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Italy likely to take a short-term, minority stake in Veneto banks

by Luca Davi

After Banca Monte dei Paschi di Siena (MPS), the Italian state will most likely also take stakes in undercapitalized Banca Popolare di Vicenza and Veneto Banca. But if all goes according to plan, only minority stakes and only for a limited time, according to Alessandro Penati, the head of the Atlante Fund that controls the two lenders.

On the sidelines of a conference, Penati discussed plans to revive the two banks, whose recapitalization has stirred up controversy with banking regulators in Frankfurt.

Estimates right now are for an overall an injection of €3-3.5 billion: up to €1.7 billion would come from Atlante 2: The fund, which had been originally been launched to invest in NPL, now instead might be used for equity.

“We want to use a precautionary recapitalization” by the state “in the right way,” he said. “We must remain shareholders and we must remain in control.”

The government's intercession would be temporary and in a minority role to help the plan along and provide guarantees to the ECB.

Now the issue is figuring out just how much the government should contribute, with financing coming from the €20 billion Savings Rescue Fund approved in late December.

It all really depends on the ECB. How the board of the Single Supervisory Mechanism, with input from inspectors, quantifies the capital gap, as it did with MPS, depends on the extent of write-downs and coverage requirements placed on deteriorated debt.

Penati and management, led by Fabrizio Viola and Cristiano Carrus, have put together a broad plan that ranges from deteriorated credit, to “unlikely to pay,” to projections on positive credit that could move into negative territory.

Il Sole 24Ore-ItalyEurope24 has determined that the ECB has required an NPE ratio of 18-19% at the conclusion of the plan.

The gap to reach the total should be covered in part through a conversion of subordinated bonds of the two Veneto banks, which are mainly in the hands of institutional investors, partly through state intervention.

The capital increase will be added to the approximately €3.5 billion already paid by Atlante between recapitalizations of spring 2016 and January 2017.

On the ECB’s desk the other issue to solve is how to deal with the €9 billion of gross NPLs held by the two banks: the best hypothesis is the spin-off of NPL from merged “good bank,” so as to bring out the intrinsic value, with the creation of two bad banks.

What is certain is there is no way around a precautionary intervention by the state. And with it, since the BRRD imposes it, subordinated bondholders will be involved, although it remains to be seen to what extent.

“The ECB wants a guarantee that the plan is fully funded from the start and has high chances of success,” stressed Penati.

In authorizing the merger between the two institutions, the ECB is putting some of its credibility on the line, the manager made clear, and it therefore wants guarantees. This is why the Supervisory Board is paying close attention to the case, and is providing support that is greater “in Frankfurt than in Italy.”

The marching order is to “get it done fast.” CEO Fabrizio Viola (”His leadership will be decisive in the restructuring, he has the credibility with the ECB to get it done,” said Penati) was at the European Central Bank recently and the plan should be presented to the boards of the two banks on February 21. The hope is to complete the recapitalization and the merger by September or the end of the year at the latest.

“All in nine months, if we get it done in a year it will be a record,” he said. There is no issue with the merger (“the ECB is telling us we should already consider it one bank and that was not easy, I consider it an enormous success”) and Penati has no doubts about the validity of Atlante's investment.

He was taking a veiled swap at the fund’s shareholder banks, who wrote down the value of their stakes.

“There's a long-term vision of zero. These devaluations make me furious. You invest in a failed bank, and then after six months write it down,” he said.

How much are the two Veneto banks really worth? “We'll see in three years,” when the new bank created by the merger has “the best ratios in Italy,” he said.