Wednesday, October 22, 2008

Unicredit Stays In The News As East European Forex Lending Starts To Unwind

Two additional pieces on news today relating to the ongoing Unicredit issue:

Unicredit and Intesa Sanpaola Share Downgrade


UniCredit SpA and Intesa Sanpaolo SpA, Italy's largest banks, had their shares downgraded to "sell'' by analysts at Royal Bank of Scotland Group, citing a slowing Italian economy and concern about earnings. Analysts said earnings at Unicredit, the nation's largest bank, would ``regress'' given the tougher environment over the next two years while capital rebuilding looked ``suboptimal.''

Core earnings growth at Intesa is also expected to turn negative over the next two years, while the bank's current dividend policy is ``untenable,'' RBS wrote in a separate note to investors. Analysts slashed Unicredit's share price estimate by 60 percent to 2 euros and Intesa was cut by 46 percent to 2.60 euros. Both banks were downgraded from "hold".


Libya May Get A Seat On Unicredit Board

Libyan investors in UniCredit may get a seat on the bank's board "in the spring,'' according to Italian newspaper Il Messaggero, citing Chief Executive Officer Alessandro Profumo's comments to the company's directors yesterday. The investors can't be given a position immediately because none of the directors is willing to step down, according to the newspaper. The Central Bank of Libya, Libyan Investment Authority and Libyan Foreign Bank last week boosted their holding to 4.2 percent in Italy's biggest lender.

Libyan investors have increased their stake in Unicredit to at least 4.9 percent, becoming the Italian bank's second-biggest shareholder, according to this Bloomberg story yesterday. Libya's central bank governor, Farhat Bengdaraa, disclosed the holding at a meeting of African central bank governors today in Cairo. The central bank, the Libyan Investment Authority and the Libyan Foreign Bank said they held a combined 4.2 percent as of Oct. 17. It wasn't immediately clear from the comments whether the 4.9 percent stake was held by just the central bank or jointly by all three institutions (although Reuters later suggested that the central bank alone held 4.9%, which opens the door to the possibility that the Libyan Investment Authority and the Libyan Foreign Bank stakes may be additional). Libyan government-controlled investment vehicles have been active in Italy for some years now. The Libyan Foreign Bank initially started investing in UniCredit in 1997, building a 0.56 percent stake, and the Libyan Arab Investment Company is now the second-largest shareholder in Turin's Juventus Football Club.

Libyans To Make More Acquisitions?

Libya's sovereign wealth fund may buy shares in Italian construction company Impreglio after taking stakes in lender UniCredit SpA and oil company Eni SpA, news agency Radiocor reported, without saying where it got the information. Staff at Impregilo have indicated that there hasn't yet been any formal contact with Libyan investors at this point, but it is hoped that Impregilo may be involved in building a coastal highway in Libya, where it is also involved in the building of a number of university centers.

Unicredit Shares Fall Again Friday Following Government Stake Plan Report

The Italian government may buy a 10 percent stake in Unicredit the Italian newspaper MF (Milano Finanza) is reporting this morning, without citing a source for its information. The government and the Bank of Italy are monitoring the situation at the bank after its share price continued to slide yesterday, the newspaper said.


Unicredit fell to an 11-year low in Milan trading following the MF report that the Italian government may buy a stake of about 10 percent in the country's biggest lender. The bank was initially down as much as 15 cents, or 7.7 percent, trading 1.87 euros, and was back up at 1.89 euros as of 9:10 a.m. local time.

The government and the Bank of Italy have said they are monitoring the situation at UniCredit as its share price continues to slide. Officials at UniCredit and the government have declined to comment on the MF report. Shares in Italy's other mega-bank Intesa Sanpaolo SpA also tumbled after MF reported that the bank will probably cut its dividend. The shares fell as much as 9.9 percent, and were 8.6 percent, or 25 cents, lower at 2.70 euros as of 9:10 a.m. in Milan.

Unicredit Very Exposed to Foreign Exchange Lending Unwind in the East of Europe


Hungarian Prime Minister Ferenc Gyurcsány announced yesterday (Wednesday) that the government had reached an agreement with commercial banks intended to protect the interests of those who have taken out foreign currency loans. The agreement, which is expected to be signed early next week, has three key components:

1) At the request of the debtor the banks will allow the duration of the loan to be extended (with fixed monthly instalments) so that the depreciation of the forint “does not place an unbearable burden on the debtors".

