Is there a case for Italian RMBS?
As expected, the EBA 2018 stress tests, which were widely reported on yesterday did not have much of an impact on markets generally, although it’s worth looking at some of the stresses.
The adverse scenario was indeed a challenging economic period spread over 3 years where GDP across the European Union declines by 8.3% versus the baseline scenario; EU commercial and residential real estate prices drop by 27% over the period; EU stock prices drop by 21%; long term interest rates move to 2.6% for the Euro area, but more so in the most debt laden countries such as Italy where they move to 4% (not unlike the current scenario); and credit spreads widen by around 300bps from the baseline projection.
There were 48 banks tested across the euro area, covering around 70% of the lending universe, and on average after the 3 year adverse test scenario the banks lost 410bps of capital with the average CET1 falling to 10.3%. Losses as always materially came from credit losses and provisions. Overall we found these results of little fresh interest as the banking system today is so well capitalised. It is worth highlighting that banks had more capital after the stress test than they had before going into the global financial crisis. The first banks that we looked at were the 2 big Italians, given the 200bps of unintended tightening that there has been in Italy, making the BTP element of the stress test quite relevant. Both suffered large losses but still had ample capital after the 3 years, with Intesa at 10.4% and Unicredito at 9.34%. For those who are more interested in the UK banks, a more active stress test conducted by the PRA will be released on December 5th.
The bigger news we think is away from the stress tests where we understand that the ECB is considering a new TLTRO. If this is the case then we see this as a very smart step by the ECB as this would provide unlimited liquidity to those banks that need it most for up to 4 years (if the term is similar to the last one). In particular the Italian banks would benefit most, as a potential funding squeeze caused by higher BTP yields would be averted (Italian banks currently hold around a third of the existing TLTRO balance, approx. €250bn).
Finally in Spain there is another issue to follow today, which is the Supreme Court’s opinion on the mortgage tax that the banks have been charging their borrowers. The banks have been correctly applying this tax, but the European Court of justice opined that the banks themselves should be paying this and not the borrowers. The impact of this potential change in law should be modest, however if the decision is applied retroactively, then the costs can really add up for the banks. There is some speculation that the period of retroactivity is going to be limited to 4 years, in which case it would be expensive but very manageable for the Spanish banks; however, if it is allowed to go back since inception it is likely to be a material hit, just like the long enduring PPI saga here in the UK. The court deliberated all of yesterday and the verdict is expected later today, so definitely one to follow.