Italian banks: from gold to kryptonite

Italian banks significantly outperformed European banks in Jan 2015 (+c10%, best-performing country in Europe), while they underperformed in Jan 2016 (-c10%, worst country in Europe). “Economic recovery, NPL improvement, better lending growth, optionality from M&A and investors’ low positioning in Italy all drove outperformance in 2015. In 2016, fear regarding asset quality (high stock of NPLs, regulatory scrutiny, lack of disposals due to pricing differences), as well as funding, lack of progress on M&A and investors’ high exposure to Italian shares, all drove underperformance”, said Citigroup in a report on Italian banks.
Too Late to Sell? — In November, Citigroup downgraded Italian banks to neutral on fear that in 2016 NII would decrease further and asset quality not improve as fast as hoped. “The trends were correct – remarks Citi – but in hindsight we were not negative enough. Recent share price moves in our view are not just linked to fundamentals, but also driven by loss of confidence. Is it too late to sell? If results disappoint on outlook and NPL trends do not show improvement, maybe not. On the other hand, better-thanexpected results could reassure the market and lead to a re-rating. Unicredit and Banco Popolare screen as more vulnerable than peers on capital and asset quality. For Unicredit, key data will be the CET1 and for Intesa sanpaolo the dividends. M&A will be the focus for Popolari”. Citi reduced Adj EPS by 8% on average for 2016/19E, mainly on the back of higher provisions.