Italy banks have overcome systemic risk, say finance elites

Bloomberg

Now that worries Italian banks will suffer a meltdown have subsided, lenders need to persuade investors they can make money.
Both optimistic buyers and more skeptical investors, gathered on the shores of Lake Como for the annual Ambrosetti Forum, agree that momentum for bank shares will depend mainly on an acceleration of economic growth and higher interest rates, while poor governance and business-model sustainability have become the main risks for the industry.
“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,” Davide Serra, chief executive officer of Algebris Investments, said. “We are very positive on Italian banks.”
London-based Algebris, which has $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 recapitalise 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 8 percent compared with a 1 percent uptick in the Europe STOXX 600 Banks Index.

‘Strong Fundamentals’
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.
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.
“Italy is showing concrete signals of an acceleration of economic growth which can spur banks’ profitability,” said Francesco Confuorti, CEO 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 percent, 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. The report also pointed out that the number will remain below 2015 levels unless action is taken to stop an increase in costs.
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.