Italian banking crisis weighs heavily on European financials ETFs

Nov 30th, 2016 | By | Category: Equities

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The banking dilemma in Italy is growing, with concerns over the solvency of $400bn worth of bad loans. The debt could have serious economic consequences for the European Union, as Italy makes up 9% of the EU’s banking sector. There are also political consequences, as a new party in Italy is using the looming financial crisis to flame anti-EU sentiment, possibly prompting its own “Quitaly”.

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The world’s oldest bank, Banca Monte dei Paschi di Siena, is close to crumbling with non-performing loans making up 22% of its assets, as reported by Global Risk Insights.

The country is also gearing up for a national referendum on 4 December. Depending on the vote, more power could be assigned to central government, or it could remain dispersed regionally. Prime Minister Matteo Renzi has said he will resign in the latter case.

The Amundi MSCI Italy UCITS ETF (Euronext: CI1), which has almost a third in financial services, is down 26.6% over 12 months in euro terms. The same fund in sterling (LON: CI1) is only down 11% over the same period due to the pounds depreciation over this period. The fund’s next biggest sectors are utilities (22.3%), energy (16.5%) and industrials (9.6%).

The UK’s decision to leave the EU has not helped Italy, in that it encouraged fearful investors to withdraw deposits from what they perceived as risky banks. Additionally, accounting for slower economic growth in light of Brexit, central banks have also kept interest rates low. Italian banks mostly lend to households and businesses and are thus significantly dependant on the ups and downs of interest rates.

More bad news comes in the shape of non-performing loans (NPLs), loans on which borrowers have not adhered to scheduled payments over the last 90 days, which make up a quarter of the country’s GDP. The world’s oldest bank, Banca Monte dei Paschi di Siena, is close to crumbling – NPLs make up 22% of its assets, as reported by Global Risk Insights.

If a bank in Italy collapsed, bond and stock holders would have to bear losses of at least 8% of the bank’s liabilities before the state could step in with emergency funding. A third of Italian households would be affected by this “bail-in”, instead of a state bail out.

The 10-year Italian government bond yield has spiked from 1% in August to 2% by late November – the iShares Italy Government Bond UCITS ETF (LSE: IITB) is down 5.6% over the last three months in euro terms.

“This crisis along with the Brexit vote, has inflamed anti-EU feelings and made a possibility such as “Quitaly” a reality,” wrote Arthur Guarino at Global Risk Insights.

“Combining this with Italians losing faith in the euro, Renzi risking the loss this fall of a vote on constitutional reform, and the outcry of small savers losing huge amounts of money, Italy’s banking crisis will only be the tip of a very large iceberg of trouble.”

For more diversified exposure across European financials, the SPDR MSCI Europe Financials UCITS ETF (LSE: FNCL) has recovered to pre-Brexit levels but is still down more than 11% over the last 12 months in euro terms. It replicates the performance of 90 holdings with 5% in Italy.

The Lyxor UCITS ETF Stoxx Europe 600 Banks (EN PARIS: BNK) has slightly more in Italy – 7.7% – and is down 16.2% over the last year in euro terms.

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