report mediobanca securities
TRANSCRIPT
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IMPORTANT DISCLOSURE FOR U.S. INVESTORS: This document is prepared by Mediobanca Securities, the equity research department of Mediobanca S.p.A. (parent company of Mediobanca Securities USA LLC (“MBUSA”)) and it is distributed in the United States by MBUSA which accepts responsibility for its content. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. Any US person receiving this document and wishing to effect transactions in any securities discussed herein should do so with MBUSA, not Mediobanca S.p.A.. Please refer to the last pages of this document for important disclaimers.
Italy
17 June 2013 Country Update-Italy
Antonio Guglielmi
Equity Analyst
+44 (0)203 0369 570
Riccardo Rovere
Equity Analyst
+39 02 8829 604
Italy seizing up – caution required A lot has changed, nothing has changed - déjà vu of 1992
Italy’s investment case seems a revival of 1992, when a political and macro crisis forced it to devalue
the Lira and exit the EMS with €140bn austerity and disposal. Debt service was 12% of GDP then
versus 6% now but current macro situation is worse and devaluation is no longer an option. Hence
it cannot be ruled out Italy having to apply for an EU bailout. The 250 bps spread tightening since
the Nov 2011 peak merely shows the market’s reward for monetary news from Frankfurt (LTRO,
OMT), NY and Tokyo (QE) rather than for political news from Rome. Argentina’s default risk, a
possible bailout of Slovenia, more macro pain, unplugging of QE, German court issues on OMT, a
lack of delivery from Letta could all lead to spread widening again, in our view.
The recession is spreading to large corporates – take the ILVA case
April data show Italy’s macro entered its acute phase with €2.3bn new NPLs in the month, VAT
collection at -7% YoY, consumers -4.4% YoY (vs -3.3% last year), and further credit tightening (-
1.1% YoY vs -0.7% in March). Unemployment subsidies are now up 7x since 2007 and we foresee
more welfare burden on the public accounts. The pain has now spread to large corporates, 160 of
which are under special crisis care. Banks’ exposure to ILVA for instance is capped to just 12bps
CT1 risk, but 40k jobs are at risk (12k directly) equivalent to 10% of the total jobs Italy lost in 2012.
Italian banks: Real estate and funding the threat, SME ABS the missed chance
Residential RE deals are down 26% YoY to 430k, the lowest since 1985. With 0.044
constructions per inhabitant in 2000-10, Italy is nowhere near Spain, which is 2.5x higher.
However, at the current coverage (10 p.p. below 2007), a further 10% RE price drop would wipe
out 170bps of 2012 Basel II.5 CT1: MPS, BP, BPER and BPM would sit below 8%, while ISP and
UCG would stay anchored at 9%. Deposits up 6% YoY confirm their stickiness, and €20bn AM
inflows in Q1 reversed the €270bn outflows since 2006 thanks to low yields on govies. But heavy
reliance on €260bn LTRO could erode c14% of our 2015e EPS when refunded to ECB. Draghi’s
recent cooling on the ECB potentially buying SMEs loans does not help. ECB-eligible SME loans
in our coverage range between €45bn (AA rated) and €145bn (A rated), i.e. between 6-15% of
Italian corporate loans. No delivery here will be a big missed chance for Italy to sustain growth.
No room for a large wealth tax but €75bn seems feasible
The debate on a large wealth tax aimed at cutting debt/GDP to 100% has three constraints: 1)
65% of the €9.5trn Italian wealth is RE already taxed above the EU average (direct real estate
taxes at 1.6% of Gross Disposable Income vs 1%); 2) only €2trn, i.e. 20% of wealth, is liquid
assets – 80% of which is retail savings at risk of outflows; and 3) it would hardly change the long
term dynamics of debt now due to >1x fiscal multiplier depressing consumption. We found room
for €75bn extra resources from: convergence between RE and financial assets tax rate (€3bn);
large fortunes tax a la French ISF (€5bn); a progressive wealth tax on the wealthiest 10% of the
population (€43bn); the Switzerland deal on repatriated funds (€20bn); and €4bn lower cost of
debt from the above. The resulting Debt/GDP down 4p.p. and 1p.p. GDP of recurrent growth
measures could create a virtuous circle but only if Italy can at the same time improve its
extremely poor track record on structural reforms and fight on tax evasion.
Mediobanca Italian Corporates Survey: credit access the main problem
More than 50 companies in our coverage responded to our first survey questionnaire aimed at
gauging sentiment: 55% of the industrials pointed to credit access as their major issue, which is why
85% of them are focused on cost-cutting and only 20% planning to increase their investments. As a
result, 50% foresee no top line growth in 2013. Low revenues and poor macro make less austerity
the clear consensus request: 44% seek growth measures, 26% ask for lower taxes and 21% for PA
restructuring vs 6% only for cutting public debt and 3% for complying with the Fiscal Compact.
Downgrading BP, BPER, Beni Stabili, Saras, Trevi and Yoox
After a 5% cut post Q1, we keep our EPS estimates broadly unchanged but reflect our cautiousness
in a string of downgrades – analysed separately in the accompanying reports published today: Beni
Stabili, BPER and Yoox to N from O, BP and Trevi to U from N, and Saras to U from O.
Italian Equity Team
Simonetta Chiriotti +39 02 8829 933
Gian Luca Ferrari +39 02 8829 482
Andrea Filtri +44 203 0369 579
Emanuela Mazzoni +39 02 8829 295
Fabio Pavan +39 02 8829 633
Chiara Rotelli +39 02 8829 931
Andrea Scauri +39 02 8829 496
Niccolò Storer +39 02 8829 444
Alessandro Tortora +39 02 8829 673
Massimo Vecchio +39 02 8829 541
Change in Recommendation
Company Rating TP
BENI STABILI Neutral (from Outperform)
€0.60
BPER Neutral (from Outperform)
€5.80
BP Underperform (from Neutral)
€0.95
SARAS Underperform (from Outperform)
€0.95
TREVI Underperform (from Neutral)
€4.45
YOOX Neutral (from Outperform)
€18.1
Source: Mediobanca Securities
Conviction pair trades by sector
Sector Long Short
Banks UCG, UBI, PMI ISP, BP, BPER
Cement Cementir Buzzi
Capital goods PRY, Danieli TFI, FNC
Oil ENI SARAS
Branded / consumers
Autogrill Geox
Insurance / assets gath.
Unipol, AZM Cattolica
Telecom / media
El Towers, Cairo
Mediaset
Auto Fiat Ind Pirelli, PIA
Source: Mediobanca Securities
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Italy
17 June 2013 ◆ 2
Contents
Executive Summary 3
Recession heading for the worst 14
Real Estate – Italy is no Spain, but . . . 25
Deposits and Am inflows - the good news 38
Tax burden on wealth: Italy versus Europe 46
Limited room for a large wealth tax but €75bn seems feasible 52
Mediobanca Italian Corporates Survey 2013 63
Conviction ideas and ratings changes 68
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Executive Summary
Walking on a thin line
A lot has changed, nothing has changed - Reiterating our negative stance on Italy
Four months after the inconclusive elections at the end of February, the investment case of Italy offers
a mixed picture, in our view:
Not much seems to have changed in Italy on the political side if Italian commentators’
favourite game at the moment is guessing how short-lived the Letta large coalition
government will be.
However, quite a lot has changed outside of Italy due to the OMT announcement that gained
momentum and the Japanese QE measures that provided a strong relief to the Italian spread.
We believe the lower spread coupled with the removal of the excessive deficit procedure could offer
room for up to €15bn spending boost to Letta, i.e.1 p.p. of GDP. However, we see this as unlikely and
surely not enough to make us feel more positive on the country. Indeed, with this note we reiterate our
negative stance on Italy in light of further macro deterioration that we see ahead. As we show below,
the spread contraction of the last 18 months is more related to QE and monetary newsflow from NY,
Tokyo and Frankfurt (LTRO, OMT) than the markets’ appreciation of what is happening in Rome.
Italian spread (vs German Bund, blue line lhs axis) and short term yield gap between BTP and BOT (as a % of BOT yield, red line rhs axis)
-200%
-100%
0%
100%
200%
300%
400%
0
100
200
300
400
500
600
OMTLTRO 2 Japan QE
European sovereign crisis with Greece
Monti fiscal consolidation
package
inconclusive Italian election
Italian market labour reform
ESM becomes operative
ECB starts buying Italian govies under the
Security Market Program
Monti appointed Italian Prime
Minister
Source: Bank of Italy, Mediobanca Securities analysis
The recession is heading for the worst . . .
Italian unemployment subsidy applications increased to more than 1bn hours today from 185m hours
in 2007, highlighting the magnitude of the current crisis. Five years into the recession mean that Italy
is heading for the worst, in our view. As recently highlighted by the BoI, over the 2007-12 period,
Italian GDP contracted by 7 p.p., disposable income by 9 p.p. and industrial production by 25pp. It
could still take more than 10 years to return to pre-crisis output levels. Not only are macro data poor
per se, but the most recent (April 2013) figures showed a negative second derivatives with macro
deterioration accelerating: €2.3bn new NPLs generation in April, VAT collection down 7% YoY,
LTRO 1
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17 June 2013 ◆ 4
consumer expenditure down 4.4% YoY (versus -3.3% YoY last year), and further credit tightening (-
1.1% YoY lending in April versus -0.7% in March).
. . . and is now hurting the large corporates – the ILVA case
If SMEs and households were first to be hit by the crisis, it now looks like the time has arrived for large
corporates to also pay their toll. Some 160 large Italian corporates are now under special crisis
administration. We highlight in this note the recent example of the ILVA environmental case, maybe
the most problematic large corporate situation in Italy today. The good news is that banks’ exposure to
ILVA seems to cap the capital erosion risk to 12bps of CT1. The bad news is that it looks very difficult
to square the circle between job security (12k employees of ILVA at risk, 40k when considering
indirect workers) and respect for EU environmental directives (high mortality rate in the area of
ILVA’s operations proved to be due to the plant’s emissions of a carcinogenic polluting agent).
We have been here before - A déjà vu of 1992
We see many similarities between the situation in the country today and that of 20 years ago, when
political instability and macro meltdown forced Italy to exit the European Monetary System in spite of
the Lira devaluation, of some Lit 100bn (€50bn) austerity measures undertaken by the Amato
government and of a large privatization plan which followed. We think the situation is worse today as
macro is hurting the economy more heavily and Italy can no longer leverage on currency devaluation.
