UBS | As partly anticipated by the press, the government has announced overnight a decree (Italian press release) that allows the state to intervene on banks’ liquidity and capital using the €20bn buffer approved by the parliament. Under the conditions of Article 32 of the Bank Recovery and Resolution Directive, the public precautionary recapitalisation would not trigger a bail -in, but only the conversion of subordinated bonds into equity.Deutsche bank While the full text of the decree has not been published yet, we believe the initial announcement is positive for the sector as it appears to cast a wide safety net for retail bondholders. However, in our view, the measures were largely anticipated and likely in the prices following the recent rally in the sector (c27% in one month).
Wide safety net for retail subordinated bondholders appears to be in place
MPS should be the first beneficiary of this decree, but the terms are not known yet. However, under this scheme, savers converted from subordinated debt into equity will be then converted back into non-subordinated bonds at par. The stated aim is to avoid litigation due to misselling. This would be positive for sector sentiment, but details on eligibility have not been disclosed yet. We note that subordinated bondholders of the banks resolved last year, arguably under different circumstances/legal framework, will receive partial compensation (c80%) only if below certain thresholds of income and financial wealth.
Decree could include other measures, such as popolari and resolution fund
According to the press, the decree might also contain other measures for the banking sector, including some amendments to the time horizon of the popolari reform following legal challenges earlier this month . Moreover, the press also notes that the decree could allow Italian banks to split over several years the follow -up contribution to the resolution fund for the four banks resolved in November 2015 .
Anticipation of the measures the main driver of c27% rally in the last month
We view the announcement as positive ast However, a significant reduction of systemic risk in Italian banks was largely anticipated by the market following the referendum and this was the main driver of the strong share-price performance of the sector in the last month (c27%). Therefore the announcement should not prove a major price-mov ing event for the sector, in our view.
