What’s going on with Italian banks?
Italian voters rejected Prime Minister Matteo Renzi’s plan to change the legislature Sunday. Renzi will step down, and there will be a new election.
Shares of Italian banks continued to fall Monday. All of the banks that we are looking at are junk rated by Moody’s. It seems most are way overleveraged.
A recent article from the Independent states that Italy’s banks are too big to fail and too big to save. It lists assets at 4 trillion euros ($4.26 trillion) and bad debt at 286 billion euros.
Will there be continued secondary offerings? Will the Italian government buy shares? Is the Italian government big enough to bail out its banking sector? Perhaps the debt holders will become equity holders as in a traditional bankruptcy.
The first bank that we will look at is Banca Monte dei Paschi di Siena (MIL:BMPS, Financial) or “il Monte” as it calls itself. The bank was founded in 1472, 20 years before Christopher Columbus found America. In the latest quarterly report, we see 160 billion euros in total assets, 104.6 billion euros in loans to customers and 8.7 billion euros in net equity. A fool could see what’s going on here – the bank is overleveraged. Assets to equity of 18.4. It only takes a small drop in assets for the bank to be insolvent.
Net nonperforming loans to loans to customer are a whopping 21.5%. Net doubtful loans to loans to customers are 10.4%. Now I’m going to show you how useless a common metric that banks use really is. It’s the Tier I Ratio. This is safe investments like cash and government securities divided by total assets such as loans. It’s 11.4%, which sounds good but as we can see is misleading.
The bank has 29.32 million shares, the stock trades at 18.34 euros, and the market cap is 537 million euros. The bank attempted a 5 billion euros capital increase, but it looks like it might be unsuccessful. I noticed that when I tried to pull up financial information, the web site made me check what country I was in. It wouldn’t allow Americans/Canadians/Australians to look at press releases. Is this more Italian bureaucracy? Probably.
The next bank is UniCredit (MIL:UCG, Financial). UniCredit has 438.9 billion euros in loans, 404.4 billion euros in deposits and 44.7 billion euros in risk weighted assets. The Tier I ratio is 10.82%. The balance sheet shows 874 billion euros in assets and 51.237 billion euros in equity, a 17-1 ratio. Overleveraged. UniCredit too has many nonperforming loans. The bank may sell Pioneer Investments to raise 3.5 billion euros. There are 6.178 billion shares, the stock trades for 2.01 euros, and the market cap is 12.48 billion euros.
The next bank that we will look at is Banco Popolare S.C. (MIL:BP, Financial). In a report from June, Tier I capital ratio is 13.7%. Banco Popolare and Banca Popolare di Milano merged earlier this year. The balance sheet shows 122 billion euros in assets and 8.6 billion euros in equity. A 14.1-1 ratio. The company has 827 million shares, the stock trades at 1.84 euros, and the market cap is 1.52 billion euros. The shares were 100 euros apiece nine years ago.
According to John Mauldin, "Eighteen percent of the total loans made by Italian banks are now considered to be nonperforming. Nonperforming loans occur everywhere, of course, but not to this level. On an aggregated basis, the Italian banking system has less than 50% of the capital it would require to cover the bad debts. Estimates are that Italian banks may need 40 billion euros just to remain solvent. The banking situation gets even worse, as we will see."
So we can see that these banks are way overleveraged, and the stocks have gotten killed. It makes a value investor wonder if there is value here. If Italy breaks away from the European Union, will it print its own lira to bail out these banks? Could these banks be a buy at 0.01 euro per share?
Disclosure: We do not own shares.
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