What could go wrong? Argentina and more
This is why we think time is a very scarce resource for Italy: the next six months will be crucial to
assess if the country can leverage on the ‘low spread QE-driven momentum’ and on the new
government to reverse the poor macro trends of the last decade, or if it will inevitably end up in a EU
bailout request, as we currently suspect.
The potential default of Argentina, the likely bailout of Slovenia, the recurring risk for the Letta
government to fall short of support from the Parliament or the unplugging of the FED QE measures
are just few examples of what could become triggers of renewed market concern on the sustainability
of the Italian debt. Argentina in particular worries us, as a new default seems likely.
Argentina Sovereign curve yield (Lhs) and debt maturity
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
3 mnths 1 yrs 2 yrs 3yrs 4yrs 5yrs
10/06/2013 01/01/2013
2.6 2.5 2.2
4.2
1.71.1
1.7
15.314.4
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 2014 2015
$bns
Source: Mediobanca Securities, Bloomberg
Not only could Argentina’s problems reignite concern on debt sustainability in peripheral Europe, but
it could also have a direct impact on the Italian economy given the exposure to Argentina of many
Italian corporates. TI and Tenaris, for instance, have double-digit turnover exposure to the country.
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17 June 2013 ◆ 5
Italian companies’ exposure to Argentina
Rating TP Turnover exposure EBITDA exposure EPS exposure
Tenaris Underperform 13.6 30.0% 23% 20%
Telecom Italia Not Rated - 13.0% 10% 2%
Campari Neutral 5.45 2.9% 2.5% 2.5%
Fiat Neutral 4.5 2.0% n.m. n.m.
Pirelli Underperform 7.0 4.0% n.m. n.m.
Trevi Underperform 4.45 3.2% 5.9% 7.9%
Generali Neutral 15.0 0.8% n.m. n.m.
Source: Company data, Mediobanca Securities
No deposit outflows and AM back to inflows – the good news
Banks deposits’ stickiness . . .
Most recent data show that Italian banks are not suffering deposit outflows as the amount of deposits
showed a 6% annual growth as at March 2013, and the stock is broadly stable at c.€1.45trn. Deposits
soared by roughly €20bn in March 2013 versus February 2013, almost equally split between time
deposits and current accounts. This trend offset the €20bn monthly drop in bonds. As a result, the
Eur20bn net funding increase at Italian banks in March versus February is almost entirely explained
by repos.
. . . and strong AM inflows
As well as deposits confirming their stickiness, appetite for risk has emerged when looking at recent
strong AM inflows: after Eur270bn of cumulated outflows since 2006, 1Q 2013 brought Eur20bn
inflows, benefiting both assets gatherers and banks. Our correlation analysis points to the drop in
government bond yields post the OMT announcement as a key driver of the recent AM inflows (Rhs
chart below).
Italian Banks – Funding Mix, € bn Inverse correlation: AUM inflows vs 2Y BTP yield
-
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2,500
Dec-
98
Jun-9
9
Dec-
99
Jun-0
0
Dec-
00
Jun-0
1
Dec-
01
Jun-0
2
Dec-
02
Jun-0
3
Dec-
03
Jun-0
4
Dec-
04
Jun-0
5
Dec-
05
Jun-0
6
Dec-
06
Jun-0
7
Dec-
07
Jun-0
8
Dec-
08
Jun-0
9
Dec-
09
Jun-1
0
Dec-
10
Jun-1
1
Dec-
11
Jun-1
2
Dec-
12
Deposits Fixed Maturity Current … Deposits Reedem. at Notice Repos Bonds
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
-50,000
-40,000
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
IT asset management sector - flows Yield 2YR IT BTP Source: Bank of Italy, ABI, Mediobanca Securities analysis
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17 June 2013 ◆ 6
Heavy reliance on ECB funding the bad news
Whilst current accounts’ outflow does not seem to be an issue for now, the ECB data confirm Italian
banks’ funding is still over reliant on the central bank. Italian banks have taken c.€260bn from the
ECB and have deposited just €12bn with it, meaning the vast majority of the LTRO liquidity is still
sitting on Italian banks’ liabilities – thus providing a crucial albeit temporary buffer to their funding
needs. The refunding of such ECB liquidity is scheduled for late 2014/early 2015. Should Italian banks’
cost of funding remain at high levels, the Italian banking system may be forced to cut back its
sovereign exposure or replace the LTRO funding with more expensive liquidity, at the detriment of
some 14% of their 2015 profitability, based on our calculations.
Italian Banks – ECB Deposits and funding (€bn) ECB Funding by country
-275
-250
-225
-200
-175
-150
-125
-100
-75
-50
-25
0
25
Dec
-04
Apr-
05
Aug-
05
Dec
-05
Apr-
06
Aug-
06
Dec
-06
Apr-
07
Aug-
07
Dec
-07
Apr-
08
Aug-
08
Dec
-08
Apr-
09
Aug-
09
Dec
-09
Apr-
10
Aug-
10
Dec
-10
Apr-
11
Aug-
11
Dec
-11
Apr-
12
Aug-
12
Dec
-12
Apr-
13
Deposits at the ECB Liabilities from the ECB
0.3
0.5
0.7
0.9
1.1
1.3
1.5
0%
10%
20%
30%
40%
50%
60%
70%
80%
€ trn
GR IRE IT ES PRT Total ECB Facility (RHS)
Source: Datastream, Company Data, Mediobanca Securities analysis
Real estate: Italy is no Spain, but asset quality will get worst
Italy is no Spain
Recent data show an ongoing marked slowdown of the Italian real estate market with residential
transactions down 26% YoY to 430k, the lowest level since 1985. Real estate prices in Italy contracted
by 12% since their 2008 peak versus a 25% correction in Spain. There are very good reasons for Italy
not to fear a ‘Spanish-like’ real estate contraction: 1) some 40% of the national value added in Spain
came from real estate in 2007, 10 p.p. higher than Italy; 2) housing completions over the last decade
were 2.5x larger in Spain than Italy despite a 30% larger population in Italy: 0.11 houses per
inhabitant in Spain versus 0.044 in Italy; 3) Italian households’ indebtedness is the lowest in EU; and
4) average loan-to-value stands at 65% in Italy versus 72% in Spain.
Italy - Number of RE residential transactions (000) Nomisma Retail real estate prices
464
558
687
769
835
866 877
816
689
614617603
448
400
450
500
550
600
650
700
750
800
850
900
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
70
80
90
100
110
120
130
140
150
160
170
180
190
200
1H
92
1H
93
1H
94
1H
95
1H
96
1H
97
1H
98
1H
99
1H
00
1H
01
1H
02
1H
03
1H
04
1H
05
1H
06
1H
07
1H
08
1H
09
1H
10
1H
11
1H
12
Residential Office Retail Source: Agenzia del Territorio, Nomisma, Mediobanca Securities
Simulation 1: up to 45% RE price correction would still leave coverage above 100%
Whilst Italy is no Spain, we think it fair to assume that a likely further real estate price correction
could affect Italian banks’ balance sheets currently sitting on a cash coverage of 41%, some 10 p.p.
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17 June 2013 ◆ 7
below the 2007 levels within our coverage universe. In the first approach of our simulation, we find
that Italian banks could bear up to 45% downward revision of their real estate collaterals and still
maintain coverage above 100%.
Simulation 2: 10% RE price drop would erode 17% of CT1 if coverage stays unchanged
Alternatively, we are interested in quantifying the capital erosion stemming from 10% real estate
prices drop subject to keeping unchanged total coverage ratios at current levels. The result is that
some 10% lower collateral value at constant coverage ratio would wash out some 17% of the aggregate
CT1 capital of our banks with CT1 ratio dropping by 170bps to 8.7% (Rhs chart below).
Estimated Max Revision of RE Collaterals Values to Hit 100% Coverage Ratio, 2012
Estimated CT1 Impact from 10% Drop in Market Price of RE Collaterals, 2012 (coverage unchanged)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Aggr
egat
e
UBI BP
CRED
EM
CREV
AL
BPER
MPS ISP
BPM
UCG
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Agg
rega
te ISP
UC
G
MPS
BP
UBI
BPER
BPM
CRED
EM
CREV
AL
CT1 Impact CT1 after RE Collaterals Mark-down Source: Company Data, Mediobanca Securities analysis
Five banks would sit below 2012 Basel II.5 8% CT1: MPS, BP, BPER, BPM and CVAL, but the last three
show room to restore capital ratios through IRB models. ISP and UCG would remain anchored above
9% CT1 ratio. In summary, although we recognise Italy is no Spain, we foresee further balance sheet
clean-up ahead for Italian banks, possibly triggered by the asset quality stress test that the ECB is set
to carry out next year.
Tax burden on wealth – Italy versus Europe Some 15 years of divergence from Europe . . .
From 1995 to 2010, Italy has pursued a fiscal policy divorcing from the rest of Europe, i.e. lowering the
tax burden on capital and wealth (and consumption) at the expenses of taxes on income. Based on
2010 figures, we calculate that taxes on the stock of capital and wealth accounted for 2.5% of Italian
GDP in 2010 (aligned to the EU average) from c.4% in 1995. The reduction of the taxation of the stock
of capital/wealth in Italy has to be ascribed mostly to the progressive relative reduction of the taxation
on real estate, culminating in the elimination of ICI on the main property in 2010. In 2010, the
amount of direct real estate taxes amounted to €9bn versus almost €13bn in 2007, less than 0.6% of
GDP in 2010 versus 0.85% in 1995.
Italy – Taxes on Wealth as % of GDP, 1995-2010 Tax receipts breakdown, 2010
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ITALY EU 27 AVG
BE BG CZ DK DE EE IE EL ES FR IT CY LV LT LU HUMT NL AT PL PT RO SI SK FI SE UK NO EU
27PERSONAL INCOME TAX
CORPORATE INCOME TAX
TAXES ON STOCK OF CAPITAL
Source: Eurostat, Mediobanca Securities analysis
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. . . reversed in 12 months (2012) due to higher real estate taxes
The trend has been reversed in 12 months as the IMU (real estate) and the additional 0.15% taxation of
custodian assets brought the burden of capital taxation to the level of 1995, making Italy the nation
with the third highest taxation of capital in EU-27 after France and the UK. IMU brought the recurrent
taxation of capital and wealth at almost €60bn p.a., equal to c.4% of Gross Disposable Income, the
level of 1995. The trend of the past 15 years was thus reversed in one year (2012).
