By Chiara Albanese
The results of a year-long health check of Europe's banking
sector has investors souring further on the broader outlook for
Italy, whose banks failed the test in greater numbers than any
other country's.
Nine Italian banks failed the so-called stress tests, and Banca
Monte dei Paschi di Siena SpA--which would need to come up with
EUR2.11 billion ($2.67 billion) in capital to satisfy
regulators--was the biggest casualty of the yearlong exercise.
Although capital shortfalls are just one factor, analysts at
Goldman Sachs Group Inc. said the long list of failing Italian
banks cements concerns over the country's growth outlook.
"The main focus right now is on the growth outlook, and this is
the context in which the 'failure' of some Italian banks needs to
be seen," said Francesco Garzarelli, co-head of macro and markets
research at Goldman Sachs.
Aside from Monte dei Paschi, Banca Carige SpA, Banca Popolare di
Milano SCARL and Banca Popolare di Vicenza SpA also emerged from
the test with a collective capital shortfall of EUR3.3 billion,
according to the Bank of Italy.
"The long tail of weak listed and non-listed Italian banks,
mostly serving regional economic districts, will continue to be
seen as a headwind on GDP growth, and this may loop back into
nonperforming loans, " Mr. Garzarelli said.
Goldman Sachs recently downgraded its stance on Italian
sovereign credit from buy to neutral.
"Italian banks' troubles threaten to worsen the gloomy economic
outlook there and could lead fears about the sustainability of the
public finances to resurface," said Jennifer McKeown, European
economist at Capital Economics.
The capital injection needed in Italy raises a worrying
comparison with Spain's poor performance in the 2011 stress tests,
which led to an EU-funded bank bailout. "The banks involved may
struggle to raise much more capital privately," Ms. McKeown
added.
Investec Wealth & Investment, which has about GBP24 billion
($39 billion) in assets under management, had been adding exposure
to the European banking sector ahead of the release of the test
results, but it has steered well clear of Italian banks.
"It has always been less easy to understand the level of
transparency of domestic Italian banks compared to other European
banks. We mostly hold U.K. and Swiss banks," said John Haynes, head
of research at the firm.
While the banks that failed were already struggling, for Italy
the results are a demonstration of vulnerability.
Mr. Haynes added that the results will lead to a period of
introspection for Italy, with a likely short-term hit to
markets.
"There are two banks in Italy which have to be dealt with: Monte
Paschi and Carige. Together they represent 8% of market share in
this industry and they have a problem," said Massimo Massimilla, a
partner at Algebris Investments, a London-based asset manager
founded by Italian investor Davide Serra.
Monte Paschi, Mr. Massimilla added, is a systemic bank for the
country which requires immediate action. "Its loans account for 10%
of GDP. International investors would put new capital in the bank
but at a price which is 50% lower than what you see today," he
said.
Looking ahead, the results should act as a wake-up call for the
banking sector
"There are more banks than pharmacies per person, it's easier to
open an account than to buy an aspirin. But high costs and
overreliance on sovereign holdings mean vulnerability in a shock,"
said Alberto Gallo, head of macro credit research at Royal Bank of
Scotland Group.
The government's plan to improve credit, which includes speeding
up payments of public arrears, accelerating the bankruptcy process
and a change in the voting system, leaves untouched the main issue,
he added.
"There are too many banks and too few profitable ones. Without
structural consolidation, Italy's credit reforms may be once again
changing things so everything stays the same," he said.
Write to Chiara Albanese at chiara.albanese@wsj.com
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