Good deal for Intesa-Sanpaolo, happy end for Italian banks

Yesterday, the Italian government approved the emergency rules for BPVicenza (BPVI) and Veneto Banca (VB). The Decree provides for total €17bn amount of resources potentially mobilized to liquidate the lenders.

Burden sharing and state aid
The government tried for months to rescue the two banks, but the effort ended on June 23, when the ECB deemed BPVicenza and Veneto Banca “failing or likely to fail” after the banks repeatedly breached supervisory capital requirements (art. 18, 1-a, of the SRMR). The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward (art. 18, 1-b, of the SRMR). The Single Resolution Board concluded that, given the particular characteristic of the bank and its specific financial and economic situation, resolution action is not necessary in the public interest (art. 18, 1-c, of the SRMR). The decision in respect of the banks is addressed to and is to be implemented by Bank of Italy. The banks are subject to winding up under Italian insolvency proceedings, including burden sharing and state aid (accordingly to the 2013 EU banking communication).

€4.8bn contribution to make the deal CET1 neutral for ISP
BPVI and VB will be split into “good” and “bad” banks: the good bank will be taken over by ISP for €1 token price. The government anticipates €4.785bn to recapitalize the good assets conferred to ISP in order to make the deal CET1 neutral. FINMIN Padoan said that further €12bn would cover potential losses stemming from the due diligence of the two banks (€6.3bn for potential NPE and €4bn for “high risk” performing loans). The €4.8bn capital contribution includes more than €1bn for the restructuring charge. The government will restore the retail subordinated bondholders (€200m) at 80%, while ISP will restore the remainder (€60m).

No State aid for ISP
ISP has obtained all its conditions for the acquisition of the troubled banks’ “good” assets. According to the press (Reuters), the deal does not constitute state aid to ISP, which should be able to create value and EPS accretion in the short term from funding synergies, cost cutting and productivity alignment. The Italian government (which should not suffer from public debt increase: the resources come from the €20bn public fund approved in 2016) should be able to recover part of the public money thanks to the bad bank recoveries (like in the case of Banco di Napoli). This is a happy end for the Italian banking system, for which is removed systemic risk and above all for ISP, which is cherry-picking good-assets for free.
While the deal should be EPS accretive as of 2018 (we cannot rule out some potential limited downside risks on ISP’s 2017 earnings stemming from a negative contribution of the assets acquired) there is no risk on dividends.

The scope acquired
According to ISP, the bank will acquire a segregated scope which excludes NPEs (NPLs, unlikely-to-pay and past dues), subordinated bonds issued and shareholdings not functional to the acquisition. The scope of the acquisition includes in addition to the selected assets and liabilities of BPVI and VB, shareholdings in Banca Apulia and other subsidiaries (the foreign banks network). The scope includes: (i) €26.1bn performing loans (other than high risk); (ii) €8.9bn financial assets; (iii) €1.9bn tax assets; (iv) €25.8bn due to customers; (v) €11.8bn senior bonds; (vi) €23bn indirect deposits (of which €10.4bn AuM); (vii) 900 branches in Italy and 60 abroad; (ix) 9,960 HC in Italy and 880 abroad.

Terms and conditions
According to the agreement, the scope includes €4bn high risk performing loans. However, ISP will have the right to give these back to the banks in compulsory administrative liquidation, should conditions occur, during the period up to the approval of the financial statement as at 31 December 2020, requiring that these loans be classified as bad loans or unlikely-to-pay loans. The public cash contribution of €4.785 will be booked in the P&L: (i) €3.5bn as post-tax contribution to make the deal neutral in terms of CET1 ratio; (ii) €1.285 as a fund for restructuring charge not subject to taxation. The restructuring charge will be used to shut down 600 branches and for 3,900 HC cuts. (iii) €1.5bn post-tax public guarantees to sterilize risks, obligations and claims against ISP for events occurring prior to the sale or relating to assets/liabilities or relationships not included among those transferred. (iv) full eligibility of ISP to use the DTAs of the banks acquired; (v) the right for Intesa Sanpaolo to change the scope of the transaction after the date of execution, where necessary, in order to obtain the unconditional approvals by antitrust authorities.

The contract is subdue to the conversion of the decree into law
The contract includes a termination clause which establishes that the contract is ineffective and the assets/liabilities/legal relationships acquired can be given back to the banks in compulsory administrative liquidation. This refers, specifically, to the event that the decree law is not converted into law or is converted with amendments/integrations that make the transaction more expensive for Intesa Sanpaolo, and is not fully enacted within the terms provided by law.

High alternative cost for Italian banks
The alternative to such a deal would have impacted all Italian banks: the liquidation of BPVI and VB with the support of the domestic deposits fund (protecting the deposits up to €100k) would have costed €12.5bn for the Italian banking system to cover the deposits up to €100k. For ISP the charge would have been €2.5bn contribution for ISP only.