Tuesday, January 10, 2017

Banca Monte de Pachi de Sienna

On December 30th, the Italian government finally bowed to the inevitable:  They rescued BMP from an ignominious ending -- bankruptcy has been avoided, although BMP is now a government owned bank.  The troubles surrounding the world's oldest bank go back nearly two decades where thoughtless growth, booking keeping skulduggery has after two bailouts has finally been nationalized, via the injection of Euro 6.5 billion.  Also two days ago BMP announced that they will raise Euro 15 billion in debt from the market, guaranteed by the Italian Treasury (so the Euro 20 billion total exposure has already been breached).

BMP has indicated that about Euro 22 billion or nearly 1/4 of its loan book is doubtful -- that recovery will be partial.  Many of the legacy assets of the banks never lived up to their promises when they were acquired and will, I suspect, be quietly shut down.  The outflow of depositors may be reversed, but why would depositors go back to  a bank that caused them such trouble to start with, depositors that have left, have found new homes for their funds, few will return.

A newer version of BMP may emerge in a few months/year -- so that Italy can continue to lay claim to having the world's oldest bank.  It will be a shadow of its former self, it will survive to justify the billion of Euro that the Italian Treasury has invested.  Investors got nothing, it should be noted that the bank has shown an incredible ability to shoot itself in the foot.  Two bailouts already made the institution tainted.

Today, Banca Intesa Sanpaolo sold some subordinated debt in the Italian market -- a Euro 1.5 billion issue was nearly 3x oversubscribed with a coupon of 7.25%.  As they say, "bankruptcy is so 2016!". The deeply subordinated bonds were popular for two reason -- the coupon and the level of subordination; there remains real "equity risk" below the new debt tranche of 13.1% -- almost twice as much as what similar bonds had a security in the December 2016 DB deal.

The question is what next?  The Italian government had a maximum amount available for bank bail outs of Euro 20 billion -- the total for BMP so far is around Euro 22 billion.  It is known that the other Italian banks are also in trouble, and poorly capitalized.  Clearly Italian banks will issue Cocos (these deeply subordinated debt instruments) but this is expensive money and the BIS deal is certain to create a benchmark -- other Italian banks will have to  pay similar prices and similar level of subordination.

Interesting times for Italy.

On a side note US bank stocks have been on a tear of late; since the November 8 election of Trump, bank stocks have been up about 30% (both BoA and JPMorgan and GS) and even some European banks have seen a "spring" in their pricing.  In fact, US financial stock accounts for nearly 50% of the rise in the DOW


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