Fitch Ratings-London-19 June 2017: The ECB's decision this month to put Spain's Banco Popular into resolution just a few days after the European Commission's agreement for precautionary recapitalisation of Italy's Banca Monte dei Paschi di Siena raises questions about the fate of two other troubled Italian banks, Fitch Ratings says.
Banca Popolare di Vicenza and Veneto Banca are in talks with the Italian and European authorities regarding precautionary recapitalisations, and Italy's finance minister said last week he expects a solution for the banks that does not include losses for senior creditors. The Italian authorities are particularly reluctant for senior debt to be bailed in, as many retail investors hold senior debt, and losses for them could hit financial stability. Senior bondholders would be vulnerable to losses if the banks were put into resolution, given their thin junior debt buffers. The Italian government passed a decree on 16 June that suspends reimbursement of subordinated bonds that mature within six months of a bank applying for a precautionary recapitalisation. This is to ensure buffers that should be available during burden-sharing do not decline because of debt maturities.
The resolution of Popular, the first under the EU's Bank Recovery and Resolution Directive, is a reminder that resolution is a possible outcome for Vicenza and Veneto, particularly if their precautionary recapitalisation falters. Their assessment for precautionary recapitalisation could be complicated by their plans to merge.
However, Vicenza and Veneto's circumstances differ from those of Popular. The ECB had determined that Popular was "failing or likely to fail" due to its recent stressed liquidity situation, whereas the Italian banks' liquidity is supported by their issuance of state-guaranteed notes. Popular had a strong and willing buyer, Banco Santander, with good capital market access, but there do not appear to be any likely buyers for the Italian banks. The stronger domestic banks in Italy all have to prioritise reduction of their own legacy impaired assets, and acquiring a troubled bank together with its impaired assets could damage the buyer and worsen the problem.
Many Italian banks contributed to rescue fund Atlante in 2016. The fund became the owner of Vicenza and Veneto after their capital increases. We warned then how the weaker Italian banks represent a contingent liability for the stronger and larger ones, and further calls on the stronger banks could put their creditworthiness at risk. Most have already taken significant impairments on their Atlante stakes in their 2016 financial statements.
The precautionary recapitalisation process in Italy has been long, adding to investor concerns about the banking sector and damaging the deposit franchises of the troubled banks being assessed. Vicenza and Veneto's market shares have declined, including in their home region of the Veneto, where they were historically strong. They are therefore becoming less systemically important, which may reduce the likelihood of precautionary recapitalisation.
Monte dei Paschi's precautionary recapitalisation follows its failed attempt to raise capital to cover its large volume of doubtful loans ("sofferenze"). But uncertainties remain. Receipt of public capital is conditional on the ECB confirming the bank is solvent and meeting Pillar 1 capital requirements, and on Italy obtaining formal confirmation from private investors that they will purchase the bank's portfolio of non-performing loans.
Our 'CCC'/Rating Watch Evolving IDR for Vicenza reflects our view that there is a real possibility that losses could be imposed on senior bondholders if the bank does not receive fresh capital in a precautionary recapitalisation, as conversion or write-down of junior debt alone would not strengthen capitalisation sufficiently.
We do not rate Veneto Banca.
<a href="
Press Release">Fitch Affirms Santander at 'A-'; Downgrades Popular's VR to 'f'</a>
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Francesca Vasciminno
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Christian Scarafia
- Senior Director, Financial Institutions