World Economy

Italy Lender Worst Performer

Italy Lender Worst PerformerItaly Lender Worst Performer

Banca Monte dei Paschi di Siena SpA was the worst performer in European regulators’, or European Banking Authority, stress tests, the only lender of 51 to have its capital wiped out in the exam, as the region struggles to contain an Italian banking crisis that the nation said won’t require state funds.

Monte Paschi’s fully loaded common equity tier 1 capital ratio, a measure of its resilience, dropped to a negative 2.4% in the adverse economic scenario, according to the test results released Friday, which put lenders through a simulation of a severe recession over three years. UniCredit SpA’s ratio fell to 7.1%, as measured under fully-loaded capital rules, the second-worst result of the five Italian lenders being examined, Bloomberg reported.

The exam intends to give supervisors across the European Union a common basis for measuring and bolstering lenders’ financial resilience. The test took on additional importance as the Italian government weighed methods to shore up Monte Paschi, sparking speculation that a shortfall would open the door to public support, though the nation’s treasury said Friday that such measures won’t be needed.

“The results are better than expected for the bigger banks, including Deutsche Bank and UniCredit,” said Carlo Alberto Carnevale Maffe, professor of business strategy at Milan’s Bocconi University. “What remains a worry is Monte Paschi which needs urgent measures to replenish capital.”

The test broke with past practice by having no pass/fail mark. More than three-quarters of the lenders maintained a CET1 ratio of more than 8% in the exam. Allied Irish Banks Plc, the second-poorest performer in the adverse scenario, had a CET1 ratio of 4.31%.

Deutsche Bank AG’s ratio fell 3.32 percentage points to 7.8% through 2018 from its starting point under the adverse scenario. It outperformed Britain’s Barclays Plc, whose fully loaded CET1 ratio dropped to 7.3%.

The legal minimum for all banks is a CET1 ratio of 4.5%. Regulators also ask banks to hold a series of buffers. On top of that, supervisors add additional requirements for each lender, while banks deemed systemically important must have an extra cushion of capital to help absorb the damage their failure would cause.

  Italy’s NPLs

Monte Paschi Friday approved a plan to tap investors for the third time in two years by selling up to €5 billion in stock to replenish capital, more than five times its current market value, contingent on the planned disposal of its entire bad-loan portfolio.

“As expected the plan will address both the shortage of capital and the offloading of non-performing loans,” said Jacopo Ceccatelli, chief executive officer of Marzotto SIM SpA, a Milan-based broker-dealer.

Italy had sought European approval to inject taxpayer funds into Monte Paschi, but the nation’s treasury, also said Friday that there was no need for such an intervention, though it had discussed potential options with the European Commission that would be compatible with state-aid rules.

UniCredit said it will work with the ECB to determine whether any additional measures or changes to the UniCredit capital plan are needed, the company said in a statement.

Italy’s lenders are saddled with about €360 billion of non-performing loans, a legacy of years of economic stagnation. Unlike Spain’s bailout in 2012, the Italian authorities didn’t force banks to resolve the situation. The ECB has now taken over supervision of the country’s biggest lenders and its demands for action have helped bring matters to a head.