Interview: No systemic crisis for Italy's banks, but more concentration needed: analyst

Recent stress tests carried out on major lenders across the European Union (EU) showed no systemic crisis of the Italian banking sector, but rather one Italian bank facing a major weakness, an economist said.

"Overall, the outcome of the stress tests has cleared the Italian system," Stefano Gatti, director of Master in Business Administration at SDA Bocconi University School of Management in Milan, told Xinhua in a recent interview.

"Besides Monte dei Paschi di Siena, which failed the test, and Unicredit, which positioned itself in the lower part of the ranking, our other banks performed positively."

"This suggests we do not have 'an Italian systemic problem', but one bank within the system that has problems," the economist explained.

On July 29, the European Banking Authority (EBA) published the results of EU-wide stress tests carried out on 51 major financial institutions to assess their resilience in case of hypothetical adverse economic conditions.

With respect to Italy, the check focused on five banks: Intesa Sanpaolo, Unicredit, Monte dei Paschi di Siena (MPS), Banco Popolare, and UBI Bank.

MPS, Italy's oldest and third largest bank, was the only one to fail, receiving the worst score.

The other four institutions "showed good resilience, despite the stringent nature of the exercise and the heavy tensions of recent years," the Central Bank of Italy said after the results were unveiled.

Unicredit performed less well than expected, but the same did other large European lenders that positioned in the lower half of the EBA ranking, the analyst noted. On the other hand, Italy's second largest bank by assets Intesa Sanpaolo emerged as one of Europe's strongest.

Nonetheless, fears about a possible contagion spreading from Italy across Europe seemed not to be soothed, and Italian banking shares remained extremely volatile all over the past week.

MPS shares registered heavy losses also despite a new bailout being announced before the EBA stress tests were published.

Under such restructuring plan, Monte dei Paschi would sell 27.7 billion euros (30.7 billion U.S. dollars) out of total 47 billions gross non-performing loans at about 33 percent of their nominal value to a securitization vehicle.

The stock would be split into three different "parts" according to the level of riskiness of the loans, and funded through securitization notes by private market investors (highest risk), the Atlante private equity fund (medium risk), or MPS shareholders (lower risk), the analyst explained.

The measure would be accompanied by a capital increase of 5 billion euros through private channels.

"The plan is laid out in its fundamentals, and the consortium coordinating the capital increase is led by JP Morgan and (Italian investment bank) Mediobanca," Gatti said.

"As such, I think the question is not if, but rather when the plan will be implemented."

Until then, uncertainty might easily keep fuelling banking shares volatility, according to the expert.

If successful, however, the plan might serve other Italian banks struggling with massive bad debts. Overall, the Italian banking system is in fact saddled with 360 billion euros of non-performing loans.

"If the mechanism outlined in the plan proves effective, allowing the MPS bailout to take off, the scheme might be seen as a model for other Italian banks to address their own non-performing loans."

However, the economist believed Italy's banking sector is going to face a double challenge in a long-term perspective.

"The first one is to try and reduce the credit risk through a sustained economic growth, which is a macro-economic variable though," he said.

The second factor would depend all on the banking system.

"Italian financial institutions will have to find a new way of banking in order to reduce costs and maximize their business, and to improve efficiency also through a organizational overhaul."

Italy's banking sector also suffers from a low degree of concentration, the analyst stressed.

Recent provisions passed by Prime Minister Matteo Renzi's cabinet should push towards a stronger aggregation: a 2015 reform indeed forced larger cooperative lenders to transform into joint-stock companies, and another law was approved in April 2016 to strengthen hundreds of small credit cooperatives.

Yet, more would be needed.

"All of the euro-zone countries suffer from a lack of banking concentration, although at various degree," Gatti explained.

"I expect this condition would lead European banks towards one decisive direction in the medium-long term and, consequently, also to attempts of cross-border mergers," said the expert. (1 euro = 1.11 U.S. dollars) Endit