After a few weeks of turmoil on the market, which, truth to be told, has not calmed down yet, we hear alarms about the soundness of the Italian banking system coming from every side, especially after the introduction of the rules concerning the procedures for resolution of the banking crisis (known as Bail In) on an European level, and the casus belli of the rescue of the four Italian banks on the brink of insolvency, which has occupied the pages of newspapers at the end of the year.
What makes the doubt on the true sustainability of the Italian banks further more allarming after the events of the last few years (from Monte dei Paschi di Siena to Banca Marche, for example), are the statements that arrive from the European Commission which see in the ‘increase of suffering, today called with the more sophisticated term Non-Performing Loans, a critical point in the estate of the country itself, which is already characterized by a high public debt. In this regard, in recent days, major newspapers have written numerous articles on the subject, putting forward very interesting tables regarding the incidence of NPLs on the balance sheets of the major banks and introducing the concept of financial Texas Ratio in mass communication.
So, what does this connection consist in? The formula that generates the indicator was created by Gerard Cassidy, analyst at RBC Capital Markets, a Canadian company, to describe the banking crisis in Texas back in the ’80s (hence the name Texas Ratio) failed where about 400 small institutions failed. The Texas Ratio, then, is a composite indicator that calculates the ratio of gross impaired loans in the financial statements of the company and the amount of tangible assets plus provisions. The obtained number is then compared with a watershed value set at 100, which represents the accounting par value in difficulty and sufferance, that is, non-performing loans and the regulatory capital. If the TR of the considered bank is lower than 100, hence the bank could be considered sound, a problematic situation would be delineated that would require additional capital.
This being said, if we were to evaluate Italian banks using the indicator described above, we would see that among the “big fishes”, Intesa SanPaolo alone, with a value of 92, and Unicredit, with 95, could be considered solid, contrary to Banco Popolare and MPS which would end up at bottom of the list, respectively, with the respective values of 156 and 146.
This model, however, does not allow to describe the situation at best, since it considers only one aspect of the business and of the risk of a credit institution, just as the “prophets of doom” who foresaw the close collapse of the Italian banks due to sharp declines in the stock market, forgetting that market capitalization is not directly correlated with the capital of the companies that repressents a completely different accounting magnitude, because the action is just a title that is a share of participation in the risky capital, not a partition of it.
Very useful, thus, is the study conducted by the Bocconi University for Corriere Economia, which has created a model for assessing the soundness of the institutions through a synthetic indicator based on seven parameters: three of capitalization (CET1, Tier 1, total capital ratio: indicators of the solidity of the European supervision), one of profitability (net interest income plus the balance from fees and other revenues) on the total assets, the trend on the stock market in 2015 (the first two weeks of January have not been considered due to the turbulence, which may have speculative roots), the two ISC, the synthetic indicator of the annual cost that gives a reference price of the account: one for the service at the counter, the other for other channels such as online operations.
The image that emerges is very different from the much more alarming given by other media and by the statements coming from Brussels. It is more in line with the statement made on several occasions by the Minister Padoan. The top ten institutions in the ranking (Intesa SanPaolo, Ubi Bank, Banco Popular, Credem, BPM, MPS, BPER, Credito Valtellinese, Carige and Unicredit), albeit with very different scores, present values that show a solidity of the companies, which is probably much higher than that of many foreign competitors, often wrongly seen as a benchmark.
Where is the real criticality of the system, then? Certainly in the fragmentation of the offer. In Italy there are over 700 independent banking groups, as I often remind, of which the first two, ISPs and UCG, are worth about 50% of the market, which become around 70% if one considers only the top fifteen largest banks.
From here to isolating an issue of common pool, where to address the business proposal, that is, the distance is short, and therein lies the real systemic risk. Not so much for the general holding, because the banking market is mostly divided in medium/large-size institutions that can guarantee a rather high stability and security, but the margins of action for nearly 90% of the banks market share are further eroded by their main competitors, reducing collection and profitability, as well as the ability to cope with the deterioration of the granted credit.