08 January 2019

Banca Carige: an inauspicious start to 2019?

The ECB announcement that it has appointed temporary administrators to the troubled Banca Carige to safeguard the bank’s financial stability was the first time the ECB used these powers - Graham Bishop assesses whether Carige is a foretaste of a new dimension of the slow-burning EU banking crisis.

On the first working day of the New Year, the ECB announced that it has appointed temporary administrators to the troubled Banca Carige – Italy’s tenth largest bank – to safeguard the bank’s financial stability. This was the first time the ECB used these powers so is Carige a foretaste of a new dimension of the slow-burning EU banking crisis? Is this the first bank where, paradoxically, the final nail in the coffin may be IFRS 9 – the accounting standard designed to be the solution to lax accounting before the Great Financial Crash (GFC)? Is the cure worse than the disease? Or is Carige’s new round of problems just an uncomfortable part of the transition to the new world where no bank is too-big-to-fail?

Carige’s lack of profitability puts it at the extreme end of the spectrum in the EU. However, the EBA Transparency Exercise continues to report for the whole banking EU system that “Profitability remains low on average and has not yet reached sustainable levels.”  Shareholders may look nervously at the way that Carige is treated and wonder whether they should throw good money after bad at other banks. According to Reuters, the 27.6% owners – the Malacalz family - has invested more than €400 million since 2015. That is now worth little and the family has baulked for the moment at contributing to a further €400 million – the specific trigger for the ECB’s decision.

Carige is well known to have long-standing problems principally stemming from massive loan losses. The magnitude of the problems is set out in gory detail in the EBA’s 2018 EU-wide Transparency Exercise[1]. Key highlights, as at mid-2018, include (versus the 130-bank average): fully-loaded CET1 ratio 10.04% (14.27%); NPL ratio 22.75% (3.58%); NPL coverage ratio 50.01% (45.97%); net interest income v total operating expenses 38.12% (56.84%); and cost/income ratio 96.42% (63.75%)

Putting the NPLs in perspective, the EBA data shows the bank’s Tier 1 capital at €1,780 million versus loan exposures in default (after provisions) of €2,794 million. Its total operating income barely covers its administrative expenses so a gradual write-off of the bad loans from profits does not seem plausible. 

So the key question is how much, and how quickly, will the NPLs have to be written off. IFRS9 arrived just a year ago – forcing expected (instead of incurred) credit losses to be recognised. It may be a game-changer for weak banks like Carige – and Carige is ranked number 8 in the EBA listing of NPLs. [...]

Full article available for consultancy clients here

© Graham Bishop