March 23, 2017 / 11:19 AM / 8 months ago

Fitch: State-Aid Requests Show Persistent Italian Bank Pressures

(The following statement was released by the rating agency) LONDON, March 23 (Fitch) Requests for precautionary recapitalisation by two mid-sized Italian banks highlight the persistence of pressures in the sector, Fitch Ratings says. The impact on Italy's sovereign rating will depend on the fiscal costs of bank support and whether it is accompanied by measures that successfully address the underlying weakness in the banking system. Banca Popolare di Vicenza's request for precautionary recapitalisation from the Italian Treasury on 18 March, alongside that by Banca Veneto, confirmed our view that the bank would require fresh capital to address a material capital shortfall. Under our criteria this would be a failure. This view was reflected in our downgrade of Vicenza's Viability Rating to 'cc' on 17 March. Vicenza and Veneto's requests follow that by Banca Monte dei Paschi di Siena (MPS) in late December. To be eligible for a precautionary recapitalisation, the eurozone's Single Supervisory Mechanism must consider the banks to be solvent and to meet Pillar 1 regulatory capital requirements. The authorities will determine the amount of any capital shortfall, and precautionary recapitalisation is subject to approval by the European Commission under State Aid rules. If a precautionary recapitalisation is not approved, the risk that a bank is resolved increases. Last year Atlante, a private fund financed by Italy's largest financial institutions, effectively took over Vicenza and Veneto when it injected a combined EUR3.5 billion of fresh capital into them. That the banks now need state support suggests Atlante's intervention bought time but did not address their underlying weaknesses. This weakens the credibility of Atlante as a vehicle for supporting the sector, and we believe it has insufficient resources left to inject material further capital into the sector. In December 2016, the Italian government set up a Treasury-funded EUR20 billion (1.2% of GDP) fund earmarked for precautionary recapitalisation needs. Government-backed recapitalisations through the fund are conditional on the banks presenting restructuring plans. MPS was the first bank to request that the fund intervene via precautionary recapitalisation. The European Commission is still examining its request and there is not yet clarity on the exact burden for creditors or the amount of capital to come from the state. One of the drivers of our revision of the Outlook on Italy's 'BBB+' sovereign rating to Negative last October was the high level of non-performing loans (NPLs) in the banking sector, which presents risks to GDP growth (by constraining lending) and the public finances (through the potential cost of bank recapitalisation). "Sofferenze", the worst category of loans, totalled EUR200bn at end-September 2016; total NPLs were EUR320bn, equivalent to 16.4% of total loans and 20% of GDP, although around 48% are provided against. Fitch expects stronger Italian banks to be able to address their asset-quality problems without state support, either by raising capital externally (eg UniCredit) or because they generate sufficient pre-impairment operating profits to compensate for credit charges. This week's ECB guidance on NPLs puts further pressure on banks with NPL stocks above the eurozone average, which includes most large and medium-sized Italian banks, to deal with these more effectively. Fitch's assessment of the banking sector's impact on Italy's sovereign rating hinges on two main issues. High public debt (132.6% of GDP at end-2016) limits the fiscal space to support the banking sector, and the costs of doing so could lead to debt/GDP peaking higher or later than we expect, which would add to pressure on the sovereign rating. We would also assess how effectively funds are deployed. For example, should they help reduce NPLs, or be conditional on some banks improving profitability and efficiency through consolidation, the possibility of future bailouts and the associated downside fiscal risks could fall. Contact: Michele Napolitano Senior Director, Sovereigns +44 203 530 1882 Fitch Ratings Limited 30 North Colonnade London E14 5GN Ed Parker Managing Director, Sovereigns +44 20 530 1176 Francesca Vasciminno Senior Director, Banks +39 02 879087 225 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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