|
As Euromoney went to press shares in troubled Italian lender Monte dei Paschi di Siena (MPS) were trading at 25 cents – a staggering 77% drop in its share price so far this year. It is not hard to see why; net NPLs stand at €24 billion, 21% of its €112 billion loans outstanding. Even if it manages to securitize the €10 billion of bad debt that the ECB has asked it to, it still faces a €5 billion capital hole that its rescue plan needs to fill.
But Italy’s problems do not begin and end with MPS, UniCredit also needs a capital boost of up to €10 billion. The NPL problem is now so acute and the capital hit to banks of selling so severe that a radical rethink is required.
By focusing on shedding NPLs the ECB is masking the real problem: these banks’ desperate need for capital. The Italian banking system needs equity in order to run its huge pile of NPLs down. Once banks are properly capitalized, they themselves can manage the reduction of NPLs. Private investors are always going to demand internal rates of return in excess of what this market can offer to buy these loans, and the banks themselves can run them at as low as 9% IRR and this would still be accretive, given where returns on equity are.