May 5, 2014 / 3:52 PM / 4 years ago

As Italy regains favour, banks rush to tap investors for capital

MILAN, May 5 (Reuters) - Italian banks, including Monte dei Paschi, can take advantage of investors’ increasing willingness to bet on the country’s economic revival as they seek to raise 11 billion euros ($15.25 billion) to strengthen their balance sheets.

Brokerages are recommending clients seize the opportunity to bolster their investments in Italy’s lenders, while foreign investors pour money in to catch up with levels held before the economic crisis.

Eight out of 15 Italian lenders taking part in the European Central Bank-led review of the quality of banking assets have announced plans to tap investors, the largest number of bank share issues in any European country this year.

A ninth, Banca Popolare dell‘Emilia Romagna, is set to approve a share sale worth up to 800 million euros on Tuesday, a source close of the situation said on Monday.

“There is a lot of appetite for Italian assets right now. The share issues will be covered,” a senior banker told Reuters.

Shares in Banca Popolare di Milano (BPM) rose earlier as the co-operative lender started offering rights to buy into a 500 million euro capital increase.

All need to strengthen their balance sheets after multiple corporate failures triggered by the longest economic recession in 70 years saddled Italian banks with 160 billion euros of bad debt, proportionally higher than in Spain or France.

Setting aside capital against bad loans curbs their lending ability and eats into Italian banks’ already meagre profit.

Yet, banks are benefiting from renewed investor enthusiasm towards Italy - and towards other southern European countries - amid first signs of a recovery emphasised by government bond yields now at record lows.

“Investors, especially foreign ones, are betting on Italy and Italian banks as they see signs of a recovery and are hopeful the new government of Matteo Renzi may be able to push through the structural reforms that Italy needs,” said Roberto Lottici, fund manager at Ifigest.

Table on rights issue by Italian banks

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TEST AHEAD

ECB board member Vitor Constancio said last week European lenders have strengthened their collective balance sheets by 104 billion euros ($144.20 billion) since last July through a range of capital-rising measures including share issues.

But some countries still have room to go.

A simulation of the stress test carried out by Royal Bank of Scotland (RBS) showed that six of 12 banks at risk of failing the test are Italian, with Monte dei Paschi di Siena and smaller Genoa-based lender Carige at the bottom of the list.

“The main reason why some Italian banks look weak is low profitability,” RBS analyst Alberto Gallo said. “Spain and Ireland moved earlier to implement external stress tests on their banks, which benefited already in 2013 from the return of investor capital and lower (government bond) spreads.”

Despite expectations of a relatively poor showing by Italian banks in the asset review, investors are playing catch up.

UniCredit Global Chief Economist Erik Nielsen estimates foreign holdings of Italian government debt are still about 200 billion euros below pre-crisis levels.

Banco Popolare, the first Italian bank to launch a share issue this year, successfully closed in mid-April a capital increase worth 1.5 billion euros.

In a further sign of investor favour, Italian banks, small and large alike, have also been able to raise more than 15 billion euros through the sale of corporate bonds this year.

“Contingent fiscal risks from the financial sector have declined as larger Italian banks took advantage of improved market conditions to strengthen capital ahead of the ECB’s comprehensive asset quality review,” Fitch Rating said upon improving Italy’s outlook to stable at the end of April.

$1 = 0.7212 Euros Additional reporting by Valentina Za and Giulio Piovaccari, editing by Louise Heavens

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