Italian banking shares are getting battered this year as the government tries to bundle and dispose of billions of euros in bad loans while attempting to reform and consolidate the ailing sector.
Since the start of the year, Italian banks have lost more than 35 billion euros (US$39 billion) in market capitalization as investors sold their shares amid concern over about 300 billion euros in soured loans, more than 30 percent of the eurozone’s total.
Italian Minister of Economy and Finances Pier Carlo Padoan on Thursday told the Senate that the banks had been caught up in “volatility hitting the global markets,” with high level of bad loans on Italian banks’ balance sheets attracting investors’ wrath.
He said that the reaction does not reflect “the economic reality of Italian credit institutes.”
“The Italian banking system is solid,” Padoan said.
Still, analysts and experts said there were multiple reasons that Italian banks have become the object of a sell-off.
“There’s a feeling that the government is struggling to do anything at all in terms of the banking sector,” said Wolfango Piccoli, managing director of the Teneo Intelligence think tank.
While the government last year pushed through a reform of the mutual banking sector, its implementation has been delayed, and hoped-for mergers among the banks have so far not materialized.
Only one is in discussion and the terms become less attractive as long as banking shares are under assault.
Piccoli said that the market reaction, meanwhile, put necessary pressure on the government to finally reach agreement with Brussels on a way to cleanup non-performing loans.
Still, the government was supposed to enact this week a decree on implementing the cleanup, along with a reform of the cooperative banking sector, but postponed it until next week.
“There is a sense of paralysis. The government is struggling and the market decided to test it,” Piccoli said.
Andrea Resti, a banking expert at Milan’s Bocconi University, said that weakness in China might be prompting investors to also off-load Italian bank shares as they seek safer investments, like German bonds, to increase the average quality of their portfolios.
He said the transfer of banking supervisory mechanisms last year to the European Central Bank (ECB) in Frankfurt might have increased scrutiny of the Italian sector, with officials pushing for banks to get the bad loans off their balance sheets.
“The ECB is growing nervous,” Resti said.
“They very much would like to see banks off-load those bad loans into separate vehicles to make sure that any losses won’t hit the banks. Instead, they will hit third-party investors,” he added.
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