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Bill Blain Finds A Conspiracy Theory Amid Europe's Bank Failures

By Bill Blain of Mint Partners

“Bring out you dead, bring out your dead… Here, he says he’s not dead.” <Crump>.. “Oh yes he is..”

Monte Dei Paschi, the world’s oldest bank, and Europe’s longest running banking pustule was lanced yesterday. Whether it cures the raging plague rife across Italy’s banking sector is another matter.
It’s been a fascinating summer in European Banking. We’ve got the horrible mess that is Coop-bank in the UK being addressed, we’ve seen Banco Popular in Spain being “sorted” and closed out, the Vento banks consigned to history, Bremer Landesbank getting a stern ticking off. We wonder who is next?

I have a little list of banks that never will be missed….

Such concerted action seems surprisingly energetic for the bank regulatory community… which is why I was fascinated by an article in the FT this morning – “Banco Popular’s failure leaves questions unanswered

I so love conspiracy theories early on a Wednesday – the FT article wonders where all Popular’s money and collateral went? A bank with a net asset value of €10.8 bln in April 2016 was worth – 2bln in June 2017? There is even a suggestion an ambitious Spanish Finance Minister and regulators keen to test their powers and garner top jobs in Brussels forced the pace towards the gallows. I particularly love the suggestion the regulatory murder of Popular was a counterstrike against Opus Dei, the Catholic super-villains looking to turn us all back to a love of Rome. Well worth a read and a giggle.

Yesterday’s bailout of MPS is convoluted… but with a nod and a wink, a little nudge here and a shove there, the rescue/bailout sort of meets EU criteria under state aid rules. It passes as a “precautionary recapitalisation” within the meaning of the Bank Resolution and Recovery Directive – apparently. 

The European commission approved state aid of €5.4 bln to recapitalise the bank, bailing in shareholders and “junior debt” to the tune of €4.3 bln, plus the securitisation (under an Italian State Guaranteed scheme going by the snappy title of “Garanzia Cartolarizzazione Sofferenze” (possibly the highest scoring Scrabble expression of all time..) of €26.1bln of NPLs to Atlante II (equity and junior) and senior notes sold to private investors. The bank plans to spend a further €1.5 bln to compensate retail holders of its sub debt who were “mis-sold”, according to the re-writing of the bank’s history.

Regulators around Europe take note. The Germans will be caught between outrage and wondering how to apply a variation themselves…

The EU says “these actions will help ensure MPS’s long-term viability"... Yeah, sign me up.

Italy’s finance minister described the MPS rescue as a “turning point in the progressive elimination of non-performing loans”. Really..??? Polite unconvinced clapping all round.

We’ve been taking a look at the rest of the Italian banking sector (well, those that are still in the game and not in the proverbial cart already), and we reckon it’s not nearly sorted. Forgetting the biggest banks, the Veneto Banks and MPS, we reckon the second/third tier of Italian banking still face a capital shortfall of around €15.2 bln.

In this modern world, €15.2 bln isn’t a particularly big capital short fall.. it’s about what the UK banks get fined monthly I think (US Readers – Mild Humour Alert), but it’s still a significant amount for Italy. It’s been haemorrhaging money into Italian banking with little discernible effect for years.

It was a busy day in Italy.. Banca Carige announced a €500mm capital call and the sale of €1.2 bln in NPLs.

Two banks stand out in Italy as worthy of watching. The capital raise by Carige y’day is well short of the €1 bln min requirement analysts had foreseen. Despite its NPLs of 34%, there are rumours it's being circled by Unicredito – which will looking to buy it cheap (and mostly fixed!).

The other name in the frame is Unipol Banca – which has a €3 bln NPL book and a coverage ratio of 36.7%, a figure pretty close to the number where the Germans told Bremer Landesbank to stop paying sub debt holders, and forced a recap.

It does strike me as fascinating that so many Southern European banks seem to suffer from impossibly large Non-Performing Loan books.. I wonder why? (Rhetorical Question – apparently it would be impolite to suggest some countries don’t have a culture of repaying debt….)

(Got to acknowledge the sterling efforts of our Summer Intern, Ben, who has been trawling the reports and internet on European banking the past few weeks!)

Otherwise, the rest of the world is focused on North Korea and all the risks that stem from its latest string, sealing wax and washing-up-liquid bottle rocket.

Relax.

They might have a very big rocket, but they nothing that will fit in it. Yet.

???