He explained that despite what has been reported as being a grave situation there could be a relatively straightforward solution in his view.
“It’s easy to get lost in the many headlines proclaiming impending doom for Italy’s banking system, especially following the “No” vote in the constitutional referendum, or in the complex details of state aid and debt burden sharing,” Bodereau said. “But in our view, the big picture is simple. Italian banks are burdened by a large stock of bad loans which they have valued at prices higher than market participants are willing to pay. In our view, to unblock the situation, the banks need to mark down the value of the loans as well as raise equity to shore up their balance sheets.”
Bodereau said that the cost of this kind of intervention is ‘manageable.’
“We estimate that around €30-40 billion of equity injections are required to bolster Italian bank balance sheets,” he said. “First, €30-40 billion is not a large number in the context of Italy’s economy. Compared with the banking crisis in Ireland, which cost around 30% of GDP to resolve, and in Spain which cost close to 10%, the Italian banking crisis likely could be resolved at a cost of around 2% of the nation’s GDP.”
He also noted that a a significant portion of the needed funding could likely be met by the private sector, in a similar way to the large recapitalization package being put together by UniCredit.
The taxpayer portion could ultimately mitigated by the conversion of subordinated debt into equity, he added. Taking all this into account the final cost to Italian taxpayers of such a recapitalization could be as low around €10bn, Bodereau noted.
He conceded however that even though a solution seems readily available, significant risk remains.
“Of course, things could also get worse. Recapitalization decisions could get postponed or cancelled to fit the political calendar. Or fears of subordinated debt conversion could lead people to withdraw deposits from the more troubled institutions, weakening them further. It is also likely that more NPL skeletons will come out of the closet.”
In terms of profiting from European banks as an investor the value is at at the bottom of the capital structure in eurozone banks such as in AT1s and equities in Bodereau’s view, but he acknowledges the volatility ahead. He also favours Spanish and Irish banks over Italian ones. Although Italy’s NPLs may be manageable that ‘does not mean it will be a smooth ride.’
