As judgement day approaches on July 29, when the European Banking Authority will announce the results of recent stress tests, analysts at Credit Suisse have conducted stress tests of their own on leading Italian banks.
UniCredit (UNCFF) and Monte dei Paschi (BMDPF) are named and shamed as being likely to suffer significant capital shortfalls, while Intesa Sanpaolo (ISNPY) and UBI Banca received a clean bill of health from the analysts.
Credit Suisse said UnicCedit could have the largest capital shortfall, with a deficit of between €4 billion and €9 billion ($4.3 billion and $9.8 billion), while it is also exposed to Turkish political risk through its stake in Yapi Kredi. However, the analysts note that this capital shortfall is already priced into UnicCedit's stock price.
Monte dei Paschi faces a likely shortfall that could be somewhere between €600 million and €3.5 billion, according to the report. Credit Suisse projects, under its worst case scenario, that Monte dei Paschi would require state aid to right its balance sheet or faces resolution, or a forced liquidation.
The analysts note that Intesa Sanpaolo and UBI Banca are likely to have excess capital even under their "adverse stress test scenario."
Shares of Monte dei Paschi fell by 2.5% during the European morning, to reach lows of €0.31, while shares of UniCredit rose by 3.9% to touch highs of €2.24. Shares of Intesa Sanpaolo rose by 2.2%, to reach highs of €1.96, while shares of UBI Banca were unchanged at €2.81.
Italy's banks have been dashed upon the rocks of financial market angst in recent weeks after the U.K.'s vote to leave the European Union exacerbated concerns over asset quality and capital buffers across the sector.
Monte dei Paschi is the most troubled. Its share price has fallen by more than 75% so far this year, and its shares trade at 0.1 times tangible book value. But despite this, returns on tangible net assets are the weakest of all those in the sector at just 2.7%.
But the problem is much bigger. There are bad loans worth about €360 billion sloshing around the sector, an amount which is equivalent to one fifth of Italian GDP.
Both lawmakers and regulators have recently begun to call on Italian institutions to clean up their balance sheets. The Italian government established a specialist rescue fund, Atlante, to buy up bad loans and enable balance sheet repair across the sector.
However, Atlante is woefully under equipped for the task at hand given that it has less than €6 billion of capital. Credit Suisse estimates that, using leverage, it could afford to buy up to €18 billion of bad loans. However, they also estimate that somebody needs to buy at least €30 billion-worth of impaired debt to begin to address the problem.
Berenberg analysts estimate that the value that Italian banks attach to their bad loans is grossly inflated. This means that any loan sales could force Italian institutions to book steep write-downs.
In this scenario, further impairment charges and deeper losses might encroach upon already weak capital buffers, leaving some banks needing to raise capital in a disinterested market.
Credit Suisse analysts project, in their note, that the Italian banking sector will eventually require some form of government intervention, probably in the form of a European TARP, or troubled asset relief program. But for now, European Union rules on state aid prevent such actions.