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Carige crisis edging towards conclusion, direction uncertain
The most surprising turn of events is the U-turn by the country’s populist government in supporting the ECB’s intervention and urgently approving a series of measures to support the bank with public guarantees and potentially taxpayer money. “The U-turn shows that when it comes to threats to financial stability, populist arguments are set aside for the greater good. This is good news,” said Marco Troiano, executive director in the banks team of Scope Ratings.
State support will initially come via guarantees on new liabilities and/or borrowings from the Bank of Italy. In principal, it could also come via a precautionary recapitalisation.
In the meantime, temporary administrators have been tasked with preparing yet another business plan, alongside the not-inconsiderable task of finding ways to strengthen the bank’s capital, cut NPLs, recover market share in core segments and find a merger partner. The ECB has extended the deadline for the bank to sustainably comply with all capital requirements until the end of 2019.
“The measures taken with regard to Carige are very similar to what the previous government did for MPS,” said Troiano. “A government capital injection has not been requested at this stage. Plan A remains a merger with a stronger bank, possibly subject to reducing NPEs and cost of funding in the short term. Should this fail, administrators may apply for a precautionary recap, as foreshadowed by the government measures announced on January 7.”
The administrators said the precautionary recapitalisation – which would cover any capital shortfall under the adverse scenario of Carige’s stress test – should be considered “as an additional measure for the protection of customers, to be activated only as a residual option”.
Written into the Bank Recovery and Resolution Directive, precautionary recapitalisations allow banks to be recapitalised with public money without entering resolution. The tool was introduced in the broader interests of maintaining financial stability, dealing with systemic liquidity shortages or situations where an otherwise solvent bank is unable to raise capital from the market following a stress test or comprehensive assessment. It is intended to prevent scenarios where insolvency would cause a serious disturbance in the economy of an EU member state.
They cannot be used to cover past or future expected losses or confer undue advantages on recipient banks. Capital injections are strictly limited to the size of a bank’s capital shortfall and governments will have to be adequately remunerated for their investments. State recaps are intended to assist banks return to long-term viability on the basis of burden-sharing with shareholders and creditors and on receipt of credible restructuring plans. Bailing-in subordinated creditors is mandatory before any public capital can be injected into a bank.
They were used in December 2015 for Piraeus Bank and National Bank of Greece, and in July 2017 for Banca Monte dei Paschi di Siena. Banca Popolare di Vicenza and Veneto Banca unsuccessfully applied for precautionary recaps. Following pronouncements from the ECB that the two banks were failing or likely to fail, and from the SRB that resolution of either bank was not warranted on the grounds of public interest, both banks were liquidated under Italian insolvency law.
While size alone may not be enough to justify a state intervention, the prospect of financial disturbance potentially extending to other banks may have played part in the decisions around Carige. However, Scope analysts point out that asset risk in the Italian banking system has been reduced in the past few years. “Carige is an outlier in Italy. The larger banks are have made very good progress on the asset quality front and are well capitalised,” said Troiano.
The ECB’s January 2 decision to place Carige under temporary administration had come after the resignation of most of the bank’s board in the wake of the refusal of the reference shareholder to back a EUR 400m cash call. Carige had raised capital via successive rights issues in 2014, 2015 and 2017 to the tune of some EUR2bn-plus, but the equity infusions had failed to set the bank on an even keel.
Proceeds from December’s failed cash call were needed to reimburse in the form of shares the Italian banks – via the deposit guarantee fund – that subscribed in November to a EUR 320m deeply-subordinated issue of contingent convertible debt after Carige had failed to find investors in the capital markets. (A further EUR 80m of bonds had been set aside for investors). The bonds initially paid a coupon of 13% but the failure of the cash call triggered a step-up to 16%.
One of the administrators’ early tasks was to meet with management of the Italian Interbank Deposit Protection Fund’s Voluntary Intervention Scheme to seek a reset of the eye-watering terms of the subordinated debt issue. They have also started a due diligence process with investors with a view to cutting Carige’s NPE ratio to between 5% and 10%.
The ratio was 27.5% at the nine-month 2018 stage though the bank has taken action since then, including a EUR 964m GACS-backed static cash securitisation of a portfolio of Italian secured and unsecured non-performing loans (Riviera NPL S.r.l. See Scope rating report). The bank has also reached formal agreement to sell 80.1% of its consumer finance business Creditis Servizi Finanziari to hedge fund Chenavari. Closing is expected by 28 March 2019.
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