Italy – Taxes on Capital as Percent of GDP, 1995-2010
€bn 1995 2010 Extra Revenues (IMU + Fin. Assets)
2010 (incl. IMU + Fin. Assets)
Real Estate Taxes 13.0 19.6 +16 35.1
Financial Assets 5.4 7.9 +5 12.9
Total Taxes on Capital 33.8 38.9 +21 59.4
GDP 865 1,556 1,556 1,556
Taxes on Capital as % of GDP 3.9% 2.5% +1.3% 3.8%
Source: Company data, Mediobanca Securities analysis and estimates
Such jump has to be ascribed to a much more severe taxation of real estate assets. Using Eurostat data
(i.e. the items named 29A in Eurostat statistics), we calculate that taxes on real estate assets (€8.6bn)
represented 0.57% of the Italian Gross Disposable Income in 2010. The Italian level of property
taxation was below EU 27 (arithmetic) average of the same year, equal to 0.68% of Gross Disposable
Income. Using a weighted average for the EU, we calculate that taxes on real estate assets would
account for c.1.0% of Gross Disposable Income, pushed upwards by the high level of taxation in France
and UK, more than balancing the low taxation in Germany. In this case, the taxation of Italian real
estate assets was much lower than the EU average.
Today we could not make the same statement. Including the incremental revenues from the
introduction of IMU in 2012 (equal to €15.5bn) in respect of ICI in 2010, the total taxes on real estate
would hit c.€24bn, and the weight of real estate taxation would account for c.1.6% of Gross Disposable
Income in 2010, among the highest in the Euro Area and well above the EU average. Hence, with the
introduction of the IMU tax, the direct real estate taxation moved in Italy from 0.6% of gross
disposable income to 1.6% versus 1% EU weighted average.
EU – Real Estate Taxation as Percent of Gross Disposable Income, 2010
2010 Real Estate Taxes (€bn, A) Gross Disp. Income (€bn, B) A / B
BE 4.4 359 1.2%
CZ 0.3 138 0.2%
DK 3.2 237 1.4%
DE 11.3 2,511 0.5%
IE 1.4 129 1.1%
ES 9.5 1,026 0.9%
FR 45.7 1,942 2.4%
IT 8.6 1,528 0.6%
IT (including IMU) 24.1 1,528 1.6%
HU 0.3 91 0.3%
NL 3.0 570 0.5%
AT 0.7 283 0.2%
PL 0.8 344 0.2%
PT 1.0 168 0.6%
RO 0.5 126 0.4%
SK 0.2 64 0.3%
FI 0.0 179 0.0%
SE 2.7 352 0.8%
UK 26.2 1,705 1.5%
EU Weighted Avg
1.0%
Source: Eurostat, OECD, Mediobanca Securities analysis and estimates
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17 June 2013 ◆ 9
Taxation of financial wealth already looks high as well . . .
In 2010, also taxation of financial assets at 0.5% of GDP in Italy stands above the Eu average, as the
total amount of taxes on financial assets accounted for 0.5% of GDP in Italy versus 0.25% average for
France, Germany, Spain and UK. In other words, already in 2010 Italy showed the highest tax burden
on financial assets. The situation will change in 2013 with the introduction of the 0.15% taxation of
financial wealth. If we added the estimated €5bn tax receipts, the taxation of financial assets would
reach approximately €13bn, more than double the amount charged in France (excluding the ISF).
Selected EU Countries – Breakdown of Taxes on Stock of Capital/Wealth, 2010
€bn ITALY ITALY (IMU/Fin. Ass) FRANCE GERMANY SPAIN UK
Real Estate 20 35 56 17 20 66
Financial Assets 8 13 6 n.a. n.a. 3
Wealth Tax 0 0 5 n.a. 0 0
Inheritance Tax 0.5 0.5 8 4 2 3
Other 11 11 9 4 3 1
Total 39 59 83 25 26 74
Source: Eurostat, Mediobanca Securities analysis
Although being the highest among the five largest countries, the taxation of financial assets accounted
for just 0.22% of the Italian households’ wealth in 2010, below the 0.35% calculated as taxation of real
estate assets as percent the Italian households’ wealth in real estate. Adding the estimated additional
tax receipts from IMU (€16bn) and financial assets (€5bn), the gap will widen further to c.25bps.
Italy – Tax Receipts on Real Estate and Financial Assets as Percent of Wealth, 2010
€bn Wealth Tax Receipts Taxes as % of Wealth
Tax Receipts (incl. IMU, Fin. Assets)
Taxes as % of Wealth
Real Assets 5,541 20 0.35% 35 0.63%
Financial Assets 3,546 8 0.22% 13 0.36%
Source: Eurostta, Bank of Italy, Mediobanca Securities analysis and estimates
. . . and will move from 2.5% of Gross Disposable Income in 2010 to 3.9%
Another way to look at the weight of taxation of capital is to measure it against Gross Disposable
Income. In 2010, we calculate taxation of capital in Italy accounted for c.2.5% of Gross Disposable
Income (GDI), aligned to the EU average. Adding €21bn from the newly-introduced taxes the ratio
would soar to 3.9%, making Italy the third highest taxation of stock in the Euro Area after UK, France
and Norway. Hence, we conclude that the taxation of capital in Italy is already among the highest in
Europe and is also high in respect of the income generated by the country annually.
EU – Taxes on Capital as Percent of Gross Disposable Income, 2010
Italy – Taxes on Capital as Percent of Gross Disposable Income, 1995 - 2010
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
NO
UK
FR
LU
IT (Imu + Others)
BE
IS
DK
HU
IE
ES
EU 27 Wavg
IT
PT
CY
PL
NL
FI
SE
EL
RO
DE
AT
LV
SI
BG
CZ
EE
SK
LT
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2010+IM
U
Source: Company data, Mediobanca Securities analysis and estimates
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17 June 2013 ◆ 10
After benchmarking the Italian tax profile of wealth – both capital and real estate – with its EU peers,
we find no room to further close the gap through higher taxation as Italy already sits above the
average. This leads us to investigate alternative ways for the country to quickly raise taxes should this
be needed in the case of further pressure on public accoutns.
Wealth tax - In search of €75bn alternative sources
Three reasons to avoid a large wealth tax
The need for a large wealth tax is a recurring debate in Italy. We estimate a €400bn wealth tax would
be needed to bring the debt / GDP ratio below 100% without disposals. We think such an approach is
not feasible when considering that:
Some 65% of the €9.5trn Italian wealth is already accounted for by real estate, offering no
room for further tax rises relative to Europe.
Only 20% of the Italian wealth is constituted of liquid assets, i.e. c.€2trn, 80% of which is
retail savings: (bank deposits 30% of total liquid assets, postal savings 15%, banks bonds 18%
and Italian govies 9%). Raising €400bn from this pot means 35% of Net Liquid Wealth, far
too high not to run the risk of deposits outflows and over penalisation of small retail savers.
A large one-off wealth tax spread over the whole population would hardly change the long-
term dynamics of Italy’s debt, when assuming current >1x fiscal multiplier expected to
depress consumers as already confirmed by the lower than expected VAT tax collection
following recent austerity measures.
Italy – Breakdown of Gross Wealth, 2011
Amount - €bn As % of Total
Residential Property 5,027 53% Not Liquid
Valuables 125 1% Not Liquid
Non-Residential Buildings 342 4% Not Liquid
Plants, Machineries et cetera... 237 2% Not Liquid
Land 247 3% Not Liquid
Total Real Estate and Physical Assets 5,978 63%
Equity in Non-Listed Limited Corporations 421 4% Not Liquid
Equity in Non-Limited Firms 205 2% Not Liquid
Life Technical Reserves 680 7% Not Liquid
Others (Commercial Loans, Shareholders Loans to Cooperatives, Others) 119 1% Not Liquid
Banknotes, Coins 114 1% Liquid
Bank Deposits 651 7% Liquid
Postal Savings 327 3% Liquid
Italian Gov. Bonds and T-Bills 184 2% Liquid
Italian Corporate Bonds 3 0% Liquid
Italian Banks' Bonds 373 4% Liquid
Foreign Securities 146 2% Liquid
Equity in Listed Limited Corporations 73 1% Liquid
Mutual Funds Units 248 3% Liquid
Total Financial Assets 3,542 37%
Total Gross Wealth 9,519 100%
Source: Bank of Italy, Mediobanca Securities analysis
Our doable €75bn wealth tax proposal . . .
Adversely affected by such constraints, we investigate the room for up to €75bn alternative sources for
the government, taking tax progression into account aimed at minimizing the negative impact on
consumers.
€3bn (up to €7bn if including SMEs) from converging the fiscal treatment of financial assets
to that of real estate.
€5bn from a large fortunes tax replicating the French ISF.
€43bn wealth tax on 10% of the wealthiest population.
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17 June 2013 ◆ 11
€20bn from an agreement with Switzerland on repatriated funds.
€4bn from lower interest service on debt stemming from the above measures.
Italy – Summary of Interventions
€bn Total Goal
Recurring Interventions 8
Alignment Taxes Fin. Assets 2013 3 Reduce Income Taxes
Wealth Tax on Wealthy Population 5 Reduce Income Taxes
Una Tantum Interventions 67
Wealth Tax 43 Debt Reduction
Taxation of Repatriated Funds 20 Debt Reduction
Lower Cost of Debt 4 Reduce Income Taxes
Total 75
Source: Eurostat, Mediobanca Securities estimates
. . . resulting in 4 p.p. of debt/GDP reduction and growth measures for 1 p.p. GDP
The conclusion would be a mix of 4 p.p. of debt/GDP reduction, not necessarily over-penalising
consumers as it would come from the wealthiest population, and room for recurring growth measures
amounting to 1 p.p. of GDP. A proper attack on tax evasion and the black economy would clearly bring
us to a much larger number, but the poor track record of Italy in this regard leads us to prefer not to
include such options in our analysis.
