Significant risk for Italian banks stocks remains, Morgan Stanley warns

Even if to a less extent than what is happening in Spain, asset quality problems and funding requirements are posing a serious challenge to the Italian banking system which should not be underestimated, Morgan Stanley has warned today.

In a research on Italian banks, analysts at the bank said that without a coordinated European solution, a significant risk for Italian banks stocks remains, especially as capital levels and internal capital generation do not provide a sufficient buffer.

“Restoring capital levels may require €5-12b of fresh resources, and we calculate capital needs of 30-50% of market cap, or €12-21b/€24-42bln for the whole sector,” the banks said.

This figure does not look insurmountable for the government as it represents 1.5-3% of the country’s GDP, but its financing could be problematic as the Italian government already provides €2.4bln of capital support to the banks in the form of bonds (€1.9b to MPS only, pictured), analysts said.

“We are more concerned that market access for most banks will continue to be restricted and thus many will be unable to repay LTRO without shrinking assets. This, coupled with necessarily higher pricing, will continue to impact domestic credit flow. We see 6-10% of loans at risk for our universe, and tight capital plays a part too,” Morgan Stanley added.

Finally, Italy’s banks business model could also face major challenges.
According to Morgan Stanley, M&A could be one solution to those challenges, if combined with significant capacity cuts.

“We think Italian banks will be unable to cover their cost of equity for a long time, given low growth and low interest rates for longer.”
For this reason, a reduction of 30% in the number of branches operating in the country should be considered despite the social cost of this initiative.

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