recapitalisation plans of Italy’s banks that
failed October’s stress tests may have been
approved, but their poor performance in the EU-wide exercise
– combined with recent fraud probes – has
sector-wide ramifications that will continue into next
There have been calls for governance reviews, predictions of
consolidation and an increase in non-performing loan (NPL)
sales throughout 2015.
In Europe’s most troubled bank sector, Monte dei Paschi and Carige have been the
worst offenders. Not only did they record the
country’s biggest capital shortfalls but members
of their management have recently been charged – and
Monte dei Paschi’s case convicted –
According to Paul Hastings partner Bruno Cova, these
banks’ stress test failings, combined with
investigations of their management, will further encourage the
trend of better corporate governance within banks.
There are rumours that non-capital related reforms could be
proposed next year. An area some say deserves further review is
so-called foundations’ control of the
- As the worst performing country in this
year’s EU stress tests, there is renewed
attention on Italian banks’ structural and
- Managers of Monte dei Paschi, the worst
performing bank in the October exercise, and Carige, another
failing bank, have been charged or arrested for fraud this
- The IMF has since warned about the ramifications
of foundations’ control of many Italian bank
boards, noting their opaque governance structures and
typically weak balance sheets;
- NPL sales are tipped to take off next year,
including through Italy’s novel securitisation
law and a new platform set up by the country’s
biggest bank and KKR
A peculiarity of Italy, foundations are the remnants of the
privatisation of the banking system in the 1990s. They were set
up by local governments to hold – and gradually sell
– bank shares, with proceeds to be used as public
But rather than disposing of their stakes, many of the
government-controlled foundations refused to give up –
or approve board proposals that compromised – their
cashflows or shares.
Foundations’ power has dwindled over the last
two or three years, with BlackRock and other investors taking
large stakes in the likes of Unicredit and Intesa Sanpaol.
studies suggest that foundations still control these
banks’ boards, the growing presence of foreign
investors has led to better internal governance.
"Banks are now far more market-friendly and less sensitive
to local patronage requests; they are becoming increasingly
market-players rather than power centres," said Cova.
But they still hold sway with more domestic focussed banks
– including Monte dei Paschi. Three managers of the
Siena-based lender received prison sentences in October for
concealing losses in an attempt to avoid diluting the
It’s an extreme example of an enduring issue.
And why it is not the direct cause of the bank’s
€2.1 billion ($2.6 billion) capital shortfall, it did play
This has created chronically
weak banks with weak capital structures
Following this year’s stress test results,
the IMF voiced its concerns regarding foundations. The
multilateral highlighted the entities’ opaque
governance structures, and noted that banks they control tend
to have weak asset quality and be less resilient to shocks.
"Certain banks’ ownership structure unwittingly
created a system whereby banks’ management could
not put propose a rights issue, as it would have been shot down
by their majority shareholders," said Cova. "And this has
created chronically weak banks with weak capital
Compared to other countries hit hard by the eurozone crisis,
including Spain and Ireland, Italy did not impose restructuring
or other measures on its banks. This, combined with
foundations’ governance shortcomings, has
motivated many lenders to simply try to weather the storm
– including through short-term, cosmetic measures
designed to make their financials appear stronger.
Cultural and governance issues aside, balance sheets need
improving. This means deals – particularly those
Market sentiment has improved since last year, making
lenders more willing to write-down or sell bad debt.
"Banks are increasingly considering the sale of distressed
debt, now that there is more confidence in their balance
sheets," said Cova. "Those transactions had disappeared from
the market, but we have now seen some sales and signs of
Giuseppe Schiavello, partner at Gianni Origoni Grippo
Cappelli & Partners in Rome agreed, adding that next year
is expected to see a boom in NPL transactions.
This dealflow could be propelled by some novel Italian deal
structures being used to offload these portfolios. An amendment
to the country’s securitisation law that took
effect in February removed the requirement for underlying
portfolios to be comprised of assets with common identifiable
"The fact you no longer need to identify enterprise
receivables on the basis of certain common criteria means banks
may have greater leeway in compiling a portfolio of diverse
receivables for a single securitisation deal," said Schiavello.
"So the process has more flexibility in that sense."
"Securitisation is one of the few areas in Italy where there
is a lot of clarity and certainty," said Paul Hastings partner
Alberto Del Din, adding that these recent tweaks make it more
Another way lenders may be able to offload their NPLs is
through an innovative new platform set up by
KKR, Unicredit and Instesa. The arrangement sees the
private equity firm turn the banks’ troubled loans
into capital for struggling companies.
While this platform has been custom-made for
Italy’s two biggest banks, it is possible for
others to join, or alternatively set up copycat platforms
tailored to their own needs.
In addition to NPL transactions, some sources expect an
increase in M&A with smaller banks merging with larger
competitors. This is expected to provide opportunities for
foreign banks looking to follow in the footsteps of other
foreign investors and gain a foothold in the market.
Bank capital report 2014
European stress tests: impact report
Italy’s NPL solution