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Milan stocks take a dive as spread widens to highest level in 3 years

by Paolo Paronetto

European stock markets were off to a rocky start yesterday, closing lower amid concerns over the solidity of the euro area, while European Central Bank President Mario Draghi warned against relaxing financial regulation.

The Milan stock exchange was the worst performer in the continent (down 2.21%), while the yield differential between Italy’s 10-year BTP bonds and the German Bunds widened to a three-year record of over 200 basis points.

Banking shared weighed in Milan on the day UniCredit launched its €13 billion capital increase. The stock declined 6.87%, while rights dropped 18.85%. Shares and rights combined lost 12.8% compared to Friday. The banking sector will remain on the radar as top banks release their 2016 results in the coming days.

Among top lenders, Intesa Sanpaolo shares dipped 2.41%, reversing morning gains, when brokers welcomed the bank's strategy in terms of dividends, bad loans (NPL), and a possible tie-up with insurer Generali.

After Intesa released its financial results on Friday and confirmed the distribution of dividends for €4 billion for 2016, main international brokers confirmed their positive recommendations on the stock (”Buy” by Citi, Deutsche Bank and SocGen, “Outperform” by Credit Suisse), while the price target over 12 months was mostly between €2.7-2.8.

Societe Generale’s analysts cited the reassuring remarks by Intesa CEO Carlo Messina over asset quality. The CEO said that the bank’s NPL strategy is “bearing results”, Intesa intends to focus on collecting the troubled loans and does not plan “aggressive sales” in terms of disposal price. Messina on Friday also denied speculation of an imminent merger deal with Generali (down 2.34%), explaining that the bank will take all the time necessary to verify the industrial and strategic sense of an eventual transaction.

Bucking the negative trend, Telecom Italia closed up 1.41% after the group led by CEO Flavio Cattaneo reported 2016 revenues of €19 billion, down 3.5%, and consolidated core earnings (EBITDA) of €8.02 billion, up 14.4%. In the fourth quarter alone, turnover increased by 5.2% and EBITDA jumped 54.2% to €2.1 billion.

Moreover, Telecom Italia does not intend to pay dividends to holders of ordinary shares over the period of its 2017-2019 business plan, Chief Financial Officer Pier Giorgio Peluso said. During a conference call, he added that Telecom Italia aims to have a free cash flow of about €700 million in 2017 and 2018. Peluso noted that the group’s net debt fell by €2.2 billion in 2016 thanks to cost containment and this will continue in the coming years.