2) FX debtors who deem that exchange rate fluctuations carry excessive risks for them will be allowed to convert their foreign currency-based loan to a forint loan. In this case the banks “will accept this request and make the switch without extra charges".

3) If a debtor finds him- or herself in a position where he or she cannot pay the monthly instalments, e.g. due to becoming unemployed, the banks will be amenable to transitionally reducing the instalments or even suspending them entirely at the request of the debtor.

I say "agreement" here, but in fact the banks had little alternative, since Gyurcsány made it plain to them that if they did not agree then legislation would be introduced to enforce the government package.

So here, right now, and on 23 October 2008 in Budapest ends, in my opinion, a fashion for taking out non-local currency denominated loans, which lasted the best part of a decade and sewpt across half a continent, and especially in Central and Eastern Europe . Basically government after government in one CEE country after another will now find themselves with little alternative but to follow Hungary's lead, as the parent banks turn off the tap on the one hand and the citizens themselves grow more and more nervous on the other.

full story on my Hungarian blog here.


Libyan Investment Authority Takes One Percent Stake In ENI


Libya now owns a 1 percent stake in Eni SpA, Italy's biggest energy company, and plans to increase the holding, according to la Repubblica. The Libyan Investment Authority, the country's $65 billion sovereign wealth fund, has bought almost 1 percent of Eni, "with an eye to a more organic alliance in the future" la Repubblica's weekly business section reported. Libya has developed an ``entente cordiale'' involving Mediobanca SpA Chairman Cesare Geronzi and investor Tarak Ben Ammar to help it win support for its investments in Italy, the newspaper said.


Banca Popolare di Milano Shares Fall Due To Concern About Tier I Ratio


Banca Popolare di Milano Scrl, a northern Italian bank, dropped to the lowest in almost three weeks in Milan trading this morning (Monday) after its chairman told Il Sole 24 Ore that the bank's current capital ratios may be insufficient. Popolare Milano fell by as much as 52.25 cents, or 11 percent, to 4.11 euros, its lowest since Oct. 10, before being halted for excessive losses.

Chairman Roberto Mazzotta told Sole in an interview that the bank's Tier 1 capital ratio of 6.4 percent may be insufficient. The ratio, a measure of a bank's ability to absorb losses, may not be high enough in a period in which lending is risky, Mazzotta told the daily.

``The low level of capital ratios relative to other European banks is one of the reasons we're not recommending Popolare Milano at this point,'' Cassa Lombarda analysts wrote in a research report. ``Capital management actions to strengthen its capital ratios may be needed.''


Share trading in Intesa Sanpaolo SpA, Italy's biggest bank by market value, was also suspened this morning (Monday) after they dropped to their lowest level in almost five and a half years in Milan following the announcement by Deutsche Bank that they had lowered its price estimate after cutting forecasts for margins and growth.

Intesa Sanpaolo fell by as much as 30 cents, or 11 percent, to 2.34 euros, its lowest since May 2003, before being halted for excessive losses. Milan-based Intesa now has a market value of 30 billion euros ($37 billion).
Posted by Edward Hugh at 9:15 AM

1 comments:

Anonymous said...

Oddio mi sono sporcato la mia cravatta da bocconiano con quella sostanza un po' marrone. Si pensavano piu' furbi degli altri.
Quelli di unicredito speriamo affoghino tutti nella merda.

9:52 AM

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Italy At A Glance - January 2008

Welcome to the Italian Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument being presented on the blog. In what follows you can find charts for Italian male life expectancy, median age, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Basically this data provides a summary of the argument which we are presenting on this blog, which is that in order to understand Italy's long term and ongoing economic malaise you need to understand something about Italian demography, and it's macroeconomic consequences. Please click on thumbnails for better viewing.

On the left you can see a chart for Italian male life expectancy, and on the right there is one showing the evolution of the Italy's median age between 1990 and 2020. Just why such factors are important, and need to be taken into account along with more standard macro economic data in accounting for Italy's stubbornly low growth rate since the mid 1990s is explained in the posts.

With such weak internal consumption growth Italy badly needs to run a trade surplus to obtain the economic growth necessary to make public finances sustainable. In this Italy is similar to Germany and Japan, and different from domestic consumer driven economies like the UK, France and Ireland. Long term fertility and life expectancy really do matter, since they condition labour force growth



and consumption patterns, and with these productivity and the growth of internal credit and consumer demand. Above left you can find Italy's ferility rate, and above right the evolution of the 25 to 49 age group, which has just passed it historic peak. On either side here you can see charts for recent quarterly GDPand long run annual GDP.


