January 18 was a cold black Monday for the Italian Stock Exchange: the shares of Italian banks have all suffered losses of more than 5%. But one bank stands out above all, and it is Monte dei Paschi di Siena, which lost almost 15%. Since the beginning of 2016, the Monte Paschi share has left over a third of its value on the field. Since the end of October the value has more than halved. A Caporetto.
Seeing the title of an ancient bank, widespread throughout Italy, taking such a beating and filling the headlines of newspapers and news bulletins arouses a some concern among savers. Understandable. There are many who have purchased financial products from Monte dei Paschi or who are current account holders. So let's try to understand something.
What happened
The sell-off was mainly triggered by the news of a new ECB investigation into non-performing loans of European banks, an indication of further tightening of balance sheet supervision (Sole24Ore). To date, Eurotower has contacted five Italian credit institutions (UniCredit, MPS, Carige, Banco Popolare, BPM) to inform them that it will launch new investigations into the management of the so-called "non-performing loans"i.e. bank bad debts. And it seems that (BPER) will also undergo the same cognitive checks in the coming weeks.
Ultimately, Italian banks are not in excellent health, this is nothing new, but the combination of a weakening of the stock exchanges, the entry into force of the new regulations on bail-in and this news relating to the ECB's fact-finding investigation, have created the perfect storm on the securities of the sector.
How likely is MPS to default?
Although it has been strengthened from a capital point of view, Monte dei Paschi is one of the institutions most exposed to non-performing loans. The CDS (credit default swap) market gives MPS a probability of default at one year equal to 5,44%; just to have a reference, Intesa SanPaolo has a chance of default by 0,11%: we are therefore talking about a 50:1 ratio between the two banks…
We don't know if MPS will be affected by a bail-in, or it will be the right time to create and use the bad banks, or an attempt will be made to push towards a merger with another bank. Our opinion here in AdviseOnly is that, given the importance of MPS for Italy, every effort will be made to avoid traumatic solutions but, obviously, we don't have a crystal ball. So the risk of a bail-in, which affects shareholders and creditors is not laughable (think of the recent case of the Portuguese central bank which decided to move bond senior banks issued by Banco espirito santo laid down by the good bank to the bad banks...).
Who risks more and who less in the event of a bail-in
1) Current account holders
They would be the last to be involved. And only in the case of deposits exceeding 100 thousand euros, for the part that exceeds this threshold. So basically, don't panic.
2) Holders of securities accounts and safety deposit boxes
The money and assets are yours: the bank is only a custodian of your investments and there is no credit risk in this relationship between bank and saver.
3) Holders of mutual funds or Sicavs
If you have subscribed to mutual funds (or other forms of collective investment, i.e. UCIs) sold or managed by MPS group companies, the units placed by the bank do not have any problems, as the assets of these financial instruments remain your property. Again, there is no debt-to-credit ratio. The assets are separate from that of the bank and are kept by a custodian bank: this is a great advantage of mutual funds & C.
4) Wealth management customers
Again, there is no credit relationship with the bank, only a management delegation. The risk you take depends only on the nature of the products in which the portfolio is invested (which is usually quite diversified).
5) Shareholders and bondholders
According to the regulations on bail-in, in the event of a bank rescue, it is possible to reduce the value of the shares and some loans, or convert them into shares, to absorb the losses and recapitalize the bank, keeping it running and limiting the damage, and thus avoiding the default dry and winding up.
Il bail-in it follows a hierarchical logic, and those who have invested in riskier financial instruments bear any losses or conversion into shares before the others. The order of priority, I remind you, is as follows:
- shares and equity instruments;
- subordinated bonds;
- senior unsecured bonds;
- deposits, but only for the amount exceeding 100.000 euros (in the name of natural persons and small and medium-sized enterprises).
Then a senior bondholders with guarantees and depositors with less than 100 thousand euros can rest easy, while FrThere is some risk for shareholders and other bondholders. And that explains the massive sales these days.
A dutiful clarification is needed: anyone who has purchased bonds placed by the bank from MPS, but who do not see MPS as the issuer, is not a bondholder of MPS. So there is no debit-credit relationship with MPS and it's all outside the scope of the bail-in.
In conclusion, MPS suffers from a variety of causes. Even if the institution's assets and liquidity are at good levels, operators fear a possible bail-in. The future of the bank is not yet clear.