Mediobanca Italian Corporates Survey
Credit access is the main problem for 55% of our sample; 50% expect no top line growth
More than 50 Italian companies in our coverage responded to our survey questionnaire aimed at
gauging expectations on the back of the recent political deadlock. Although roughly one out of three
companies considered the latter as a very negative on their economics, it is not politics per se the main
source of concern. Some 55% of industrials point to credit access as their major problem, whilst banks
mentioned the high and volatile cost of funding (lhs chart below). If 85% of the banks foresee a decent
top line growth this year, more than 50% of industrials expect no top line growth (rhs chart).
Worrying factors for the coming future Revenue growth expectations in 2013
29%
57%
23%
16%
43%
10%
11%
13%
45%55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MB Sample Financials Industrials
Credit access Capital markets access Interest rates volatility Interest rates
30%37%
14%
14%
13%11%
13%
27%
33%
16%
71%
3%3%14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MB Sample Financials Industrials
Extremely A lot Moderatly Neither much nor little Slightly No
Source: Mediobanca Securities
85% focus on cost-cutting and only 20% is increasing investments versus last year
This is why 85% of our sample are considering further costs rationalisation and only 20% are planning
to raise investments versus last year. The recent decree to speed up payments to corporate by the
Italian PA does not seem to represent a game changer, as only 24% say this could have a significant
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17 June 2013 ◆ 12
impact. Some 80% of the panel expects that the weak scenario could lead to some sector consolidation,
but only 8% believe M&A opportunity would come from distressed PA assets.
Plan to increase investments Plan to further optimise costs, 2013
No17%
Slightly30%
Neither much nor little
20%
Moderatly13%
A lot17%
Extremely3%
Slightly10%
Neither much nor little
14%
Moderatly31%
A lot28%
Extremely17%
Source: Mediobanca Securities
Priorities: growth (44%), lower taxes (26%), public debt (6%), Fiscal Compact (3%)
The companies interviewed are all well aligned in terms of their priorities for the new Letta
government. As shown in the chart below, out of the five options proposed, 44% of the pool indicated
growth strategies as a necessity to revitalise the stagnant economy. The rest of the companies
prioritise the reduction of fiscal pressure (26%) and the restructuring of the Public Administration
(21%). Surprisingly, only 6% of the pool believe the reduction of the high public debt is a priority, and
only 3% care about respecting the Fiscal Compact. Austerity.
Priorities for the next government
3% 3%6% 7%
21%
22%
21%
26%
22%
26%
44%56%
43%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MB Sample Financials Industrials
Growth strategy Reducing fiscal pressureRestructuring Public Administration Reducing public debtComply with fiscal compact
Source: Mediobanca Securities
Conclusion: softening austerity is the government conundrum
The overall picture of our survey is for a country in a ‘wait and see’ mood with companies reluctant to
invest, more focused on cost-cutting plans and in strong need of increasing their credit conditions.
Low prospects for revenues and poor macro expectations make the softening of the austerity stance
the clear consensus request emerging from our survey.
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17 June 2013 ◆ 13
Stocks ideas and rating changes
Pair trades by sector
Following a weak set of Q1 results, we ended up downgrading our 2013 and 2014 estimates by 5% on
average on our Italian coverage. We remain cautious on the growth prospects for 2013 and 2014, and
expect further downgrades in 2H 2013, driven by the macro outlook further deteriorating. As a result,
we maintain a cautious stance on Italy, which leads us to favour defensive stocks and names with high
earnings diversification outside of the country or stocks with corporate action/ restructuring potential.
Our key high conviction pair trades are:
Banks: long UCG, PMI and UBI vs short ISP, BP and BPER
Cement: long Cementir vs short Buzzi
Capital goods: long Prysmian and Danieli vs short Trevi and Finmeccanica
Oil: Long ENI vs short Saras
Branded and consumers: long Autogrill vs short Geox
Insurance and asst gatherers: long Unipol and Azimut vs short Cattolica
Telecom and media: long El Towers and Cairo vs short Mediaset
Auto: long Fiat Industrial vs short Pirelli and Piaggio
Rating changes
In light of our incrementally negative view we downgrade the following stocks:
Banco Popolare (Underperform from Neutral, TP € 0.95 )
Beni Stabili (Neutral from Outperform, TP € 0.60)
BPER (Neutral from Outperform, TP € 5.80)
Saras (Underperform from Outperform, TP € 0.95)
Trevi Fin. (Underperform from Neutral; TP €4.45)
Yoox (Neutral from Outperform, TP € 18.10)
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17 June 2013 ◆ 14
Recession heading for the worst Time is a very scarce resource for Italy. Five years into recession mean that the
economy is now heading for the worst with unemployment subsidies up to more than
1bn hours from 185m hours in 2007. April data show a rise of €2.3bn in NPLs in the
banking system, VAT collection down 7% YoY, consumer expenditures down 4.4% YoY
(versus -3.3% YoY last year), and further credit tightening (-1.1% YoY lending in April
versus -0.7% in March). Not only is the second derivative turning more negative and
signalling further deterioration ahead, but if SMEs and households were hit first by the
crisis, it looks like the time has now arrived for large corporates to pay their toll as well.
Some 160 large Italian corporates are now under special crisis administration.
In this note, we take a closer look into the ILVA environmental case, probably the most
problematic large corporate situation in Italy today. The good news is that banks’
exposure to ILVA seems to cap the capital erosion risk to 12bps of CT1. The bad news
tough is that it looks very difficult to square the circle between job security (12,000
employees of ILVA at risk) and respect for EU environmental directives (high mortality
rate in the area proved to be due to the plant’s emissions of a carcinogenic polluting
agent).
We see many similarities between the situation in the country today and that of 20 years
ago, when political instability and macro meltdown forced Italy to exit the European
Monetary System in spite of the Lira devaluation, of some Lit 100bn (50bn) austerity
measures undertaken by the Amato government, and of a privatization plan of
Lit180trn (€90bn). We think the situation is worse today as the macro headwinds are
hurting the economy more heavily, and Italy cannot leverage on currency devaluation
anymore. This is why we think the next six months will be crucial to assess if the country
can leverage on the ‘low spread QE driven momentum’ to reverse the poor macro trend
of the last decade, or if it will inevitably end up in a EU bailout request. The potential
default of Argentina, the likely bailout of Slovenia, the recurring risk for the Letta
government to fall short of support from the Parliament or the unplugging of the FED
QE measures are just few examples of potential events triggering renewed market
concern on the sustainability of the Italian debt.
Turnaround story or is it too late?
Little has changed in Italy . . .
Four months after the inconclusive elections at the end of February, Italy offers a mixed picture. On
the one hand it is difficult to indentify major discontinuity signs:
Same President. After several attempts, the Italian parliament ended up appointing Mr
Napolitano as President of the State for the second time – based on no agreement among the
various parties on any other potential candidate. It is the first time in the history of the
Italian Republic that the same President has secured a double-seven years mandate.
Same large coalition government. PD and PDL, the two opposite parties that reluctantly
supported Monti’s technocrat cabinet in 2011/2012 have now both agreed to fully endorse a
new large coalition government under the premiership of PD deputy head Letta. This is in
line with our expectations set out in our Perfect Storm note (26 February) when immediately
after the elections we attached a 70% probability to a Grosse Koalition outcome.
Same macro picture. The Italian macro situation has not improved over the last quarter,
rather the contrary, as we show later.
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17 June 2013 ◆ 15
Same high public debt issues. The Italian debt has reached record levels of €2.035trn
and is now expected to reach 135% of GDP in 2014. This was, still is, and will remain, in our
view, the priority number one for the country.
. . . but much has changed outside Italy
Spread contraction. The contraction of the Italian spread could become a real game
changer if it were to prove sustainable. The OMT announcement from the ECB and the QE
strategies in place at FED, BoE and most importantly at BoJ provided a significant window of
opportunity for the Italian momentum to build up on the back of spread contraction. Since
Japan’s QE announcement at the beginning of April, the spread versus German bunds
contracted by almost 100bps.
EDP. The removal of the EU excessive deficit procedure (EDP) on Italy could we believe pave
the way for Italy to access EU funds aimed at providing some support to its economy.
Softening austerity. France and Spain have recently been given extra time from Europe to
revert to the 3% deficit threshold. Whether Italy has sufficient argument to aim for the same
remains to be seen, but France and Spain represent the precedent on which Italy could rely to
obtain similar concessions.
Some €15bn gift on the table but . . .
Our back-of-the-envelope calculation suggests that spread contraction + EDP removal + extra deficit
spending allowance might create a ‘little treasury’ in the hands of the Letta government in the region
of €15bn – offering scope for a nice spending boost to the economy without harming Italy’s fiscal
targets. This means some 1.0 p.p. of GDP, which couples with the boost potentially stemming from the
€40bn late payments of the public administration debt (the total amount being estimated by
Confindustria above the €100bn region) to Italian SMEs. Were we facing a marked positive u-turn in
EU growth prospects (to potentially benefit the Italian export driven GDP) coupled with a clear
roadmap towards EU convergence, we could conclude that the new government has a nice window of
opportunity to try and push for Italy to become a successful EU restructuring story. Unfortunately
though, this is far from being our base case scenario.
. . . time is running out fast
We actually think the reality is quite different, and we have little faith in the above materialising:
Spread. Relying on low spreads for extra budget spending is risky. The yield on Italian BTP
rose sharply in few days last couple of weeks on market concern on the unplugging of QE
measures from the FED and on the German court ruling on OMT, showing that it is far too
early to assume the EU sovereign crisis has normalised. We do not believe Italy can rely in
the long term on lower interest service of its debt as a driver of extra deficit spending.
EDP. Accessing EU funds is a potential 2014 option which needs local authorities (regions
and municipalities) to be operating with best practice in terms of governance and public
accounts in order to gain access to such funds.
It remains very unlikely to us to expect that Italy will be allowed to temporarily exceed the 3%
deficit cap in light of its high public debt.
Recent macro data point to further deterioration. Chances are high in our view that macro
data, recently revised downwards both for Italy and Europe, will face further downgrades in
2H 2013.
Also, as we argued in our recent downgrade of the EU banking sector to Underperform
(Banks Briefing – Risk up and capital not enough, dated 25 March) we fear the speed
towards EU convergence is slowing down too much, and we believe the risk for the sovereign
crisis to resurface is high. The potential delay or the weak implementation of the banking
union project for instance would be particularly negative for Italy in our view.
