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Italy’s Atlas Fund Seen as Positive, but Is It Big Enough?

The bank fund is designed to help banks bolster capital and offload bad loans, but its size pales in comparison with the underlying problem.

The stock market has given a warm welcome to Italy’s latest effort to help its banks repair their balance sheets, but it remains unclear whether the initiative is big enough for the task.

Last week the Italian stock market regulator Consob approved the creation of a new fund financed by healthy banks and insurers to help shore up some of the country’s more-troubled institutions. Named Atlante, or Atlas in English, after the Greek god of endurance, the fund will need all the endurance it can muster.

Quaestio Capital Management, the Milan-based firm that will manage Atlante, announced that it had received more than €4 billion ($4.5 billion) from banks and insurance companies to launch the fund. Fund raising will close on April 28, and authorities hope to raise as much as €6 billion by that date. That would be a tidy sum, but it pales in comparison with the banking sector’s €196 billion in nonperforming loans, the largest such pool in Europe, at the end of 2015.

“Anything that is done to strike out on the path of resolving Italy’s very bad NPL problem is a positive,” says Marc Ostwald, a strategist at broker ADM Investor Services International in London. “It’s going to be a very long and protracted process. Whether the fund is too small depends on what comes next.”

The move has given a boost to Italian bank stocks but hasn’t dispelled concerns about the threat that NPLs pose to the sector. UniCredit shares closed at €3.49 on April 26, up nearly 25 percent from its lows just before Atlante was first announced earlier this month but still down 32 percent for the year to date. Intesa Sanpaolo’s shares were up 14 percent from early April but down 20 percent since the end of 2015.

The launch of the fund comes as the Italian economy shows signs of recovery. Growth was 0.6 percent last year after three years of recession, and unemployment dropped to 11.9 percent from 12.7 percent — still high but the first decline in a decade. The total portfolio of nonperforming loans declined by 3 percent last year.

Atlante was established after a contentious meeting between leading bankers and Prime Minister Matteo Renzi on April 11. The country’s most profitable banks, including Intesa Sanpaolo and UniCredit, were reportedly strong-armed by the government into contributing hundreds of millions of euros into the fund. Another contributor will be the government-owned Cassa Depositi e Prestiti (CDP), which uses postal savings deposits to invest in infrastructure and enterprises.

“In our view, the financial profiles of the large banks will weaken, and ratings could come under further pressure, if they are called on to continue to provide extraordinary support to the banking sector,” Francesca Vasciminno, analyst at Fitch Ratings in Milan, said in a research note.

Atlante is supposed to help banks offload their NPLs, and it is charged with ensuring that there is a buyer of last resort for banks that have been ordered by the European Central Bank to raise capital.

The list includes Popolare di Vicenza, which must raise €1.75 billion in May, and Veneto Banca, which is trying to raise €1 billion in a cash call in June after posting a loss of €882 million in 2015. In addition, Banca Monte dei Paschi di Siena, the troubled Tuscan lender, may need to raise a further €2 billion to €7 billion in the months ahead, according to analysts at Morgan Stanley. Those three offerings could absorb the entire amount of the fund, with nothing left over for NPLs.

UniCredit is underwriting the Popolare di Vicenza capital raising, and investors had worried it would have had to purchase the shares itself if there were insufficient market interest, hurting its own capital. The Atlante deal is “good news for UniCredit, but it will drag Intesa and a number of other Italian banks into funding an investment which would normally fall outside their risk parameters,” said Fitch’s Vasciminno.

Still, most analysts see the fund’s formation as a positive step that will strengthen the country’s banking sector. “We believe the Atlante fund could be effective to reduce short-term risk of bank failure,” Alvaro Serrano, bank analyst at Morgan Stanley in Madrid, said in a note to customers. “But it doesn’t fully resolve the NPL issue in Italy and isn’t enough to address concerns on Monte dei Paschi.”

Renzi has been under pressure at home to resolve the bank mess, especially following the suicide of a pensioner in Rome, who lost his life savings when four small banks were merged and the resulting “bail-in” forced holders of the bank’s bonds to lose their capital. It is common practice in Italy for banks to sell their own bonds to their retail customers. Thousands of protesters took to the streets with signs reading, “Give us back our money.”

Renzi’s intervention was also key to the March merger of Banca Popolare di Milano and Banco Popolare, creating the country’s third-largest bank by assets. Renzi sees M&A by smaller banks as a way of increasing lending to small businesses in the country, which have been crippled by a shortage of capital.

David Edmonds, who leads the portfolio advisory group at Deloitte in London, says the effort to relieve the NPL problem is a positive, if incremental, step. “None of them is a big bazooka that just fixes the entire problem, but these are steps that will start to assist,” he says. Last year Italian banks sold €30 billion worth of NPLs, more than the €20 billion by Spanish lenders, he calculates. “There is a market developing that needs a good three, if not five, years to run,” he adds.

The Atlante fund will help implement a NPL disposal plan adopted in February. Known as GACS by its Italian acronym, short for Garanzia Cartolarizzazione Sofferenze, or Nonperforming Loans Securitization Guarantee, the plan envisions banks setting up their own special purpose vehicles, or bad banks, to take over some of their bad debts.

The SPVs will then securitize the bad loans, with an equity tranche, a senior tranche and a junior tranche. The senior debt will be guaranteed by the state, and Atlante will buy the riskier junior debt. The idea is that the state guarantee will make private equity firms likely to buy the riskier equity and junior debt in the marketplace, allowing Atlante to purchase more NPLs.

One complication is that the European Union bans state aid to banks, so it is unknown yet whether it will approve a deal involving money from the state-owned CDP. The Italians hope that the Atlante fund will put the CDP at sufficient distance to win approval. “There probably won’t be too many objections as long as they circumvent the rules in the right way,” says ADM’s Ostwald.

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