Italian banks smart at demand for more capital

Italian banks are due to make a comment later on Thursday on demands from Brussels that the system requires €15bn in additional capital.

But the mood in Italy was made clear by the head of Italy’s banking association, Giuseppe Mussari, late on Wednesday who said that he had sent a letter to the European Commission and other EU authorities expressing his «profound perplexity» that the Italian banking system should require more capital.

Italian banks are smarting at the edict from Brussels after the system, under pressure from Mario Draghi, the former Bank of Italy governor who is now heading to the European Central Bank, pressed them to raise €10bn of capital in the spring this year.

Sharp falls in their share prices since, rising funding costs and a squeeze on liquidity as a result of the eurozone contagion means many are still looking exposed.

Attention is most closely focused on UniCredit, Italy’s largest bank by assets, which raised €7bn from 2007 to 2009 but was the only large Italian institution to fail to go to the market this spring. Analysts estimate it requires €5-8bn of capital to put it safely within the new EU limits.

Senior bankers familiar with UniCredit say if a market window presents itself the bank, which operates in 22 countries, may be prepared to undertake a rights issue. Otherwise, it is expected that Federico Ghizzoni, its chief executive, will present a plan to shrink itself within EU limits by asset disposals and cost cuts in its cost-heavy Italian operations.

There is also concern about Italy’s midsized regional mutual or popolari banks, where senior bankers admit the need for capital may instigate a round of consolidation. In a test for the sector, Banca Popolare di Milano, a poorly-run regional bank, is expected to go to the market next week to raise €800m, more than its market valuation.

Of all the Italian banks, Intesa Sanpaolo, its largest retail bank, is best capitalised. A €5bn capital increase in the spring this year raised its core tier-one ratio to 10.2 per cent.

However, it has the largest exposure of Italian banks to state debt of about €60bn, which has put pressure on its funding costs, plus exposure worth 2 per cent of its loan portfolio to Portugal, Spain, Ireland and Greece.

Corrado Passera, chief executive, has said its retail branch network was a stable source of funding with 73 per cent of direct customer deposits coming from the retail business.

The strength of its plain vanilla retail business has also provided support for the issue of covered bonds which analysts say may remain a key source of funding in the future. As with all Italian banks, there is significant room for cost cuts across its branches in Italy.

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