by Giovanni Razzoli, EQUITA SIM Equity Analyst
Italian Banks are focused on fixing of the tail risks in the short-term. Executive summary
The findings of regulators (EBA and ECB) on Covid-19 as overly pessimistic scenarios in terms of dilution of CET1 (-233 to -380 bps)
In a relatively conservative scenario, EQUITA estimates a negative impact due to the Covid-19 of -85bps in the base case rising to -164bps in the worst case
Based on EQUITA estimates, Italian banks are sitting on €208bn of high-risk loans (ie 15% of the loan book) which are likely to suffer significant negative impacts because of the Covid-19
Equita estimates that 17% of high-risk loans (€36bn) may be impacted by the Covid-19, with a negative impact on the CET1 of 80 bps (from 13.2% to 12.4%), with NPE ratio increasing from 6.8% to 8.5%
The price action on banks since mid-February (-40%) is still incorporating a prudent scenario – despite the recent revamp of M&A speculations following ISP offer on UBI – with around 40% of high-risk loans being impacted by the Covid-19
Consolidation in Europe has accelerated and it will accelerate further, but in the past translated into negative returns
ECB approach looks more lenient on M&A, allowing to leverage on the SREP buffers
Positive SREP buffers are a key element in M&A transactions to pay for restructuring costs
Given current sector and company-specific conditions, an exit strategy of the MEF (Ministry of Economy and Finances) from BMPS represents a suboptimal exercise in the short-term.
Download the full report by Giovanni Razzoli, EQUITA SIM Equity Analyst in Milan.