Italian banks: modest rebound in stock market and road uphill

Over the past month, the Italian banking sector has lost about -11.10 percent on the stock market. The Ftse Italia Bank, since March 10, when the U.S. federal authorities intervened to rescue Silicon Valley Bank, has been affected by the new phase of uncertainty. The bailout of Credit Suisse and speculation about Deutsche Bank then confirmed a heavy mood in the sector in Europe as well, encouraging the ECB to soften its tone on its next moves despite the half-point rise it made this month.

After the frost, signs of recovery in the sector were tentative for the time being. At the European level, the Stoxx Banks recovered 4.62 percent from the low reached on March 20 (with an overall red of -14.98 percent since the end of February). In Italy, similar; the Ftse Italia Banks recovered 5.39% from the March 17 low.

Some Italian institutions were harder hit than others, however. Mps, constantly plagued by the weakest link syndrome among Italy’s large groups, has given up 25.6 percent in the past month as of March 28. Credem and Bper lost 18.7 and 14.9 percent, respectively. The two largest groups, Intesa Sanpaolo and Unicredit are the least damaged by this phase, with a stock market loss of around 9.1 percent and 9.2 percent, respectively. Larger institutions, in the logic of a flight to bank deposit quality, could favor more solid and systemic banks.

“Thinking about what has occurred in the U.S. and European banking sectors, with the emergent acquisition of Credit Suisse by Ubs, on the Italian banking sector, the words of Giulio Tremonti come to mind, who, as Minister of Finance during the 2008 crisis, stated that “Italian banks were saved because they do not speak English.” In other words, the Italian financial system, especially after the consolidations of recent years, tends to take rather limited risks on the exposures it takes on,” financial advisor and founder of DLD Capital Scf, Edoardo Fusco Femiano, told We Wealth.

“That said, the global banking sector suffers at this stage from an imbalance between the management of funding and lending: rising interest rates create asymmetries between the cost of funding and the possibility of deploying this funding on assets that can remunerate it with margin,” he added, “this state of affairs is now structural and was largely predictable. Debt-ridden economies such as those in Europe and the U.S. cannot sustain such a high cost of money for long, and central banks now have to choose between financial system stability and fighting inflation.”

Banks on balance, the overview in the U.S.

In the U.S., the banking sector has been even harder hit, despite the solid protective measures put in place by the Federal Reserve and the Treasury Department, compounded by regulatory failures that have exposed the balance sheets of “non-systemic” banks to significant unrealized losses (due to the effect of rising rates on long-term bonds in the portfolio). Since the beginning of March, the S&P Banks index has lost 23.7 percent (red rising to -28.32 percent in the index dedicated to regional banks, while the S&P 500 stripped of financial stocks is up 1.76 percent, as of March 27. Even in the U.S., big banks such as Goldman Sachs, JP Morgan Chase, and Morgan Stanley suffered less backlash from the new phase of uncertainty.

As expectations for rate hikes have subsided on both sides of the Atlantic, growth stocks have picked up, as evidenced by the positive performance of the Nasdaq Composite over the past month, up 2.47 percent.

Italian banks the chances of a comeback

With the selling suffered by Italian banking stocks, has a buying opportunity opened up, or was it an appropriate retrenchment in the face of the future scenario? “On the valuation level, it is complex to express an opinion because, certainly, steadily rising rates can only bring instability to the financial sector,” said Fusco Femiano, “in addition, the centrality of this sector raises further questions about the consolidation of the stock market rebound that started from the October 2022 lows. If before the key issues in the markets were inflation and the tightness of the business cycle, today it is quite evident that a third one has been added, namely the tightness of the financial system.”

“Banking worries do not seem likely to abate despite reduced (thankfully) financial speculation,” eToro market analyst Gabriel Debach commented to We Wealth, “numerous adverse factors are at play: rising concerns about an economic slowdown, with a decline in private sector lending growth; the potential greater need for financial hedging, accompanied by a review of dividend policies or, more likely, buybacks; as well as reduced support for net interest and other banking margin growth.” On March 28, regarding buybacks, the okay came from Europe for Unicredit’s €3.3 billion deal, which galvanized the stock in the latter part of the session (+4.38 percent).

Concerns about future shareholder remuneration opportunities do not take away from the fact that the banks remain “decidedly solid, vaccinated by the latest crises that have hit financial institutions in the last two decades and with the various European stress tests ready to sift through the different scenarios,” Debach said, recalling that the ECB stress tests subject the system to far more severe shocks than the recent news events.

“Indeed, in general, large banks have strong balance sheets, diversified sources of income, and more regulation today than in 2008. But, as mentioned, this is not enough to shelter the various institutions from possible sudden sell-offs.

As evidenced by the recent performance of Italian stocks, “in Europe to suffer most from speculators’ pressures are above all stocks with a lower reputation,” Debach said, “Société Générale records the biggest declines among the top banking groups (-27 percent since March 8). Today’s news just about Société Générale, BNP Paribas, Exane, Natixis, and HSBC in the crosshairs in France does not help.”