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17 June 2013 ◆ 16
Next six months will give us the answer – stay cautious on Italy in the meantime
This is why we maintain our cautious stance on Italy for now. Time is the crucial variable here, as five
years into recession has put Italy in a border-line situation now. We think the next six months will be
crucial in assessing the final outcome. Either Italy will soon build momentum in terms of growth by
cashing in on the benefits of Monti’s reforms and leveraging on its export-driven GDP, or it will face a
likely worsening of the macro and sovereign crisis that might force the country into a bailout request.
The spread improvement is mainly related to exogenous monetary factors
The Italian spread has halved since the resignation of Berlusconi in November 2011. Roughly one-
third of this improvement came after the appointment of the Letta large coalition government in April.
Hence, at first sight the market seems to have appreciated the austerity measures proposed by Monti
and the large coalition backing the recent Letta cabinet. However, as we try and show in the chart
below, such spread improvement has little to do with the Italian political landscape, and much more to
do with monetary action around the world.
Italian spread (vs German Bund, blue line lhs axis) and yield gap between BTP and BOT (as a % of BOT yield, red line rhs axis)
-200%
-100%
0%
100%
200%
300%
400%
0
100
200
300
400
500
600
OMTLTRO 2 Japan QE
European sovereign crisis with Greece
Monti fiscal consolidation
package
inconclusive Italian election
Italian market labour reform
ESM becomes operative
ECB starts buying Italian govies under the
Security Market Program
Monti appointed Italian Prime
Minister
Source: Bank of Italy, Bloomberg, Mediobanca Securities analysis
The Monti government took office in November 2011, which basically coincided with Draghi’s
LTRO 1 announcement in early December (see Europe’s last minute deal, 5th December
2011). Equity and fixed income markets rerated on the back of such newsflow, so that the
Italian spread enjoyed three months of marked improvement.
It is with the LTRO 2 announcement in March 2012 that the market started questioning such
a facility: if three months after providing €490bn funding to EU banks through LTRO 1 the
ECB felt the need of an extra €530bn injection, it clearly meant the problem was not fixed.
But more importantly, ECB deposits’ data in Q1 2012 confirmed that the vast majority of
LTRO funding ended up being parked at the ECB, hence providing tangible evidence of how
the monetary transmission mechanism was not properly functioning. It appeared evident
that the ECB’s ability to stimulate the economy in the lack of printing power was capped. The
Italian spread reflected such concern, widening back to pre-Monti levels just three months
after the LTRO 2 announcement.
LTRO 1
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In November 2012 we would have expected the market (and the spread) to negatively react to
the end of the Monti government. Rather, we noticed that the spread kept narrowing until the
February 2013 elections, clearly showing the benefit of the ‘whatever is needed’
announcement of Draghi backing his OMT plan as announced at the end of the summer 2012
(see Time to Call the German Bluff, 6th June 2012). Not only was OMT the only reason of
such spread improvement in 2H 2012, but even today it is on the back of the ECB potentially
activating such a tool that sovereign funding conditions remain relatively benign in
peripheral Europe.
The February inconclusive elections followed by two months of negotiation to form a
government and to appoint the president of the State started to be reflected in spread
widening (see Election approaching, uncertainty raising, 18th February 2013). However, it is
the ‘Abenomics’ massive QE announcement from the BoJ at the beginning of April that seems
to have provided another window of spread relief for Italy.
Don’t look at the spread but monitor the yield gap between BTP and BOT
The conclusion from the above is that the Italian political uncertainty of the last 18 months played
more like a second derivative on the spread, whilst it is monetary newsflow from NY, Frankfurt and
Tokyo that seems to have represented the first derivative of the spread contraction Italy has enjoyed.
This means:
The low spread does not necessarily mean the market is rewarding the Italian austerity stance
or the unusual Letta grand coalition Government.
If we agree that an accommodating monetary policy around the world ended up becoming the
first ally for the Italian spread, we believe it must follow now that Italy runs the risk of
becoming a key victim of market concern on the FED starting to unplug its five years’ QE
measures.
Post OMT announcement, the spread lost its relevance as a ‘barometer’ of solvency risk
perception on any EU country, given the backup of the ECB.
This is why in our recent update on Italy (see Elections approaching, uncertainty raising, of 18
February) we introduced a new measure for the Italian solvency risk. This is the yield difference
between BTP and BOT. Such a gap has no reason to exist unless the market wants to differentiate
between bonds at risk of restructuring (BTP) and bonds not subject to restructuring (BOT as any
money market instrument).
The chart above shows such a gap (red line) in relative terms, i.e. as a percent of the BOT yield.
Reconstructing a proper time series is not an easy exercise, which is why we only show such ratio at
specific times where available data allowed us to construct such ratio minimising the margin of error.
The key message is that since 2010, i.e. when the Greek deficit problem emerged and the sovereign
crisis started, the relative yield gap in Italy between BTP and BOT ranged between 1x and 3.5x the
yield on BOT, far too much. We interpret such finding as the real underlying solvency concern of the
market, which would have otherwise closed such a profitable arbitrage.
A déjà vu of 1992 – we have been here before
History repeating itself . . .
History repeats itself and Italy seems to make no exception to this. It is interesting, in our view, to note
the many similarities between the Italian situation today and 20 years ago:
Dissatisfaction with politics. Now, as in 1992, the dissatisfaction towards the existing
political class has brought Italians to openly and publicly criticise its politicians.
Implosion of existing parties. In 1992 the Christian Democrats and the Socialist parties
essentially disappeared under corruption scandals, paving the way for Berlusconi’s arrival.
Additionally, the former PCI (Communist party) broke down in its social democrats
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component (today PD) and its more leftish representation. Equally today, we have had the
dissatisfaction towards Monti and all the central catholic parties disappearing coupled with
the ongoing tension within the PD party, which leads many commentators to expect the PD to
potentially break down. It is the strong leadership of Berlusconi that makes the PDL immune
for the time being from internal tensions, but one could reasonably expect that the PDL is
also destined to internal attrition when Berlusconi decides not to lead the party anymore
after 20 years of strong leadership.
New parties. The consequence of such turmoil was dissatisfaction towards existing parties.
In early nineties this led to Berlusconi’s new Forza Italia party and the Northern League
success at the expense of Socialist and Christian democrats parties, which essentially
disappeared or converged into Berlusconi’s new party. Twenty years later the two traditional
parties (PD and PDL) together lost almost 10m votes in the February 2013 elections, which
ended up rewarding a brand new movement, Five Star, which became the first party at its
first election catalysing the Italians’ dissatisfaction against the political class.
Institutional bottleneck. Now as then, Italy faced a dangerous institutional bottleneck
with the overlapping between national elections (April 1992) and the appointment of the new
president of the state (May 1992). It took a record 16 attempts at that time for the newly
appointed Italian Parliament to find a convergence on Oscar Luigi Scalfaro as the new
President. This time around it only took six attempts, but simply because it appeared
immediately clear there was no room for convergence on any new name but Napolitano.
Letta versus Amato. Today (Letta) as then (Amato) it is the former number 2 of the social
democrats party to take the lead of the Government.
. . . hopefully not in full
We firmly hope that the similarities will stop here, because what happened next 20 years ago proved
very painful. Then as now the economic situation of Italy was particularly difficult (in the early 1990s
it was the emerging markets bubble that triggered the macro slowdown) so to challenge the
sustainability of its public debt.
The Amato government remained in power for only 10 months.
The market speculation against the Lira forced Amato in July 1992 to pass a very painful
decree (worth almost €50bn in Lira equivalent at that time) aimed at calming down the
markets: from higher retiring age to real estate tax and most importantly a 0.6% tax on bank
deposits.
In spite of such austerity measures, three months later Italy was forced to exit the European
Monetary System and devaluate its currency.
This was followed by Amato’s resignation, who was replaced by a technocrat government
headed by the governor of the Bank of Italy Ciampi.
The situation is worse today
Italy transformed the Euro from opportunity to threat
We believe the situation is more problematic today than it was 20 years ago, as the recession is denting
GDP growth much more heavily than in 1992.
The lack of room to manoeuvre on currency devaluation today is probably the most negative
difference versus 20 years ago. It is due to the Lira devaluation and assets’ disposals that Italy
managed to put its debt / GDP on a virtuous path starting from 1994 – as shown below. The
Euro straitjacket is clearly not providing a similar currency adjustment flexibility today.
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Italian growth vs debt evolution
Source: Mediobanca Securities
It was due to a Lit 180trn (€90bn) disposal plan that the country managed to improve its
debt-to-GDP ratio in the following 10 years. But as we show below, that proved short lived
and as soon as the crisis started denting Italian GDP growth again, Italy reverted to the
>120% debt / GDP region. Essentially over the last ten years Italy has managed to waste the
double benefit of low funding rates following the Euro introduction and of its disposal plan.
Or to put it differently, Italy took the luxury of remaining sited over the last decade rather
than using the Euro low rates relief as a key opportunity to implement painful but well
needed structural reforms. The lack of action in leveraging on the Euro-driven low cost of
funding and the assets disposal plan, largely explain Italy’s lack of competitiveness today, in
our view.
Debt / GDP, 1992-2005 Debt / GDP, 2001-12e
100
105
110
115
120
125
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Without privatizations With privatizations
95%
100%
105%
110%
115%
120%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Mediobanca Securities, Bank of Italy data
Recent macro data do not help
On the one hand, one should note that the interest service on debt today amounts to ‘just’ 6% of GDP,
exactly half of the level registered in 1992. However, with the Lira devaluation Italy managed to inflate
debt away, which it clearly cannot do today. This is why we think the major difference between today
and 20 years ago is that the current recession is the worst ever seen in Italy – as recently stated by the
Minister of Finance Saccomanni. Most recent data unfortunately support such a stance:
As recently highlighted by the BoI, over the 2007-12 period Italian GDP contracted by 7 p.p.,
disposable income by 9 p.p., and industrial production by 25 p.p. It could take more than 10
years to revert to pre-crisis output levels.
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The ECB just revised downwards its 2013 GDP growth expectations for the Eurozone to
-0.6% from -0.5%. We see downside risk to such a number putting Italy at risk of further
downgrades.
Low R&D investments explain part of the competitive gap of Italy, given that investments
have not exceeded 1.2% of GDP over the last decade, versus the EU average of 1.9%.
