Same again but different this time!
26 June 2017 by Gary Kirk
It has been an interesting period for the European banking sector, where, over the past month, we have seen orchestrated solutions to resolve ailing banks in both Spain and Italy. Of greater interest has been the adaption of EU guidelines to create a solution for each country. Despite, seemingly having defined rules on state support for banking resolutions across the Eurozone, the solutions sought by the Spanish and Italian regimes have been quite different.
In Spain, equity and subordinated bond holders were fully written down before the assets were sold to an acquiring bank (Santander) for €1; while in Italy a ‘bad bank’ has been created while the ‘good assets’ have been sold to an acquirer (Intesa). To summarise the Italian solution: the authorities liquidated the banks under Italian law, thereby avoiding a “resolution” under the European law, which means that equity and subordinated debt holders share the burden (100% loss). However, the state can protect against a serious disturbance, and therefore retail subordinated bond holders will qualify for a compensation scheme (covering 80% of their loss). In total, the state is setting aside a package of almost €17bn in potential compensation and guarantees for Intesa (to protect capital ratios), who, in return, will also help to partially compensate the subordinated bond holders (covering the remaining 20%). In each case senior bond holders have escaped unscathed.
The differing nuances of how country regulators interpret and handle banking resolutions can be discussed in detail, but for us the most interesting fact is that in both cases the real winners have been those acquiring institutions who have stepped in to help resolve the situation. Both Santander in Spain and now Intesa in Italy have acquired attractive assets at a considerable discount while the regulators have cleaned up problematic domestic lenders, and protected retail deposit holders while minimising any contagion in the sector.
While the Italian solution is very much a classic Eurozone fudge, we do see this as another encouraging development in the bank capital sector and further illustration of the relative value opportunities for those investors prepared to be selective, and for major banks willing to be patient. Intesa effectively has a deal to buy two banks for approx. minus €5bn, and if they need funding, its available from the ECB at -40bps. No wonder the stock is rallying.
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