Italy Banks in Bad-Loan Spiral Underline Southern Europe Malaise
Comment of the Day

August 01 2013

Commentary by Eoin Treacy

Italy Banks in Bad-Loan Spiral Underline Southern Europe Malaise

This article by Sonia Sirletti and Francesca Cinelli for Bloomberg may be of interest to subscribers. Here is a section
Italy is immersed in its longest recession in more than 20 years as businesses and households struggle to repay debt and find new credit lines. Finance Minister Fabrizio Saccomanni said two weeks ago that banks aren't lending enough to help boost a recovery. In France, President Francois Hollande's government is calling for more lending to help end the recession, while in Spain, which sought a bailout for its banking system last year, Economy Minister Luis de Guindos said banks should justify decisions to cut financing to companies.

BNP Paribas SA, France's biggest bank, said yesterday that second-quarter profit fell 4.7 percent to 1.76 billion euros, hurt by an increase in loan loss provisions in Italy.

Non-performing loans surged 22 percent in May from the same month of 2012 to 135.5 billion euros, according to the Italian Banking Association. Lending by Italian banks to the private sector dropped 3.3 percent in June from a year ago to 1.6 trillion euros, the association said in a report last month.

Banks were more reluctant to lend in the second quarter because of the unfavorable prospects for economic activity and higher credit risk, the Bank of Italy said last week.

Eoin Treacy's view European banks have no choice but to restrict access to credit because they have strict capital requirements that must be met. Concurrently, the bad loan issues which have been simmering for a number of years now are not about to disappear. Therefore, access to credit lines from the ECB remain essential. The Italian government above all else must continue to tow the line in terms of delivering the types of reforms demanded by its creditors.

10-year yields rallied from 3.6% to almost 5% by late June but have since compressed to approximately 4.4%. A break in the six-week progression of lower rally highs would be required to question current scope for continued lower to lateral ranging. The BTP spread over German Bunds continues to trend lower and a sustained move above 300 basis points would be required to question medium-term potential for continued outperformance.

Even as the challenges facing the Eurozone's banking sector remain daunting, the divergence in performance between leader and laggards suggests that they need to be addressed on their individual merits. The Euro STOXX Banks Index found support in the region of the April low and the psychological 100 from late June and has rallied to test the progression of lower rally highs. The Index is now somewhat overbought as it approaches an area of potential resistance near 120 but a break in the six-week progression of higher reaction lows would be required to confirm supply dominance in that area. Intesa SanPoalo (Est P/E 14.09 DY 3.45%), Italy's largest bank, has a relatively similar pattern to the sector index.

Among French banks, BNP Paribas (Est P/E 10.63, DY 3.02%) found support in the region of the 200-day MA from late June and broke out to new two-year highs this week. A break in the medium-term progression of higher reaction lows would be required to question medium-term upside potential. Institutional broker, Natixis (Est P/E 12.32, DY 2.57%) has held a progression of higher major reaction lows for a year and also hit a new two-year high this week. Following today's strong earnings Soc Gen (Est P/E 10.87, DY 1.36%) rallied to break its progression of lower rally highs.

A number of Spanish banks are also noteworthy. BBVA (Est P/E 11.43, DY 5.87%) is one of a very small number of Eurozone lenders to derive more revenue from outside the region than inside. Its dividend has stabilised following some aggressive cuts in the last few years and the share is rallying to test its six-month progression of lower rally highs. This article has some additional detail.

Banco Popular Espanol (Est P/E 115, DY 0%) failed to sustain its downward break in June and has rallied to break medium-term progression of lower rally highs, pushing back above the 200-day MA for the first time since 2010 this week. While increasingly overbought in the short term, a clear downward dynamic would be required to check momentum beyond a brief pause.

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