Next on the left we have a chart for recent movements in Italian inflation while on the right we can see changes in the trade gap between exports and imports. Inflation is reasonably tamed in Italy (now why?), despite the recent slight uptick, but it is Italy's inability to generate a trade surplus which is the main problem structurally.


Now on the left we have the chart for household consumption and on the right the recent retail sales data. Finally the chart on the bottom left shows recent movements in Italy's business confidence index,while the chart on the right shows the equivalent data for consumer confidence.Bottom line, the evidence of growing weakness is everywhere.

Arguably these are all the data points you need to understand my lengthy post on The Euro Area and Italy's De-Facto Dependence On Exports, as well as why it is that the danger Italy may once more fall into recession presents us with the difficulty of what the credit ratings agencies will say about the resulting impact on the government debt situation.


2008 Forecasts: The OECD in December revised their 2007 Italian forecast down to 1.8%, and the 2008 one down to 1.3%. Confindustria also revised their forecast down in December, arguing that growth would slow to 1 percent in 2008 from an 1.8 percent this year, citing factors like the rising cost of food and oil and the rise of the euro against the dollar. Such numbers are clearly not encouraging, but arguably downside risk for 2008 is greater even than either the OECD or the Confindustria forecasts reflect Morgan Stanley's Vladimir Pillona is somewhat more sanguine. While presenting the MS central forceast for Italian economic growth to slow to 1.0%Y in 2008, from 1.8%Y in 2007, he goes on to note that "even annual GDP growth of 0.5%Y next year has a significant possibility of occurring, as shown by our model’s forecast error bands".

I personally will be very surprised if we still see calendar year 2008 anything like as high as 1.8%, but more to the point even 1.3% may be rather on the high side if we get a significant deterioration in the external environment, especially in Eastern Europe on which Italy is fairly dependent, and where the Italian banking sector has significant exposure. So that puts me much nearer to Pillona's "basement bargain" number of 0.5% than to any of the others. One of the reasons for my pessimism relates to my assessment of Italy's current trend growth rate, and to the level of fiscal and monetary tightening which may be operating on the economy even as it slows. During 2007 the Italian govenment has been running a fiscal deficit of comfortably below the 3% of GDP required by the EU commission. But since this fortunate situation was in part acheieved by the use of one off measures, and in part by the strong tax inflow from the above trend growth, the government will need to maintain a comparatively tight fiscal stance to keep things on course, and any attempt to further loosen may run into real problems with the EU commission and the credit rating agencies. And as I keep arguing, it is very hard to see an accomodative monetary posture from the ECB in the near future. The IMF in their October World Economic Outlook came in with a similar figure of 1.3% for 2008, the Economist Intelligence Unit is forecasting 1.7% in 2007 and 1.4 in 2008, and the latter 2008 figure was also endorsed by the EU commission in its November forecast.

As I indicate, my own view is well to the downside of all this. The only apparent bright spot on the horizon is employment, but I am dubious that in the context of Italy's ageing workforce this will work through as some are hoping, as I expain at some considerable length in this post here. My opinion is that Italy will enter recession at some point during 2008, and that we may well have 2 consecutive quarters of negative growth. The continuing high euro will maintain pressure on Italian exports, and high oil and food prices will maintain pressure on the inflation front, at least in the firts half of 2008. At the same time, and despite rumours that Romano Prodi's government is compemplating a large tax cutting package, I anticipate that the fiscal environment will remain tight. Italy's large (106% GDP) accumulated debt, and the vigilance from the gentlmen at Standard and Poor's and the other credit rating agencies more or less guarantee that.

As most of the forecasts suggest, we have been seeing growth which is somewhat above trend during the upswing in the last couple of years, so it would not be surprising if we now saw some below trend growth. Trend growth (over a 5 year average) in Italy may even have fallen into the 0.5 to 1% range, so if I have to put a number I would say 0.7% with a definite "downside risk" tag attached. The nearest forecast to this that I have seen is the 1% one from the Morgan Stanley GEF team. The implications of such sustained low growth are, I think, important, since if Italy cannot find the way to raise trend growth up towards the 2% mark there is simply no way the government debt can be stabilised and sustained. And with each passing year we have one year less to crunch time.