November 21, 2018 / 6:41 PM / 18 days ago

Bearish bets on Italian banks pile up as budget turmoil weighs

* Italian bank stocks down 30 percent in 2018 so far

* Cabinet secretary calls for ban on short selling

* Volume of bank shares on loan has jumped in past months

* Graphic on short positions: tmsnrt.rs/2R6bPnT

* Graphic on banks' price to book: tmsnrt.rs/2PIQzb6

By Helen Reid and Danilo Masoni

LONDON/MILAN, Nov 21 (Reuters) - Investors have piled up bearish bets on Italian banks in recent weeks, data shows, underscoring the lenders’ dim profit outlook and worries over the euro zone’s third-largest economy as Rome’s showdown with Brussels over its budget escalates.

Italian banks have lost 40 billion euros in market cap since May as budget concerns pushed bond yields to near five-year highs, eroding the value of their large sovereign bond portfolios and raising the risk of capital shortfalls for the weaker lenders.

On Wednesday, the European Commission took its first step towards disciplining Italy over its expansionary 2019 budget after Rome refused to change it, paving the way for an excessive deficit procedure.

Ahead of that move, investors have ramped up their bets that Italian banks, which hold nearly one-fifth of the country’s government bonds, will fall further.

Short sellers have targeted medium-sized lenders as well as adding shorts on investment bank Mediobanca and asset manager and bank Banca Mediolanum.

The volume of those banks’ shares on loan - seen as a proxy measure for short interest - has shot to its highest in at least 15 months, according to data from FIS Astec Analytics.

Some 8.7 percent of Mediolanum’s shares outstanding are on loan, while Mediobanca has 15 percent of its shares outstanding on loan and has the highest possible borrowing activity rating, according to the short interest data provider.

“If you were to believe in the tail risk of a rerun of a 2012 scenario, a more sovereign-style crisis, obviously Italian banks will clearly be negatively impacted by that,” said Benjie Creelan-Sandford, a banking analyst at Jefferies.

Italy’s third-largest lender Banco BPM has also seen its cost to borrow shares – a measure of the demand to short shares – rise by 40 percent over the past three months, while UBI Banca and BPER Banca have seen a less pronounced but steady rise in loan volumes.

POLITICIANS SEEK CURBS

Some Italian politicians are seeking curbs on short selling of bank stocks. On Wednesday, cabinet secretary Giancarlo Giorgetti called for a ban on the practice in an effort to protect banks from a rise in bond yield spreads.

Activity in Italy’s top banks Intesa Sanpaolo and UniCredit has been more muted, the data showed.

The big banks have a smaller proportion of their shares outstanding on loan but have also seen short interest rise. The volume of Intesa shares on loan has risen fivefold over the past month.

For UniCredit and Intesa, loan volume has in fact fallen from levels in May when the market sold off sharply on worries about a budget showdown with Europe.

This could show investors have become more confident the two largest lenders are better placed than their peers to deal with the fallout of the budget showdown.

Goldman Sachs analyst Silvia Ardagna is sceptical that the fiscal easing proposed by the government would stimulate growth.

“This is because the increase in interest rates and the widening of spreads that occur on the back of a fiscal expansion in high-debt countries leads to an increase in the banks’ cost of funding, which is passed on to consumers and firms,” she wrote in a note.

That may lead to a further fall in Italian assets, she said.

Ultimately a ban on short selling may not move the dial on Italian bank stocks if investors don’t see an end to the budget showdown, said Jefferies’ Creelan-Sandford.

“There’s a school of thought that suggests short-selling can exacerbate the pressure, but you expect over a longer period of time the share price reflects ... the underlying fundamental value,” he told Reuters.

“From that point of view the ability to short sell or not shouldn’t really make a difference.”

Reporting by Helen Reid and Danilo Masoni; editing by Josephine Mason

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