Banks’ asset quality remains a source of major concern. Recent BoI data point to NPLs in
April up 22.3% YoY versus 21.7% YoY growth in March reaching €133bn, i.e. c9% of the
Italian GDP. Hence the system generated €2.3bn new NPLs in the month. Additionally,
coverage decreased to 50% in April from 51% in March.
Unemployment rate reached 12% with 40% youth unemployment. This means 3m people out
of the job market in 2012, half a million more than in 2011.
Unemployment subsidies may best capture the fast deterioration of the Italian economy:
rising to more than 1 billion hours of unemployment subsidy burdening public accounts
today from 185m hours in 2007.
It follows that consumers’ expenditure keeps contracting so that in the first four months of
2013 it is down 4.4% YoY versus - 3.3% YoY recorded over the same period last year.
This explains why VAT tax collection in Q1 2013 is down 7% YoY.
Also, credit contraction continues to cap the room for investments. Banks loans were down
1.1% YoY in April versus - 0.7% in March.
It follows that what really worries us is not the negative picture per se but the fact that the second
derivative keeps turning negative – signalling further deterioration ahead. If households and SMEs
have been hit first, it is for sure now the large corporates that are adding further concern to the Italian
economy, as confirmed by the ILVA case study proposed below.
The crisis is moving from SMEs to large corporate – the ILVA case
More NPLs and less lending for corporates
If Italian households and SMEs have been the first to suffer from credit contraction, recent data show
that the problem is now expanding to large corporates. The delta €2.3bn NPLs generated in April, for
instance, come entirely from corporates versus a flattish trend in households. Construction and real
estate, for instance, show NPLs +33% YoY and +35%, respectively. Lending contraction clearly does
not help either. BoI data show that if households are facing a stable lending availability scenario now
versus last year, it is the corporate world that is facing an acceleration in shrinkage to lending access:
to –4.3% YoY in April from -3.3% YoY in March.
Not surprisingly, in our view, some 160 large corporates in Italy are now under special crisis
administration, and ILVA, the eighth largest steel plant in the world, based in Southern Italy, is
probably the most relevant case.
ILVA recent events: from the 2010 environmental problems managed by Berlusconi . . .
Troubles at ILVA, which is part of one of the main European steel producer groups RIVA FIRE, began
in 2010 when the largest company’s plant (located in Taranto, Southern Italy, and on which some 75%
of city’s GDP – directly and indirectly – depends) was blamed by a local association for environment
protection to be the source of a carcinogenic polluting agent above the limits set by the Italian law. The
problem was temporary solved by Berlusconi’s government, which waived the law with a decree
(155/2010). However, since then the focus on the pollution released by the plant has increased
exponentially and subsequently drawn the attention of public prosecutors. In light of the results of
several technical reports showing a clear correlation between the plant’s emissions and the mortality
rate of the area, Italian magistrates disposed the sequestration of all the products coming from the
plant as being not compliant with the legal standards.
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. . . to the 2012 temporary fixing by Monti . . .
In 2012 Mario Monti’s government passed a decree (213/2012) to bypass the verdict of the public
prosecutors, thus allowing ILVA to restart production. Despite this move and the resulting inability to
reorder the seizure of production, the prosecutors did not give up and disposed the seizure of €8.1bn
of assets belonging to the Riva family (owner of ILVA), accused of environmental disaster and
therefore asked to compensate for the damages created.
. . . followed by recent Letta decree
Although the seizure did not directly affect the production of Taranto’s plant, fears of indirect
repercussions and of cash flow problems led Letta’s government a few weeks ago to pass a decree to
un-seize the €8.1bn assets and to appoint a special commissioner (Mr Bondi) to lead the company and
to elaborate a plan to tackle the environmental issue, while keeping operations running.
Potential clash with EU directive
The substantial importance given by the last three Italian governments to ILVA derives from the high
level of employees at risk in the case of a shutdown of the plant: currently some 12,000 people directly
work at ILVA’s plant, but the total number of workers at stake could reach the 40,000 threshold when
considering all the Italian companies directly and indirectly linked to ILVA. As shown above, for the
time being the Italian governments have managed to avoid the shutdown of the plant and the
consequent unavoidable bankruptcy of the company with ad-hoc decrees aimed at buying time. That
notwithstanding, Italian measures could clash with some EU directives (for example, directive
2010/75, which sets limits on industrial emissions, or directive 35/2004, which affirms the ‘polluter-
pays’ principle) so that the efforts of the respective Italian governments might still be nullified.
According to press reports, ILVA is currently losing some €50m per month and the lack of final fixing
plus the potential clash with EU discipline, forces us to attach high probability to the worst case
scenario for ILVA.
Banks’ potential losses in 3-12bps CT1 region
Analysing ILVA’s accounts in order to determine the current banks exposure is not an easy exercise for
the following reasons:
FY2012 Annual Report for both ILVA and RIVA FIRE (the controlling company) are still not
available.
In 2012, the Riva Group was largely reshaped following a massive restructuring plan aimed at
separating the two main activities of the group, the so-called ‘long products’ from hot and
cold rolls, the latter produced in ILVA’s plants.
FY2012, ILVA perimeter does not correspond to that in FY2011, as some foreign activities
have been conferred to another holding, leaving only the Italian operations at ILVA.
In FY2011, RIVA FIRE consolidated Annual Report showed €2.7bn of bank debt, of which
€0.7bn was allocated to ILVA. As the RIVA Group has been split into two holdings – one of
which retaining ILVA activities – the debt of the Group might have been re-allocated, but we
do not know in what way.
In 2011, ILVA reported an additional c.€2.2bn debt exposure to Group’s companies. At the
current stage, it is not possible to assess whether the beleaguered financial position of ILVA
may put at risk the financial strength of the other entities of the Group.
As such, the above-mentioned restructuring of the group means that our calculations should be taken
with considerable caution. Mindful of the fact that the reshaping of the Group may have significantly
altered the financial position of the different entities within the RIVA Group, we attempt to make
some calculations starting from ILVA’s FY2011 Annual Report.
As at the end of FY2011, ILVA’s bank debt exposure amounted to €719m, split as follows:
€120m of short term debt.
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€599m of long term debt, €175m of which is due to expire within one year (i.e. in 2012).
The company had a negligible amount of cash and cash equivalents on balance sheet.
As a consequence, at the end of FY2012 we could infer ILVA’s bank exposure to range between €424m
(assuming the full repayment and no renewal of the €295m credit lines expired 2012) and €719m (in
case of roll-out of maturing debt). In both cases, such amounts should not represent a threat for the
Italian banking system: assuming the whole of ILVA’s bank debt is classified as NPLs and covered 66%
(we would expect some kind of collateral/guarantees backing the credit line), we calculate the amount
of provisions could stand in the €450m region for the system, equal to €350m impact on CT1 capital
as at Mar-13, i.e. 3bps of the aggregate CT1 of the nine Italian banks under MB coverage.
Should we expand such a simulation to the entire group, i.e. to the RIVA FIRE consolidated accounts,
the potential losses for the banking system could reach the still manageable 12bps region given banks’
exposure of €2.7bn, i.e. more than 4x the €720m banks’ exposure of ILVA on which we based our
exercise.
Argentina the next source of concern for Italy?
The 2001 default secured 93% backing from bondholders . . .
Following the 2001 financial crises, Argentina was unable to roll over its debts and following the
resignation of President de la Rua the country defaulted on $81.8bn debt, which at that time was the
largest sovereign default in history. Following negotiations with the IMF, the country moved to a
tender offer on the debt outstanding in 2005 and in 2010. This managed to secure the backing of 93%
of the defaulted debt holders who agreed to exchange their holding for new securities at a 65% loss.
. . . but litigation on the remaining 7% could open up to a new default . . .
The remaining holdouts have been targeting better payment terms or a repayment in par, utilising
litigation. The old bonds had pari passu clauses, which means that should Argentina be in a position
to pay bondholders of the new securities then the holdouts should also be paid. As such, the holdouts
have proceeded to sue the country for $1.3bn, which was given the backing of US courts. The amount
has been derived from past principal and past interest. Argentina’s reaction so far has been to reject
the verdict and reiterate the offers of 2005 and 2010, which unsurprisingly have not been accepted.
The current Argentine President Cristina Fernandez has vowed not to pay the “vultures”, however, so
that a feasible way to end this story would be to enter another technical default in order to avoid
having to make any payments to any holder.
. . . which is why yields are rising
The yield curve for Argentina is somewhat limited given its reputation as a serial defaulter, but we
show in the chart below how the observable yield levels have increased since the start of the year as
investor fears increased.
Argentina Sovereign curve price (rhs) and yield (Lhs)
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
3 mnths 1 yrs 2 yrs 3yrs 4yrs 5yrs
10/06/2013 01/01/2013
101.3
87.8
79.7
100.7
89.3
83.6
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
3 mnths 1 yrs 2 yrs 3yrs 4yrs 5yrs
Price
10/06/2013 01/01/2013
Source: Mediobanca Securities, Bloomberg
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In the rhs chart below, we also outline the current debt maturity schedule for the country. Whilst the
majority of the debt is zero coupon securities, we note there are two floating securities maturing in
July and August and a fixed coupon in September, which could trigger a technical default in case of
no-coupon payment to the holdouts. Not surprisingly, the risk of an Argentina default coupled with
the Asian and China slowdown and with the recent S&P downgrade of the outlook in Brazil to negative
from stable have triggered a severe correction, which brought the emerging markets index back to
summer 2012 levels (lhs chart below).
Emerging markets index Argentina debt maturity schedule, $bn
679.23
640.88
580.00
600.00
620.00
640.00
660.00
680.00
700.00
JPMorgan Emerging Global Total Return Index
2.6 2.5 2.2
4.2
1.71.1
1.7
15.314.4
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 2014 2015
$bns
Source: Mediobanca Securities, Bloomberg
Tenaris and TI the Italian companies most exposed to Argentina
The potential default of Argentina could have a double negative impact on Italy, in our view. On the
one hand it could reignite concern on debt sustainability in peripheral Europe, while on the other it
could directly affect the Italian economy particularly exposed to Argentina.
The table below summarises the key companies under MB coverage with exposure to Argentina, none
of them on an Outperform rating.
Italian companies’ exposure to Argentina
Rating TP Turnover exposure EBITDA exposure EPS exposure
Tenaris Underperform 13.6 30.0% 23% 20%
Telecom Italia Not Rated - 13.0% 10% 2%
Campari Neutral 5.45 2.9% 2.5% 2.5%
Fiat Neutral 4.5 2.0% n.m. n.m.
