Italian referendum: spotlight on the banking system

Market volatility is increasing with less than two weeks to go until the Italian referendum. The tension can be seen in the bond market and in Italian banking stocks in particular.

Support for a ‘No’ vote seems to be increasing in the opinion polls, and this is only increasing fears in the market that the Italian referendum could result in a long period of political instability. Possible scenarios include a caretaker government or a government reshuffle, ahead of new electoral laws that would allow a return to the polls to elect a ‘new’ parliament.

The latest polls have all put the ‘No’ campaign ahead by 5% to 10%, although about a quarter of Italian citizens remain undecided. The last day that surveys could be published was November 18 according to Italian law, and so while campaigning will continue for two weeks ahead of the vote, there will be no further update on voting intentions.

One way to track sentiment on the referendum is to look at the IG digital 100 binary on the outcome of the election. Currently, that puts the probability of a ‘No’ victory at 70% (representative of IG client accounts with open positions).

The main tensions in the bond market surround fears that Italian debt could be downgraded in the event of a ‘No’ victory. The BTP-bund spread rose in November to 175 basis points, from 145. The spread between the BTP and Spanish sovereign bonds rose in one month to 50 basis points, from 40, a level not seen since early 2012.

The damage in the stock market is so far limited, as the Italian market is supported by the gains being posted in global markets including the US and Germany. The Italian index fell just 3% in November. However, Italian banks are firmly in the spotlight, particularly Banca Monte Paschi di Siena and Unicredit because of their upcoming capital increases.

MPS is facing the most difficult challenge because of its huge capital increase of at least €5 billion that is supposed to be raised in the weeks following the referendum. The Tuscan lender has its annual shareholder meeting on November 24 and the capital increase should be approved at this event. Bondholders will also respond before the referendum to the bank’s plan to raise at least €1.5 billion by converting subordinated bonds into shares. The holders of these bonds have a real dilemma over whether to accept the offer — do they become MPS shareholders with the greater risk that entails or do they not convert and face the risk of a subsequent ‘bail-in’ with far worse consequences.

MPS shares are volatile, often posting double-digit swings in a single trading session. The technical outlook remains broadly bearish.

Unicredit, meanwhile, is expected to try and raise more than €10 billion in its own capital increase, although the latest speculation in the media says that figure could rise to €13 billion. The timing of raising isn’t yet known, but the bank can’t hang around for too long. New chief executive Jean Pierre Mustier is continuing to try and raise new funds in the meantime as part of his overhaul of the bank and bolstering of capital buffers. The CEO is trying to sell Unicredit’s Pioneer asset management arm, and while Aberdeen Asset Management has dropped out of the race to buy it, citing the high price of about €3.5 billion, talks continue with other bidders. Mustier may also try to sell Unicredit’s stake in Polish lender, Bank Pekao.

Unicredit stock fell 75% to €1.70 from €6.00 between October 2015 and July 2016, but in the last four months the price has been contained in a slightly ascending channel. The signs of recovery are not yet so strong to justify a positive technical outlook and therefore traders need to look out for possible falls. Any failure in the support area of €​​1.85 would open a descent towards strategic long-term support of €1.70.

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