Carige is emerging from a bitter battle over its leadership, which came to a head last week when top shareholder Vittorio Malacalza secured a majority of seats on the bank’s new board.
Malacalza has toppled a series of Carige’s CEOs and managed to push out Paolo Fiorentino to put former UBS banker Fabio Innocenzi at the helm.
A group of rival shareholders had favoured keeping Fiorentino in charge to help move the bank towards a merger, but Malacalza fended off the opposition, voicing scepticism about finding any obvious suitors at this stage.
With the boardroom fight now resolved, Carige must submit a capital plan to the European Central Bank by November 30, having had its last plan rejected.
“We are all waiting to see what the next moves will be and what message Mr Innocenzi wants to send to the market,” said a source close to Carige’s last round of capital raising.
In its first major statement following the boardroom scrap, the Genoa bank indicated that raising tier two capital would be an important part of its turnaround strategy.
But Carige has been there before. It had to shelve its initial plans to sell tier two in March, because volatility caused by the Italian election had pushed its cost of funding beyond levels that the former CEO was willing to stomach.
There is little evidence to suggest it will be easier for Carige to prove its access to the market this time around.
“Investors want a very high coupon,” said Filippo Alloatti, senior credit analyst at Hermes Investment Management. “But the higher the coupon, the more painful it will be for the net interest margin at Carige, and the more likely it will be that the ECB starts asking questions about the viability of the bank.”
“The ECB’s patience is likely to be wearing thin given the time that has been spent on resolving corporate governance issues between the different factions at the bank.”
Battle of the banks
There has been an eerie silence out of Italy in the capital markets of late, as most of the country’s banks have pressed pause on their issuance plans while they wait to hear see investors react to the latest budget plans from the government.
The parties in power have made expensive electoral promises that have contributed to clashes with the European Commission.
If sentiment turns more positive on Italy after any agreement about the deficit target this week, GlobalCapital understands that a number of second tier Italian banks will be competing with Carige for space in the tier two market between now and the end of the year.
This includes Banco BPM and UBI Banca, but also Banca Monte dei Paschi di Siena, which has committed to issuing a further €700m of tier two as part of a capital plan agreed with the European Commission.
“It is a tight timeline for Carige if you count the number of days left this year that will be open for a tier two transaction,” said Alloatti.
“If Monte [dei Paschi] comes with a high coupon, it could throw out Carige’s chances of getting a good deal.”
An equity analyst following the bank said that Malacalza had indicated that he was ready to subscribe to part of a new tier two from Carige, which could put about €50m-€60m of investment into a new trade before it has even been opened up to other investors.
This hadn’t been the case in the spring, because of the shareholder’s disagreement with the former CEO’s plans.
“The Malacalza family could diversify its exposure by buying tier two, and it could possibly secure some return on its investment given that the bank won’t pay a dividend in the foreseeable future,” said the analyst.
Here we go again
Selling tier two is only likely to be one leg of the work that Carige will have to put in to convince the ECB that its business is still viable.
The bank has already made strides in the right direction. It has substantially reduced its book of bad loans and has improved its total capital ratio through previous rounds of capital raising.
But the new management will have to consider further asset disposals, and may also need another equity raise to help increase the cash coverage on its remaining non-performing exposures.
Unfortunately for the bank, its last capital raise was very painful for investors. It had to raise €500m in a 60:1 rights issue in December 2017, and its share price has fallen consistently since that time, to trade at a fraction of a cent.
“Malacalza has always been supportive of previous equity raises, and was supportive last year, so the read across is that the family would likely be supportive again,” said a banker close to the Carige rights issue.
“They have a massive stake in this bank and have followed all the rights issues so far to date, which has been extremely expensive for them, so it would be very odd for them to withdraw that support at this stage.”
But this won’t be the case for other investors, which could balk at the suggestion of more capital raising after such a punitive rights issue.
“It’s not a question of whether the Malacalza family will buy more equity, it’s more about the willingness of the rest of the market to cover what they don’t buy,” said the source close to Carige’s last round of capital raising.
The source said that it was important to try to decipher exactly how much extra capital the ECB might want the bank to raise.
The previous management had planned to sell €100m-€200m of tier two, but market participants have suggested that this might only cover some of its overall capital demands.
“Unfortunately nothing has really changed in the Carige situation over the last year,” said a senior equity capital markets banker in Milan. “We deliberately sat out the last rights issue because that transaction was always unlikely to be definitive or provide a medium or long-term solution to its capital problems.”
The ‘hospital bank’
A number of observers have had positive things to say about the make-up of Carige’s new board, including about Innocenzi and the new chairman Pietro Modiano, who both worked at Pioneer Investments in the early 2000s.
But there is still some scepticism about the possibility of Carige going it alone, which seems to be the general thrust of new management’s plans.
The source close to Carige’s last round of capital raising said that one way to secure the bank’s future would be for the Malacalza family to take the bank private by buying up the remainder of its share capital, though the source questioned what the ECB would make of this.
“The flexibility Carige has to produce cashflow and accumulate capital is very limited,” the source said. “Therefore a merger is still essential in my opinion. The prep work which has been done already is all fine and the last management team did a fantastic job on that, with all the complications around them.”
Other market participants agreed with this sentiment.
“The overall project is more important than another round of capitalisation for Carige,” said the Milan-based ECM banker. “Plenty of Italian banks need money but what is far more important is that these banks find their way.”
“Carige will still have to merge with another bank, because otherwise in a couple more years it will be in the same situation which it is in now, needing more money.”
Over the course of the next month, the prospect of EU supervisory action will be hanging over the Genovese lender.
Italy is the country in which the EU’s Bank Recovery and Resolution Directive (BRRD) has been tested the highest number of times, but none of these tests have so far resulted in a bank being put into resolution.
Monte dei Paschi benefited from a precautionary recapitalisation by the state, while Banca Popolare di Vicenza and Veneto Banca were deemed too small to be wound up using anything other than ordinary insolvency laws.
Alloatti suggests that the market is already braced for Carige’s failure in the event that it cannot come up with a viable strategic plan.
“Carige is what I would call a hospital bank,” Alloatti said. “They have been recovering from a number of issues for as long as I can remember.
“Unless you’ve been on a trip to Mars for the last few years, it should not come as any surprise if we arrive at the worst-case scenario of a resolution.”