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Italy commits $19 billion for Veneto banks in biggest bailout

LiveMint logoLiveMint 26-06-2017 Sonia Sirletti

Milan/Brussels: Italy will commit as much as €17 billion euros to clean up two failed banks in one of its wealthiest regions, the nation’s biggest rescue on record.

The intervention at Banca Popolare di Vicenza SpA and Veneto Banca SpA includes state support for Intesa Sanpaolo SpA to acquire their good assets for a token amount, finance minister Pier Carlo Padoan said Sunday after an emergency cabinet meeting in Rome. Milan-based Intesa can initially tap about €5.2 billion to take on some assets without hurting capital ratios, Padoan said. The European Commission said it approved the plan.

The lenders will be split into good and bad banks, and the firms will be open on Monday, prime minister Paolo Gentiloni said. Intervention was needed because depositors and savers were at risk, he said. The northern region where they operate “is one of the most important for our economy, above all for small- and medium-size businesses.”

While an additional €12 billion will be available to cover potential further losses, Padoan said, the Italian Treasury estimates the fair value of the losses at about €400 million. That amount is already included in the funds provided to Intesa.

“Under current terms, this is a good deal for Intesa as it would increase earnings and market share at seemingly no cost to capital,” said Alexander Pelteshki a fixed-income investment manager at Kames Capital Plc.

Intesa rose as much as 4% in Milan trading, the most in two months, and was up 3.6% at 2.71 euros as of 9:03 am. The stock has gained 11% this year.

The government tried for months to find a way to keep the banks afloat, including an appeal to wealthy businessmen in the region to contribute to a rescue. Those efforts ended Friday when the European Central Bank said the two banks are failing or were likely to fail and turned the matter over to the Single Resolution Board in Brussels for disposal. The SRB, in turn, passed the issue back to Italian authorities to allow the banks to be wound down under local law.

Protecting savers

Intesa agreed to purchase the assets of the two banks for €1, the lender said in a statement Monday. The intervention will safeguard jobs at the banks as well as the savings of about 2 million households and the financial interests of 200,000 businesses, it said. The agreement gives Intesa the right to return to the liquidators at-risk performing loans with a face value of €4 billion should their quality deteriorate.

The Bank of Italy appointed administrators for the two banks, including former Monte dei Paschi di Siena SpA chief executive officer Fabrizio Viola.

Since the ECB’s decision Friday, Italy rushed to assemble the measures to carry out the plan because a local regulatory framework was required to allow the banks to open Monday. The deal crafted over the weekend is in line with the bloc’s state-aid rules. Shareholders of the two banks as well as holders of subordinated debt “fully contributed” to the plan, limiting costs of the Italian state, EU Competition Commissioner Margrethe Vestager said in a statement.

Different views

The solution will limit competition distortions because the two Veneto banks will exit the market, or be significantly downsized in the case of those activities that are transferred to Intesa, according to the commission.

Their liquidation with state support was hashed out less than three weeks after Spain organized an orderly sale of Banco Popular Espanol SA to Banco Santander SA without state aid, and amid talks to allow Italy to rescue Banca Monte dei Paschi di Siena SpA, the world’s oldest bank, through a so-called precautionary recapitalization.

In recent months, “bank intervention is specific to each troubled bank situation on its own conditions, with government and regulatory decisions on how to intervene influenced by multiple major macro factors,” said David Hendler, founder of Viola Risk Advisors, a credit analysis firm in New York state. “For global bank investors, the European banking sector and how to invest in it is very confusing, not uniform, and difficult to predict.”

Crucial decision

The decision to let Italy dispose of the two banks under national insolvency law was crucial in shielding senior debt from losses. The EU’s bank-failure law, known as the Bank Recovery and Resolution Directive, puts investors, including senior creditors, on the hook for losses if necessary to fund restructuring. The BRRD is part of the EU’s attempt to prevent the public bailouts seen during the financial crisis.

It was “a very pragmatic decision” to interpret the BRRD leniently in this case and shouldn’t affect investor confidence in the European banking union, said Marina Brogi, a professor of international banking and capital markets at Sapienza University in Rome.

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“To be effective and avoid sizeable unintended consequences it would have been better to give banks more time to modify their liabilities before” the new rules on banks resolutions came into force, she said.

The two banks were forced to seek government aid after they failed to raise capital from investors in 2016. After reviewing their books, the ECB in April said they needed about €6.4 billion of new capital, prompting a search for ways to bridge the gap.

Previously, Italy sought to rescue the lenders through a so-called precautionary recapitalization, using a mix of state and private funds as well as debt and equity writedowns to finance the removal of bad debts. The private sector balked at the plan.

Intesa offer

Intesa earlier in the week offered to take on the assets of the two Veneto banks on the condition that it wouldn’t harm its own capital and dividends. The proposal excluded soured debt, higher-risk performing loans and subordinated bonds, along with shareholdings and other “legal relationships.” A purchase would only move forward if it didn’t lower Intesa’s common equity Tier 1 ratio, the bank said.

The finance minister reiterated that the measures will ensure that senior creditors and depositors of Popolare di Vicenza and Veneto Banca would be protected in the wind-down under national insolvency law, and customers would see no interruption in service. Retail junior bondholders involved in the burden sharing -- who can be reimbursed up to 80% according to rules—will be totally refunded because Intesa said it can fill the gap.

Intesa chief executive officer Carlo Messina said in a statement the bank will provide €60 million for the reimbursement of retail subordinated bonds. The lender will use voluntary exits during the integration of the lenders’ assets and said it will provide an additional 5 billion euros of credit for the local region. Bloomberg

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