ECB policy shift puts Italian banks in the crosshairs


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MILAN — Shares in Italian banks plunged on Friday, hurt by a rise in the country’s debt costs as the European Central Bank prepares to end purchases that put in its coffers a fifth of all Italian government bonds.

The risk premium Italian bonds pay over safer German bonds jumped the most in two years this week, setting a new high since May 2020 after the ECB delivered a stark warning on inflation and flagged a rate hike in July.

Italian banking shares are strongly correlated to the country’s debt costs. Lenders are large holders of Rome’s debt, which exposes to market volatility. They are also vulnerable to an economic slowdown caused by tighter financing conditions.

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The Bank of Italy on Friday cut its 2021 forecast for domestic gross domestic product (GDP) to 2.6% from 3.8% in January.

With its 2.8 trillion euro ($3 trillion) public debt, Italy has been one of the main beneficiaries of the ECB’s bond buying program, which has kept in check Rome’s borrowing costs.

“With real GDP growth estimates falling, debt/GDP at around 150% and the ECB ending asset purchases …, we’re getting more calls from investors on the impact on European banks from higher (Italian) BTP (bond) spreads in particular,” UBS analysts said.

Investors fret about diverging financing conditions across the euro zone, despite the ECB’s pledge to counter unwarranted fragmentation among member states as it tighten its policy.

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“A big buyer of bonds is leaving the market in fairly uncertain times,” UBS added.

Higher bond yields, which move inversely to prices, inflate financing costs for banks which must pay a premium over sovereign debt bonds to borrow on the market.

Italy’s banking index fell 8% by 1437 GMT, mirroring losses at heavyweights Intesa Sanpaolo and UniCredit.

Smaller peers fared even worse with Banco BPM down 11% and BPER Banca falling 14%. Shares in BPER had risen markedly before a new business plan on Thursday where Italy’s fourth-largest bank braced for higher bad loans.

Italian companies may struggle to sustain higher borrowing costs, hurting lenders’ balance sheets or weighing on public finances given that 40% of Italian corporate loans is guaranteed by the state.

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Higher yields can also hurt banks’ capital ratios. However, after suffering heavy capital losses during the sovereign debt crisis of 2011-2012, banks have moved to reduce their vulnerability to market swings.

Nudged by regulators to diversify sovereign bond holdings, they have also booked a higher proportion of Italian bonds among “held to collect” (HTC) assets that do not require “mark to market” because they are held to maturity.

JPMorgan analyst Stephen Dulake said that Italian banks had more than halved the share of BTPs held at fair value among assets available for sale.

“Given that the Italian banking sector has previously acutely felt the sharp edge of BTP volatility, we highlight … how the potential risks of Italian government bond holdings has been materially reduced over the last five-year period,” he said.

He noted Italian banks had beefed up their capital ratios in recent years, and cut domestic bond holdings by a quarter though banks’ BTP holdings still amount to more than core capital.

UniCredit CFO Stefano Porro this week dismissed concerns about higher Italian bond yields saying that over half of the bank’s 41 billion euro Italian bond portfolio was classed as HTC.

($1 = 0.9459 euros) (Reporting by Valentina Za; editing by Agnieszka Flak and Emelia Sithole-Matarise)



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