Is there still hope for Italian banking sector?


A better clue to the immediate threat to the solvency of Italy’s banking sector lies in the prices of its bonds. Many of these bonds, while trading considerably below their price at issue, provide a more sober view of the Italian banking sector.

7 December, AtoZForexMarkets are now focused on the banking system in Italy, following the referendum. Because financial assets signal the view of investors on how the lenders, including Monte dei Paschi, will further develop.

Italian banking sector: stock prices

On Monday, the stock price of Intesa, which is considered to be the healthiest in the country, dropped. But after the shares rebounded and are now trading higher, at its highest level since June. In some cases, the shares of Italian banks have declined due to the potential dilution. For instance, UniCredit is expected to announce a 13bn share sale this month.

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Monte dei Paschi’s shares plummeted 85 percent this year. Hence, investors expect high levels of dilution as part of a projected €5bn capital increase and the securitisation of €30bn of bad loans. Yet, current investors have the benefit of getting an equity tranche in a securitization of non-performing loans. In case the stock price of the bank declines further, the trust in the securitisation solution for the lender can be lost.

Italian banks' bonds

Bonds prices of Italy’s banks are a good indicator of the solvency of the banking sector. Although many bonds trade at discount, they provide a more actual outlook on Italy’s banks. UniCredit’s €1bn additional tier 1 bond is trading at 87 cents on the euro. Whilst, in February it traded at 71 cents. In the beginning of the year, the AT1 market implied higher risks than it does now, despite the resignation of Matteo Renzi and the referendum.

On Monday, Monte dei Paschi announced that the bank raised just over €1bn in a debt-for-equity swap. One of the bank’s bonds is trading below 30 cents on the euro. While, the bonds that can be exchanged for new equity in the bank, were trading over 50 cents in mid-November. A €369m tier 2 bond is trading at 54 cents on the euro and has dropped by 10 percent this week. If the decline of this bond continues, it suggests that markets are expecting a conversion of institutional subordinated debt to equity. At the same time, if prices will go up it would suggest that investors think the private sector solution is likely to go ahead.

Bonds of regional banks

Despite certain bonds are trading higher than anticipated, others have gone down. These bonds are usually held by smaller lenders presented regionally. For instance, Banca Popolare di Vicenza has been previously rescued by a private fund. One of its subordinated bonds in now trading at 47 cents on the euro. These prices suggest that regional banks are at risk as they were previously injected with new capital. Therefore, it may weaken faith in the effectiveness of future recapitalisations.

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