Shouldn’t Intesa pay more than 1€?

Ok, I know it is a tricky question, for more than one reason, just to mention a few:

  • No other buyers around (TINA argument) –
    • only top 3 Italian banks are big enough to consider the deal like this
    • Uci and Banco BPM are still working on internal restructuring
    • BNL or Cariparma may rely on their french shareholders, but it’s far more complex if the subsidy of Italian gov goes to a French group…
  • Need to close the deal immediately
  • Need to deal with redundancies (but Italian gov will pay for this)
  • Need to deal with high risk performing loans (but Italian gov will hedge this part)

All this to not mention the money Intesa wasted in Atlante fund (>1bn) and National Resolution fund (some 1bn).

banca-intesa_int-nuova

The matter is quite complex and available info are not yet complete. I could recommend the very careful analysis provided by prof. Luca Erzegovesi on his blog and in particular this first attempt to write down a financial report of the deal.

So let’s avoid to question granular details and stick to basic naive logic:

  • in general you pay 1€ a bank when it is insolvent and liabilities are greater than assets – that’s why Santander will raise 7Bn and Ubi will look forr 400m additional capital)
  • if you acquire a clean bank you usually pay more than 1€ – this is what happened with Friulardia and Carispezia sold by Intesa San Paolo to Cariparma Credit Agricole
  • Intesa sanpaolo is not only buying a clean bank
    • is getting subdsidized (1,285Bn ) to address redundancies
    • is reciveing a contribution (3,5Bn) to maintain capital adequacy
    • is beeing hedged by default on risky loans until 2020 ( 4Bn guarrantee)

Keep it simple stupid: how can the price still be 1€?

I may get it wrong, it is a complex matter and info available are not complete. Let’s give a look at the pro forma balance sheet drafted by prof Erzegovesi

Cattura

Can you see the 3.3bn Assets – Liabilities difference?

According Francesco Lenzi analysis on Econopoly this may be somehow compensated with the 3.5bn to increase capital:

Ho inoltre ipotizzato che il supporto finanziario offerto dallo Stato a Intesa SanPaolo “a fronte del fabbisogno di capitale generato dall’operazione di cessione, per un importo massimo di 3,5 miliardi” sia quasi interamente coperto dal patrimonio netto di cessione. Il fatto che nel decreto 99 si qualifichi “erogazione al cessionario” solo i 1,285 miliardi relativi alla copertura degli oneri di ristrutturazione e “supporto finanziario” i 3,5 di rafforzamento patrimoniale, potrebbe giustificare questa ipotesi. Anche in questo caso però informazioni precise non ce ne sono.

We are not sure of this point and it makes a substantial difference on the size of the potential upside for Intesa, but again let’s stick to the basic point: if an upside do exist how can the price be 1€?

We should of course consider that any kind of future contingent liability for Intesa would have voided the main constraint for the bank to accept the deal: the acquisition must be neutral for its capital rations and dividend policies.

But what about a general clause like: the bank and the gov will sit together in 2020 (expiry date of the guarantee on risky loans) and in good faith will assess if the bank has obtained a gain greater than 1€ from the deal and agree a form for the bank to give back 50% of this gain to the Bad Bank?

We know for sure that nobody wanted to handle Venete Bank (neither Intesa if not subsidized) and Italian gov needed to provide some convenient package to persuade the “buyer” of the Good Bank –  could it be possible that someone would have paid more than 1€ if that package were known in advance? 

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@massimofamularo

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GLG – Gerson Lehrman Group – Council Member

 

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About Massimo Famularo

Investment Manager and Blogger Focus on Distressed Assets and Non Performing Loans Interested in Politics, Economics,
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1 Response to Shouldn’t Intesa pay more than 1€?

  1. Pingback: Italian NPL Market Update 2017-07 | Massimo Famularo (ENG)

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