Italian banks: Neither borrowers nor lenders; Weak banks are squeezing the life out of the Italian economy

Italian banks: Neither borrowers nor lenders;  Weak banks are squeezing the life out of the Italian economy

May 10th 2014 | MILAN | From the print edition

“I’M SCARED to ask the banks for help,” says Alessandro Amati, the boss of Axel Elettronica, an Italian electronics firm. “It doesn’t seem they want to help concretely, just words.” The complaint is a common one among Italian businesses about a banking system that, on paper at least, ought to be one of Europe’s soundest. Total bank assets in Italy stand at a relatively modest 2.6 times GDP, compared with 3.2 times in the whole of the euro area. Italian banks generally shunned the sorts of toxic financial instruments that brought down banks in America and Germany. And the country has not experienced a housing bust on a par with that in Ireland or Spain.

Yet for all their sobriety, Italian banks are struggling amid a mountain of bad debts from Italian businesses, big and small. These are rising by about 20% a year and now stand at more than 8% of all bank loans, or almost 17% of GDP. The euro-area average is 11%, although Italy uses a slightly stricter definition of souring loans.

The main culprit is Italy’s economy, which has been shrinking for more than two years. In addition, a slow legal system makes it difficult for creditors to recover money owed to them. In many cases banks simply keep on extending loans to firms that have no hope of repaying them. Alberto Gallo of Royal Bank of Scotland reckons that some 30% of Italian firms owe five times or more than their annual earnings before interest, tax, depreciation and amortisation, a ratio that would make a private-equity firm blush (see chart).

Italy’s bankers are also contributing to a dangerous downward spiral by withholding credit from firms that are growing. Faced with the prospect of large write-offs, bankers are generally retreating from risk. Holdings of government bonds as a portion of total assets are among the highest in Europe. This leaves Italian banks dangerously susceptible to a sudden jump in yields on Italian government debt.

Meanwhile, the number of companies saying that access to finance is their biggest problem has been increasing over the past two years, even as it has been falling in places such as Germany. Some members of Confcommercio, a business association, have had their overdraft limits halved overnight. It reckons only about 10% of members applied for loans last year; only a quarter of those applications were approved. For the economy as a whole lending to non-financial firms fell by almost 9% over the two years to December, according to the European Central Bank (ECB).

For the minority of small Italian firms that do manage to get finance, the rates they pay are about two percentage points higher than those charged to firms elsewhere in the euro area. That is partly due to the risks involved in lending to firms in a sluggish economy. But it is also a reflection of Italy’s dysfunctional banks, many of which also struggle to borrow money from bond investors or in capital markets. One measure of this is the reliance on the ECB’s Long-Term Refinancing Operations (LTRO), an emergency source of funding put in place when it seemed the euro area might break up. Fitch, a ratings agency, points out that last year Italy overtook Spain to become the largest user of LTRO funding.

There is some hope of change. The ECB’s impending inspection of the balance-sheets of banks across the euro area is prompting some to write down bad debts and raise capital now, to avoid humiliation. Intesa and Unicredit, Italy’s two biggest banks, earlier this year posted combined losses of almost €19 billion ($25 billion) in part due to write-downs. In April they struck a deal to pool some of their bad debts and have them managed by KKR, an American private-equity firm.

Meanwhile Italian borrowers are obliged to make do. Marco Colonna Romano of Slide, which designs furniture, says the firm has been forced get customers to pay in advance. The company itself paid largely in cash (with a small loan backed by invoices) when it needed a new warehouse. And Mr Colonna Romano turned to a relative for a loan when he had trouble getting a mortgage.