Market volatility, which had initially centred on BMPS after the bank published its January 11 statement setting out the summary of a letter from the ECB about draft prudential requirements and other matters, quickly enveloped other Italian banks as the narrative developed.

From a story centred on ECB concerns about BMPS’s market access, capital, profitability and NPL coverage, the story transformed into one about the supervisor’s actions in sending (non-binding) recommendations to SSM-supervised banks with formal time-frames to increase and align total NPL coverage ratios (i.e. including legacy stocks) with those of new NPLs.

The focus on Italian banks is unlikely to go away any time soon, even if sovereign event-risk lessens, as the run-off of TLTRO funds – of which the Italian banks were heavy users – will highlight ongoing funding and market access issues. For the time being, however, while the setting of time-lined increases in legacy NPL provisions caught the market off-guard, the statements the banks put out conveyed a business-as-usual demeanour:

• Banco BPM said it is well ahead in terms of ECB indications in relation to its de-risking activities and does not foresee any material impact on the Group’s current and prospective profitability and capital position.
• BPER Group said it does not foresee any economic and financial effects for the financial year 2018 and that the expected impacts in the next three years are not significant, also thanks to the sharp reduction in the stock of impaired loans achieved between 2016 and 2018, and the further reductions expected in the coming years.
• Intesa Sanpaolo said it does not envisage any significant impact in respect of targets and forecasts concerning its income statement and balance sheet for the 2018 financial year and the 2018-2021 Business Plan, already disclosed to the market.
• UBI Banca said no significant impacts are expected with regard to targets and projections concerning [the] income statement and balance sheet for the financial year 2018 and to those already disclosed in the 2019/2020 Business Plan.
• UniCredit said that since Q3 2016, it had reduced its NPE portfolio by more than EUR 36bn as of Q3 2018. As a consequence, it said its core bank NPE ratio was 4.3% in Q3 2018, in line with its EBA sample peers and it has committed to fully run off its non-core portfolio by 2021. In addition, UniCredit has a 62% NPE coverage ratio that is evidenced as highest in the sample of Eurozone banks in the recent EBA stress tests under adverse conditions. Consequently, UniCredit considers its NPE coverage fully adequate … UniCredit estimates that the regulatory dialogue with the ECB could lead to a low annual single digit basis point impact on its CET1 ratio for any additional coverage of its NPE stock, for each year up to 2024, the date mentioned by the ECB in its communication.

“The Italian banking sector as a whole has been making steady progress around capital, non-performing exposures and other performance metrics. Among the larger banks, the likes of Monte dei Paschi di Siena and Banca Carige are outliers. What these past days have shown, however, is that news flow still has the power to negatively affect in the eyes of investors a country whose banks still account for a quarter of all euro-area NPLs,” said Sam Theodore, team leader for financial institutions ratings at Scope Ratings. According to EBA data, EU-wide NPLs stood at EUR 714.3bn as of the end of the third quarter of 2018.

The ECB had laid out on 11 July 2018 its plans to address NPLs by setting bank-specific supervisory expectations for legacy and new NPL provisioning based on a benchmarking of comparable banks and guided by individual banks’ current NPL ratios and main financial features. Its aim was to “ensure continued progress to reduce legacy risks in the euro area and achieve the same coverage of the stock and flow of NPLs over the medium term”.

“It would appear the market was expecting a less prescriptive approach to dealing with legacy NPL stocks,” said Theodore. “The ECB actions clearly highlight the ongoing imperative under new supervisory board leadership to deal once and for all with NPLs.”

With regard to BMPS, the supervisor wants the bank gradually to fully provision for NPLs by the end of 2026. Beyond that, the ECB also pointed to specific concerns about the bank’s ability to keep to the targets of its restructuring plan, including capital and profitability targets. The ECB also pointed to significant Bund-BTP spread widening, which also led to concerns about BMPS’s capital position given its BTP exposure.

The ECB made specific reference to BMPS’s impaired access to capital markets, which was crystallised in its failure to issue a second line of Tier 2 notes in the fourth quarter of 2018. BMPS had sold an EUR 750m over-subscribed offering of 10-year non-call five Tier 2 notes in January 2018 (at a chunky 500.5bp spread over five-year swaps) but it had an additional Tier 2 requirement that it had attempted to cover in the fourth quarter of 2018.

The bank showed investors a new issue but failed to proceed on the back of heavy market volatility. Its January 2018 issue was by then trading at heavily distressed levels. The latest bout of volatility came just as BMPS was about to go on the road with a covered bond. The Italian covered bond market had re-opened in early January with a €750m five-year outing by Credito Emiliano and market participants were talking up a revival of OBG issuance in the wake of that re-opening and a reduction in Italian-inspired sovereign volatility following the passing of the 2019 budget.

Author: Keith Mullin:  k.mullin@scopegroup.com