Pirelli Underperform 7.0 4.0% n.m. n.m.
Trevi Underperform 4.45 3.2% 5.9% 7.9%
Generali Neutral 15.0 0.8% n.m. n.m.
Source: Company data, Mediobanca Securities
It can be seen that the exposure to Argentina ranges from 1% of turnover at Generali up to 30% at
Tenaris.
Some 50% chance of a government crisis in Italy this year
In conclusion, this introductory chapter points to what we consider the most scarce resource for Italy
today – time. Five years into the most severe recession of the past century means that without
inverting the trend soon Italy could be facing a very problematic situation ahead. It is fair to argue that
Italy’s destiny is now in EU hands more than in Italian hands. Without Europe, i.e. the ECB, to keep
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buying the required time and without Italian politicians using such time for painful but inevitable
structural reforms, we think the country might end up requiring a European bailout support. The large
coalition government is facing a crucial role in implementing structural reforms. But its ability to
deliver is dependent on a number of moving parts, which is why Italian commentators and opinion-
makers are split:
The bullish argue that for various reasons this government can stay together for a long time
and deliver what is needed: the common interest of both PD and PDL in buying time, some
70% of new PMs appointed willing to secure their future, Napolitano threatening his
resignation in the case of government crisis, and the time required to implement
constitutional reforms all seem to call for a long life of this government.
However, the list of obstacles potentially forcing a short term government is equally if not
more convincing to us: Berlusconi’s trials make the government road particularly bumpy in
the case of conviction, potentially forcing him to unplug his party’s support to Letta and to
advocate new elections. Also, the potential implosion and break-down of the PD party at his
winter congress could pave the way for this. But more in general, we think that any external
factor turning against the Italian spread could affect the government: from the unplugging of
the QE measures to reigniting the sovereign crisis triggered for instance from Argentina or
Slovenia or the OMT constitutional debate.
Given the above, we think it fair to attach no more than 50% chance for this government to remain in
power longer than this year. This means that the many uncertainties surrounding this unusual large
coalition government could implode any time leaving the market with a totally unpredictable situation
on what would happen next.
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Real Estate – Italy is no Spain, but . . . Recent data show an ongoing marked slowdown of the Italian real estate market, with
residential transactions down 26% YoY to 430k – the lowest level since 1985. Real estate
prices in Italy have contracted by 12% since their 2008 peak versus a 25% correction in
Spain. We believe there are very good reasons for Italy not to fear a ‘Spanish-like’ real
estate contraction: 1) some 40% of the national value added in Spain came from real
estate in 2007, 10 p.p. higher than Italy; 2) housing completion over the last decade was
2.5x larger in Spain than Italy despite 30% larger population in Italy; 3) Italian
household indebtedness is the lowest in the EU; and 4) Average loan-to-value stands at
65% in Italy versus 72% in Spain.
In spite of such differences, we fear that further real estate price correction could affect
Italian banks’ balance sheets, which are currently sitting on a cash coverage of 41%,
some 10 p.p. below the 2007 levels within our coverage. We propose two approaches. In
the first, we investigate how much real estate prices could drop in Italy without its
banks suffering total coverage (cash + collateral) dropping below 100%. Our reassuring
answer is that by our estimates Italian banks could bear up to 45% downward revision
of the fair value of their real estate collaterals and still maintain coverage above 100%.
In our second approach, we aim to quantify the capital erosion stemming from 10% real
estate prices drop subject to keeping unchanged total coverage ratios at current levels.
The result is that some 10% lower collateral value at constant coverage ratio would wash
out some 17% of the aggregate 2012 Basel II.5 CT1 capital of our banks with CT1 ratio
dropping by 170bps to 8.7%. Five banks would sit below 8% CT1: MPS, BP, BPER, BPM
and CVAL, but the last three show room to restore capital ratios through IRB models’
adoption. ISP and UCG would remain anchored above 9% 2012 Basel II.5 CT1 ratio. In
summary, although we recognise that Italy is no Spain, we foresee further balance sheet
clean-up ahead for Italian banks, possibly triggered by the asset quality stress test that
the ECB is set to carry out next year. Draghi’s recent cooling on the ECB potentially
buying SMEs loans does not help. ECB-eligible SME loans in our coverage range between
€45bn (AA rated) and €145bn (A rated), i.e. between 6-15% of Italian corporate loans. No
delivery here will be a big missed chance for Italy to sustain growth.
Marked slowdown in Italian real estate
With an owner occupation rate of 80%, Italian households remain among the most exposed to the
residential real estate among large European countries.
Selected European Countries – Owner Occupation Rate (%)
0
10
20
30
40
50
60
70
80
90
Source: EMF, Mediobanca Securities
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Residential transactions are down 26% YoY in 2012 . . .
In 2012 the total number of residential transactions dropped by 26% YoY to 448,000, the highest drop
recorded to-date and the lowest amount since 1985 when residential transactions were 430,000 (Lhs
chart below). In value terms, residential transactions declined 26.3% to €74.4bn. The magnitude of
the drop in the number of transactions largely exceeded expectations. In the first months of 2012,
Nomisma still expected 594,000 transactions in the year, 33% above the actual number. The picture
worsened during the year as shown by the acceleration in the quarterly drop (Rhs chart below).
Number of transaction (000) – Residential Number of quarterly residential transactions, YoY
464
558
687
769
835
866 877
816
689
614617603
448
400
450
500
550
600
650
700
750
800
850
900
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-3.0%-2.6%
-1.5%
0.0%
1.2%1.5%
1.7% 1.8%1.6%
1.3%
-0.1%
-1.9%
-3.4%
-4.2%
-4.6%
-4.1%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
Source: Agenzia del Territorio, Mediobanca Securities
The number of mortgage loans for house purchases fell by 38.6% in 2012, even more than the overall
number of transactions. Consequently, transactions that involved a mortgage loan declined to 37% of
the total, eight percentage points below that in 2011. The amount of total mortgage loans granted to
households for house purchases declined by 43% in 2012 to €19.6bn; and the ratio between mortgage
loans and the total value of transactions decreased to 26% from 34%.
. . . due to several factors
Lower prices coupled with lower interest rates helped to sustain the so-called affordability index,
which was unchanged in 2012 at the 2011 level. In light of the stable affordability index, worsening
expectations, higher taxes on houses (IMU), and lower credit availability appear to be the main drivers
of the drop in transacted volumes.
Average number of yearly salary to buy a house House Affordability index for Italian households
Source: Agenzia del Territorio, Mediobanca Securities
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17 June 2013 ◆ 27
Commercial real estate does not provide a better picture
Transactions in commercial real estate among large professional corporations declined below €2.0bn
in 2012, down from around €4.0bn p.a. in the prior three years. Insufficient re-pricing, especially for
non-core assets, is the main driver of the low volumes. Low liquidity in commercial real estate is a
problem in view of the relevant amount of funds approaching maturity and of the potential sale of real
estate assets held as guarantees by the banks.
Commercial real estate – transaction volumes (€ bn) Transaction volumes by quarters (€ bn)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2006 2007 2008 2009 2010 2011 2012
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
Source: Nomisma, Quotidiano Immobiliare,JLLS, Mediobanca Securities
So far, 2013 point to flat/slightly increasing investment volumes. According to JLLS, in the first
quarter of 2013 total transaction volumes amounted to around €0.6bn, up from €0.5bn in 1Q 12 while
some important negotiations are ongoing on the market (mainly involving foreign opportunistic
investors) and should be closed during the year.
Real estate overview - Italy versus Spain
The magnitude of Spain’s residential real estate bubble was twice that of Italy
Using the European Mortgage Federation (EMF) data, we calculate that Spanish residential real estate
prices ballooned by c.135% in seven years, a rise that is twice the magnitude of that of Italian real
estate (c.+70% in eight years). Since their highs, real estate prices have fallen by c.25% in Spain as of
September 2012, and we expect they have kept falling over the past few months.
According to EMF data, residential real estate prices in Italy have stabilised over the period 2008-
2011, fluctuating at level c.70% higher than in 2000. As the EMF does not provide quarterly updates
on Italy’s real estate prices progression, we cannot provide an exhaustive comparison based on a
homogeneous dataset for what happened in 2012 in Italy.
Nomisma data show that the increase in Italy’s retail real estate prices hit 70% of 2000 levels in 2008,
similar to that flagged by the EMF. With two different sources showing a maximum 70% increase in
real estate prices in Italy, we conclude the magnitude of Italy’s real estate bubble was much smaller
than that of the Spanish one. Unlike the EMF, Nomisma data show a different picture since the peaks,
with retail real estate correcting by c.12% at the end of 2012 from the peak hit in 2008. We regard such
an indication as more realistic than a substantial stabilisation at peak-prices (as shown by the EMF
data till 2011). In addition, such a correction would be equal to 50% of that of Spain’s, i.e. equivalent to
a growth of roughly 50% of the Spanish one.
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Italy and Spain – EMF Residential RE Prices, 2000-07 Italy – Nomisma Retail RE Prices, 1992-2012
80
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 III 12
Spain Italy
70
80
90
100
110
120
130
140
150
160
170
180
190
200
1H
92
1H
93
1H
94
1H
95
1H
96
1H
97
1H
98
1H
99
1H
00
1H
01
1H
02
1H
03
1H
04
1H
05
1H
06
1H
07
1H
08
1H
09
1H
10
1H
11
1H
12
Residential Office Retail
Source: EMF, Mediobanca Securities analysis, Nomisma
Differences in Italian and Spanish real estate markets
In our view, the prices of real estate collateral are theoretically safer in Italy than in Spain, for a
number of reasons listed below.
Italian economy less dependent upon real estate and construction. The Spanish
economy relies more on real estate and construction activity than Italy: at the peak of the real
estate market (2007), we calculate that real estate/construction sector accounted for c.40% of
the national value added in Spain (the EU second highest after the UK), c.10 percentage
points higher than Italy. In addition, the interdependence between the Spanish economy and
the real estate sector is exacerbated by the ongoing government cost-cutting programmes in
infrastructure after years of heavy spending. Unlike in Spain, Italy’s investment in
infrastructure has been relatively poor, while the so-called Stability Pact imposed by the
Central Government to regions and municipalities virtually stopped any local spending and
investments.
