Italian bank shares close to best month since 2009

Italian bank shares are on track for their best month in more than seven years as signs the government may intervene to support its financial sector gave fresh momentum to a rally.

The FTSE Italia All-Share banks climbed 2 per cent in afternoon trading, leaving it up more than 22 per cent so far in December. The index is now on course for its best monthly showing since April 2009.

Tuesday’s gains came after the Italian government asked parliament to authorise up to €20bn in potential support for Italian lenders.

UniCredit rose 2.1 per cent and Intesa, widely seen as the most stable bank in the country, added 1.8 per cent

Italy’s volatile banking sector remains 37 per cent lower for the year and has been dominated by fears over its €360bn of non-performing loan exposures.

Broader sentiment towards the sector has been coloured by the travails of Monte dei Paschi, the lender that needs to raise €5bn in capital to avoid a government bailout.

Since Italy’s referendum on constitutional reform at the start of December, which prompted Matteo Renzi’s resignation as prime minister after voters rejected his plans, shares of Italian banks have defied expectations of further sharp drops and rallied.

“We’re coming in to the endgame now with regards to how this whole issue is going to be resolved,” said Hani Redha, a portfolio manager at PineBridge Investments.

“This cloud of uncertainty has been hanging over us for such a long time that the market is starting to see through and anticipate a resolution, with the government stepping in,” he said.

Monte dei Paschi late last week gained approval for a voluntary debt-for-equity swap to retail investors. The bank raised more than €1bn in an institutional swap earlier in December.

The bonds in that deal later collapsed in value to below 20 cents on the euro, though they have since recovered some of those losses. One such bond is now trading at 36.9 cents.

Investors are paying close attention to events at Monte dei Paschi, in part because of the implications for capital increases and non-performing loan deals at other banks. UniCredit plans to raise €13bn in new equity early next year.

Monte dei Paschi also plans to sell about €30bn in gross non-performing loans by packaging them up and selling them on as bond-like products — a process known as securitisation. The government will guarantee the senior, or least risky, portion of these bonds.

A state rescue of MPS could damage relations between Italy and European-wide authorities.

Earlier in December, the European Central Bank rejected a request from Rome to delay the private sector rescue. In an earlier letter to the ECB, the board of the bank pointed to political instability following the resignation of Mr Renzi.

Italy’s most recent banking woes have come alongside a rising wave of political uncertainty across Europe and beyond.

“My sense is that incumbent governments across Europe are very concerned about the calendar of political events,” said Mr Redha. “The last thing they need now is a banking crisis on their hands.”