`Hold Your Nose' and Buy Beaten Italian Banks, Investors Say
(Bloomberg) -- The latest jolt to European political stability may be an opportune time to snap up Italian banking shares, many of which have just resurfaced from years of being in the doldrums.
“It’s definitely a close-your-eyes and hold-your-nose purchase,” said Ben Kumar, a London-based money manager at Seven Investment Management, which manages about $16 billion. “Unless you think that the euro zone is going to let Italy fail, there should be upside from here.”
The growing political crisis in Italy hit bank shares again on Tuesday with Intesa Sanpaolo SpA and UniCredit SpA among the worst performers in Europe. Pro-and anti-European forces are clashing in Rome, with another election expected as early as September after parties failed to form a government in the wake of a poll in March.
The current selloff evokes memories of the roller-coaster days in 2011 and 2012 when Italy, along with Spain, was struggling to weather the euro zone’s sovereign-debt crisis. Italian banks emerged from the crisis as among the weakest in the region and made huge efforts in the following years to revamp. Lenders raised about 23 billion euros ($26.6 billion) of fresh funds last year and 4 billion euros was provided by the state for the recapitalization of Banca Monte dei Paschi di Siena SpA.
UniCredit CEO Jean Pierre Mustier tried to calm markets on Tuesday, saying in an interview with Bloomberg TV that the current situation wasn’t comparable to the previous sovereign-debt crisis, because the economy was strong, banks have strengthened their balance sheets and clients were upbeat.
“There’s no fear in Italy, let’s be clear about that,” he said. “There may be fear in the international media but there is no fear in Italy when you speak to normal people in the street or you speak to companies.”
Still, the political turmoil over the past two weeks has rocked Italian markets as the country’s euro-skeptic populist parties began mobilizing for an early election and investors weighed the risk of Italy leaving the euro zone. The nation’s banks, which are down 23 percent over the past two weeks, double the size of the retreat in the benchmark stock index, have been in the spotlight because of the new government’s proposals that may reverse years of efforts to strengthen the banking system.
Banks including Banco BPM SpA, Unione di Banche Italiane SpA, Intesa Sanpaolo and UniCredit, have been the worst performers among Italian stocks since May 15. The sell-off has been so strong that Italian financial shares, which have been trading at a premium over European banking stocks throughout this year, are now valued at the steepest discount relative to regional peers in 15 months.
Measures introduced by the outgoing Democratic Party government, including a loan guarantee and rules to make recovery easier, helped Italian banks cut their pile of non-performing loans by about 25 percent since 2015 to 270 billion euros. They also sparked a thriving market for Italian non-performing loan sales.
“Italian banks are now stronger than in the past in terms of capital and are on a positive restructuring trend for both cost-cutting and reduction in non-performing loans,” said analysts, including head of equities Diego Franzin at Amundi Asset Management, which oversees about 1.4 trillion euros, in a note. “In the short term, we keep a prudent view, but when we see more clarity in the political landscape, Italian banks could rebound thanks to their cheap valuations.”
While Italian banks have “sound fundamentals” and are trading at a discount to European peers, according to Credit Suisse Group AG, further political uncertainty could boost banks’ cost of risk and endanger the pace at which they can cut their non-performing exposures.
“People haven’t had a good panic about the euro zone in a while,” Seven Investment’s Kumar said. “But things like European banks, including Italian ones, start to look really interesting here.”
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