EU banking system: Bad Loans/Tot. Loans. In the EU, the average of this ratio, is equal to 6.5% while in Italy is higher than 16.5%. At the beginning of the recession, the amount of past due loans was equal to 40 billion (2007), while today they accounted for 200 billion. Credits were clearly given to those who did not deserve them. As of today, the gross amount of NPL is equal to 349 billion, while the past due loans are 215 billion, money that banks while recover with great difficulty. The impaired loans can be divided among the following: mortgages to households and big real estate debtors for a total of 10 million Italian involved.

A typical example of a real estate entrepreneur that was not able to return the funds to the bank its referred to the entrepreneur Antonio Muto, the latter got approved a loan from Monte dei Paschi for 27,5 million to build a mall, a parking lot and apartments downtown Mantua (north of Italy). The site was abandoned only after 13 million euro were spent and the company filed for bankruptcy. What about the remaining 14,5 million? Banks usually handles credit on work advancement. In this particular case, MPS was sending its commissioners to check upon the works, but the latter were just looking at the works being done without checking the amount spent to realize them. The reaming amount has mysteriously disappeared, leaving works men and engineers involved in the construction without a penny. It seems Antonio Muto got the financing thanks to its direct connections with the former CEO of the bank and surerly not from the merits he had. As of today, MPS has to carry 45 billion of NPL. In December 2016, the Italian government has launched a fund of 20 billion taken from taxpayers to save the bank. Another astonishing situation is the one of Cassa di Risparmio di Ferrara. This bank was recently rescued by other healthy bank while it has 2 billion in NPL of which 350 million held by 5 positions which were equal to the entire bank’s capital. The latter had basically borrowed its entire assets, a uniqueness example of irresponsibility. Moreover, financing decisions were not taken based on risk analysis but on a clientele’s favors.

One of the main “Italy’s debtor” is the real estate entrepreneur Francesco Caltagirone. He built hotels chains, harbor and airport but unfortunately one of its company filed for bankruptcy in 2012 covered by one billion in debts. Many are the banks involved: Banca Etruria, Veneto Banca, Banca Popolare di Vicenza, MPS, BNL, Cariage, Unicredit, Banco Popolare. What happened with Caltagirone is pretty common, all the banks involved, despite their willing, become shareholders of the bankrupt company hoping that with the sale of assets of the latter they can get back the funds previously borrowed.

Another brilliant case is the one of CIR group, owned by the Italian family De Benedetti. Sorgenia, the newly born energy company of CIR group, was entirely financed from the banking system for 1.8 billion of which 600 million only from MPS. The company is suddenly in crisis and the banks asked for a capital increase of 150 million. De Benedetti claims he has no funds to put in the capital increase and hence Sorgenia pass its entire ownership to the Italian banks with a problem to be solved of 1.8 billion. The strangeness is that De Benedetti had the money for the capital increase; the holding company CIR was indeed sitting on 400 million in cash. The losses were covered drawing on the funds from the savings of Italians.

Unicredit and Intesa San Paolo respectively have 79,7 and 63 billion in gross not performing loans but their total assets are so important that allow them to withstand to the impact. The worst Italian bank in terms of Texas Ratio, which is nothing more than the ratio of Net credit to tangible net assets, are Unipol Banca 380%, MPS 262%, Veneto banca 238%, Banco Popolare 217%. The rest of Europe as well as the United states have consolidated the banking system right after the crisis by injecting money in to the system. Germany injected 238 billion, Great Britain 162, Spain 50, United States 400. While in Italy politics recognized the problem too late and only after the bail in rules were set, so that no more state aids were allowed from ECB.

At this point, Italians banks have nothing to do than to solve the problem at home and clean up their balance sheet from impaired loans. Banks are facing two options: restructuring the credits little by little and treat them internally or sell them to foreign investors (vulture companies) at such a low price to probably force the bank into a capital increase. The ECB is pushing for the second option to lighten the system quickly, while the governor of Bank of Italy is supporting the thesis that by treating them internally the average rate of recovery is more than double: 40% against 15-20%. If Italy hadn’t underestimate the problem of NPL before Bail-in’s rules were set, the government could have created a specific fund to help the banking system in the same way the other European’s states did. But Italy is always late and only now 20 billion will be allocate to the system, in derogation to the bail-in rules, to strengthen the system. In the next weeks the ECB will express himself on how to treat the NPLs so that the interested bank will move accordingly. This been said, Italians banks need now to move fast and recover that absent credibility who has accompanied them for too long.