Investor appetite for Italian bank shares will in the future depend less on individual cases, which are being cleaned up, and more on economic factors, according to investors, top executives and analysts gathered on the shores of Lake Como for the annual Ambrosetti Forum.
Italian banks have have been doing better since the European Union started clarifying steps for cleaning up three troubled lenders and quarterly earnings showed progress on capital and bad loans. Now, both optimistic buyers and more skeptical investors agree that momentum for bank shares will depend mainly on acceleration of economic growth and higher interest rates, while poor governance and business model sustainability take the lead among remaining risks for the industry.
“We are very positive on Italian banks,” said Davide Serra, chief executive officer of Algebris Investments, in an interview on the sidelines of the event in Cernobbio, Italy. “The perception that systemic risk is over has supported shares in recent months and looking forward the ability of the country to exit from a sluggish path of recovery and expectations of higher interest rates will be a trigger to buy bank securities.”
London-based Algebris, which has 10 billion euros ($12 billion) of assets under management has committed about 20 percent of its portfolio into Italian bank equity and credit, including holdings in lenders such as UniCredit SpA, Intesa Sanpaolo SpA and Banco BPM SpA.
In June, the government committed as much as 17 billion euros to wind down Banca Popolare di Vicenza SpA and Veneto Banca SpA, and a month later got EU approval to give 5.4 billion euros of aid to recapitalize Banca Monte dei Paschi di Siena SpA, thus addressing what were considered the main systemic risks for the banking industry. Since then, shares of Italian banks have jumped almost 9 percent compared to a 2 percent uptick in the Europe STOXX 600 Banks Index.
Italy has very strong fundamentals and its healthy economic growth is pushed by exports, consumers and investments, so “the core banking activity in Italy is actually quite profitable,” said Jean Pierre Mustier, chief executive officer of UniCredit SpA, Italy’s biggest bank.
Though still lagging behind euro-area peers, Italian economic recovery looked more convincing this year with gross domestic product expanding 0.4 percent in the second quarter and a rise in exports of Italian goods over the same period despite a stronger euro. GDP could expand 1.5 percent this year if the current pace of growth is confirmed for the rest of 2017, Italian statistics institute Istat said in August.
“Italy is showing concrete signals of an acceleration of economic growth which can spur banks’ profitability,” said Francesco Confuorti, chief executive officer of Advantage Financial SA, a Milan-based investment firm. “This may be a boost in the short term, but banks should use this positive environment to address their governance and improve their structure, cutting branches and costs.”
Banks’ operating profit for 2016 was down by 27 per cent, mainly owing to a drop in income, Bank of Italy data shows. Italian banks’ operating profit should rise this year helped by continued growth in economic activity and the slight increase in the slope of the yield curve, the central bank said in its stability report published in April. The report also pointed out that the number will remain below 2015 levels unless action is taken to stop an increase in costs.
“The traditional commercial banking sector is not yet attractive for private investors,” Giancarlo Aliberti, a partner at Paris-based private equity firm Apax Partners said. “Recent restructurings have solved the short-term problem of lack of capital and are very positive for the banking system, but banks still have an infrastructure and business model that generates profits below what a private equity investor needs, which means that only selected opportunities where short-term restructuring is feasible might be attractive.”
Italian banking Association data shows subdued loan growth for the private sector, with loans to Italian residents up 1 percent at the end of June at 1.5 trillion euros. Banks have only increased lending to households, which as a whole have a low level of indebtedness, and to firms with high credit ratings, according to Bank of Italy reports.
While Italian banks have raised almost 30 billion euros of fresh money since 2014 to strengthen their balance sheets, they continue to be burdened with more than 170 billion euros of net non-performing loans.
The European banking system as a whole has a questionable level of capital and that could lead to problems in the next economic slowdown, said Jim McCaughan, CEO of Principal Global Investors, whose firm oversees more than $420 billion in assets. “For many banks, prosperity is very dependent on continuity of the economic momentum,” said McCaughan who suggests staying underweight on the European banking sector.
— With assistance by Jerrold Colten, Flavia Rotondi, John Follain, Lorenzo Totaro, and Chiara Albanese