Blain's Morning Porridge - Italian banks are a tougher job than the Augean Stables

Mint – Blain’s Morning Porridge – Feb 7th 2017

“The Augean Stables will be remembered as light spring clean when it comes to the books of Italian banks”

After Unicredito launched its right issue yesterday, it really should be about banks this morning, but first.. this American Chap is beginning to worry me.

Ever since the US election I’ve been persuaded things are never as bad as you think – so I’ve bought into the upside potential of tax change and growth. Well placed American financiers have repeatedly assured me Trump will be controlled by the party, and decisions will be taken and directed by a cabinet of experts. I’ve bought into that “certainty about the Trump uncertainty”, and pitched a basically pragmatic positive outlook for US growth based on “its never as bad as you think it might be.”

I’ve taken the view the US as a whole can never be as bad as Trump is individually, therefore his negative effects will be ameliorated into growth. I’ve bitten my tongue and accepted Trump is a necessary evil who will drive cathartic change…

What if I’m wrong? I didn’t know about the Bannon factor…

The way the Trump presidency is coming together is beginning to look suspect. Too little information on the real stuff. Talk about tax reform and other economic policies is cheap. Too much confusion and potential conflict as off-the-cuff policy looks to be deliberately confrontational. Rumours the unstoppable Steve Bannon has effectively marginalised Trump’s talented son-in-law Jared Kushner doesn’t help.

And for those who love conspiracy… what does no less than 6 Goldman Sachs’ alumni on the roster actually mean? More than one left-wing blog has seized that fact as evidence Trump is even more in the pocket of the evil bankers than Washington ever was. Remember how Trump wanted to eviscerate Clinton for being in the pocket of bankers because she spoke to the Vampire Squid at a private dinner?

Of course, it’s easy to be nasty about The Donald.

It’s easy to accept Fake News at face value.

But the bottom line is the hopes for US Growth driving global recovery is a fine balancing act – Donald doing just enough to be disruptive and effect positive change. The danger is he goes too far and creates a bunker mentality. There’s a danger this is swinging to the wrong side of that equation.. Watch that space…

Back to Unicredit… and the media campaign being mounted to push its current rights issue.. which is apparently the fifth rights issue under 3 CEOs since the crisis began. Yeah.. the previous ones really solved the crisis…. Despite that, a number of stock pickers have put out positive recommendations on the stock.

Why?

This is a bank that after provisioning some 70 bln of lost lending, still had a further Euro 77 bln in bad loans (1 Euro in 6), until it sold about Euro 18bln of that in a rush deal before Christmas to Pimco and Blackrock for as little as 6 cents (average price of 13 cents). That means a further Euro 14 bln rights issue and asset sales are just going to reduce the remaining bad loan pile by a little.. and there is nothing to suggest it will ever make decent recoveries on the dross that is left. The experience of the loan sale revealed glaring issues with data and servicing of the underlying loans.

Basically Unicredit’s only strategy is to hope the Euro 44 bln of bad loans on its books aren’t going to get any worse, and that European recovery is strong enough to let the Italian economy thrive.

Unfortunately hope is never a strategy.

Italy is the only European country that has seen GDP actually contract since 1998. Even Greece has been positive. Alongside a stagnant economy, sclerotic politics, Italy’s failure to resolve banking during the crisis allowed the banks to slumber on, unable to cope, and fuelled a culture of bad lending. And it aint just Unicredit – its all the rest.

The problem may now be unfixable. Under European rules Italy can’t rescue the banks without first bailing in depositors – which, as we all know, is a no-way politically. It’s at an impasse with Europe which is just going to deepen as this latest Unicredit rights issue fritters away..

Again… watch that space..

Out of time..