T. Rowe Price’s Continental European Equity Fund recently exited its position in Italian bank Intesa Sanpaolo. Its portfolio manager Dean Tenerelli said the firm appreciates “the strengths of Italy’s most capitalised bank, which trades at roughly book value, but is sceptical about the company’s ability to pay €7bn in dividends planned over the next two years”.
Tenerelli says the banking sector in Italy remains in a difficult position despite the government taking drastic steps to remove a significant amount of the nonperforming loans.
“The uncertainty following the result of the UK’s Brexit vote has led to further uncertainty in the European economy, which we feel will have a detrimental impact on Intesa’s performance,” he adds.
Looking at it from the bright side, the Italian banking sector only needs one fourth of the capital injection that Germany did to solve its banking crisis (2% vs 8% of its GDP according to Jung). “So the banking issue in Italy can and will be resolved, eventually,” he said.
But the economist points out two things; first, Italy needs to resolve its banking crisis sooner rather than later. And its banking situation right now is different to the Lehman crisis.
A rational way to go forward would be to set up a bad bank with the ‘toxic assets,’ and restructure later on,” comments Jung.
Uncertainty
The referendum is so important, because with political reforms it is easier to reform the economy. On the flip side, if the outcome causes more uncertainty, financial markets will not like it.
A Renzi defeat would greatly increase political uncertainty as no one is really sure what will happen in a post-Renzi Italy.
Olly Russ, head of European income at Liontrust, views a defeat for market-friendly, reforming Prime Minister Renzi and move to the Five Star Movement as something that will be taken “very badly by the markets.”
Whereas the UK’s decision to leave the European Union was largely a political decision, for a country to leave the euro is completely different, emphasises Russ. He views it as a systemic threat to Europe in a way that the UK leaving or not leaving the trade union simply was not.
“It will have a massive economic and financial effect on markets that is not easy to calculate, but the effects will be massive, especially for a country like Italy which is one of the largest with a huge pile of sovereign debt to be concerned about,” he said. “If the worst case scenario happens, then that is a big, big issue,” added Russ.