Housing completions 2.5x larger in Spain than Italy. Over the period 1999-2010,
housing completions exceeded five million units in Spain versus less than three million in
Italy, despite a population 30% larger in Italy. In 2011 housing completions in Spain
collapsed by 75% from the peak hit in 2007 versus -50% in Italy on a number already 50%
below Spain’s peak (317,000 in 2006 versus 640,000 in Spain in 2007). Over the period
2000-2010, we calculate that Spain completed the construction of 0.11 houses per inhabitant
versus 0.044 per inhabitant in Italy, i.e. 2.5x .
RE/Construction % of Value Added, 2007 Housing Completions, 2000-11
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
UK
Spain
Fra
nce
Neth
erl
.
Denm
ark
Sweden
EU
-27
Belg
ium
Aust
ria
Italy
Germ
any
Fin
land
Irela
nd
Norw
ay
Pola
nd
Gre
ece
Cze
ch R
.
Hungary
Slova
kia
Construction/Total VA RE, Rent. and bus. activ./Tot VA
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
600,000
650,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Spain Italy
Source: Bank of Italy, Mediobanca Securities analysis
Household indebtedness much lower in Italy. The personal indebtedness in Spain is
much higher than in Italy. A higher level of debt by definition translates into higher
probability of default and in a higher quantity of real estate assets up for sale. Aside from
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Norway, data show that the country with the highest debt (residential mortgage per capita) is
Denmark (€43k), followed by Netherlands (€38k), Ireland and Sweden (€30k). Italy actually
has the lowest level of debt per capita in Europe. The debt per capita must be put in context
with the disposable income in each country. In this respect, the highest ratios are shown by
Denmark, Ireland, Netherlands, Portugal, Spain, Sweden and the UK. Again Italy is the most
virtuous country in this respect.
Res. Mtg. Debt/Gross Disposable Income per Capita, 2005-10
Res. Mtg. Debt per Capita, 2005-10 (€’000)
15%
25%
35%
45%
55%
65%
75%
85%
95%
105%
115%
Net
her
lands
Irel
and
Den
mar
k
UK
Swed
en
Nor
way
Spai
n
Ger
man
y
Bel
gium
Finla
nd
Fran
ce
Ital
y
2005 2006 2007 2008 2009 2010
0
5
10
15
20
25
30
35
40
45
Nor
way
Den
mar
k
Net
her
lands
Irel
and
Swed
en UK
Bel
gium
Spai
n
Finla
nd
Ger
man
y
Fran
ce
Ital
y
2005 2006 2007 2008 2009 2010
Source: Eurostat, EMF, Mediobanca Securities analysis
Loan-to-Value (LTV) below the average in Italy. Generally, a high LTV is associated
with high default risk, and a high default risk may translate into a larger number of forced
sellers, i.e. into a larger amount of properties coming to the market. Using the LTV of first
time buyer provided by the ECB for Eurozone countries and various indications from Central
Banks, we calculate approximately c.73% LTV in Europe, peaking at c.100% in the
Netherlands. Italy stands below the EU average and below Spain.
Loan-To-Value, 2007-10
Country Loan-to-Value %
Austria 84
Belgium 80
Czech Republic 45
Denmark 80
Finland 81
France 91
Germany 70
Greece 73
Hungary 61
Italy 65
Ireland 83
Netherlands 101
Norway 48
Poland 65
Portugal 71
Romania 68
Slovakia 80
Slovenia 65
Spain 72
Sweden 70
UK 80
AVERAGE 73
Source: ECB, Central Banks, Statistical Offices, Mediobanca Securities analysis
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Broad definition of financial distress in Italy
Financial distress is captured one way or another within the four categories
The definition of impaired loans (sofferenze, incagli, ristrutturati, scaduti) in Italy is broader than in
most European countries, as it comprises insolvency, temporary financial difficulty, restructuring
(with or without a loss for the lender) and payment overdue. On past-due loans, Italy also looks to be
in line with its European peers. Current Bank of Italy guidelines specify that, after 90 days of arrears, a
loan must be classified at least as past due, in line with EU best practice. However, management has
the discretion to classify it as incaglio or sofferenza after just one day of delay in the loan payment. As
such, we believe that the possibility of not capturing a situation of distress in one of the four Italian
categories is limited. Outside of Italy, the 90-day past due rule dominates as the main criteria to
classify a loan, generally causing the exposure to be classified as Non-Performing and possibly
assigning a 100% probability of default. On the other hand, loans less than 90 days overdue and
restructured loans are generally regarded as performing outside of Italy and not impaired.
Italy – Criteria of Classification of Problematic Loans
Category Definition
Sofferenza
Non-Performing Loan: on- and off-balance sheet exposures to borrowers in a state of insolvency (even when not
recognised in a court) or in an essentially similar situation, regardless of any loss forecasts made by the bank,
irrespective of whether any collateral or guarantees have been established to cover the exposures. Also included are
Italian local authorities in a state of financial distress for the amount subject to the associated liquidation
procedure.
Incaglio
Doubtful Loan: on- and off-balance sheet exposures to borrowers in a temporary situation of difficulty, which may
be expected to be solved within a reasonable period of time; irrespective of whether any collateral or guarantees
have been established to cover the exposures. Sub-standard loans should include exposures to issuers who have not
regularly honoured their repayment obligations (capital or interest) relating to quoted debt securities.
Ristrutturato/ In Ristrutturazione
Restructured Loan: on- and off-balance sheet exposures for which a bank, as a result of the deterioration of the
borrower’s financial situation, agrees to amendments to the original terms and conditions (for example, rescheduling
of deadlines, reduction of the debt and/or the interest) that give rise to a loss. These do not include exposures to
corporates where the termination of the business is expected. The requirements relating to the “deterioration in the
borrower’s financial situation” and the presence of a “loss” are assumed to be met when the restructuring involves
exposures already classified under the classes of substandard or past due exposures. If the restructuring relates to
exposures to borrowers classified as “performing“ or to unimpaired past due/overdrawn exposures, the requirement
relating to the “deterioration in the borrower’s financial situation” is assumed to be met when the restructuring
involves a pool of banks. This is irrespective of whether any collateral or guarantees have been established.
Scaduto
Past due Loan: on- and off-balance sheet exposures, other than those classified as doubtful, substandard or
restructured exposures that, as at the reporting date, are past due or overdrawn by over 90 days on a continuous
basis. This is irrespective of whether any collateral or guarantees have been established to cover the exposures.
Source: Intesa Sanpaolo, Bank of Italy, Mediobanca Securities analysis
Cash coverage ratio of problem loans is down 10 pp in five years
By our calculations, the cash coverage ratio of Italian banks’ problematic loans dropped by 10
percentage points in five years (see table below) to 41% in 2012 from 51% in 2007 within our coverage.
Such a calculation does not include the allowance on performing loans, which could add a few
additional points of coverage ratio. We would point the following:
The drop in gross problem loans coverage ratio is partially explained by the fact that the
problem loans category with the highest coverage ratio (i.e. sofferenze) has reduced its weight
over time to 55% in March 2013 from 67% of problem loans in 2007.
The aggregate data of the sample of banks under MB coverage show that the secured problem
loans have only marginally increased in five years, to 76% in 2012 from 75% in 2007.
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The aggregate data of the sample of banks under MB coverage show that the fully secured
problem loans (i.e. where the secured exposure is larger than the net residual exposure)
ballooned to 63% of total net secured loans in 2012, from 40% in 2007. In our view, this
could explain why the aggregate data of the sample of banks under MB coverage show a
declining coverage ratio in all the four categories, with the exclusion of past due loans.
Italian Banks: Cash Coverage Ratio of Gross Problem Loans, 2007 – March 2013
2007 1H 08 2008 1H 09 2009 1H 10 2010 1H 11 2011 3M 12 1H 12 9M 12 2012 1Q 13
Aggregate 51% 50% 48% 44% 41% 41% 41% 41% 41% 40% 40% 39% 41% 40%
ISP 54% 51% 49% 43% 41% 42% 43% 45% 46% 43% 43% 43% 43% 43%
UCG 54% 55% 52% 50% 46% 45% 45% 45% 45% 44% 44% 43% 45% 44%
MPS 38% 44% 43% 39% 40% 40% 42% 41% 42% 40% 39% 38% 41% 40%
BP 37% 31% 35% 34% 27% 27% 27% 27% 26% 25% 25% 24% 27% 26%
UBI 37% 37% 36% 32% 29% 30% 30% 28% 27% 26% 26% 25% 26% 26%
BPER 46% 44% 43% 40% 37% 37% 37% 36% 34% 32% 32% 32% 37% 36%
BPM 47% 46% 42% 32% 27% 26% 24% 24% 28% 28% 29% 28% 34% 34%
CREDEM 39% 43% 39% 39% 36% 35% 36% 36% 36% 35% 35% 34% 35% 35%
CREVAL 51% 49% 45% 43% 36% 35% 39% 37% 33% 30% 31% 29% 35% 33%
Source: Company Data, Mediobanca Securities analysis
Aggregate Italian Banks: Cash Coverage Ratio of Gross Problem Loans, 2007 – March 2013, break down
2007 1H 08 2008 1H 09 2009 1H 10 2010 1H 11 2011 3M 12 1H 12 9M 12 2012 1Q 13
NPL 67% 65% 62% 55% 52% 54% 55% 56% 57% 55% 55% 54% 54% 55%
Doubtful 23% 24% 27% 31% 34% 33% 31% 29% 28% 28% 28% 28% 30% 30%
Restructured 3% 3% 3% 7% 7% 8% 9% 10% 10% 10% 10% 9% 9% 8%
Past Due 6% 8% 7% 7% 8% 6% 5% 5% 5% 7% 7% 8% 7% 7%
TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Source: Company Data, Mediobanca Securities analysis
IT Banks – Breakdown of Secured and Unsecured Net Problem Loans, 2007
IT Banks – Breakdown of Secured and Unsecured Net Problem Loans, 2012
40%
35%
25%
Fully Secured Net Problem
Loans
Partially Secured Net Problem
Loans
Unsecured Net Problem Loans
63%13%
24%
Fully Secured Net Problem
Loans
Partially Secured Net Problem
Loans
Unsecured Net Problem Loans
Source: Company Data (UCG, ISP, MPS, BP, UBI, BPER, BPM, CE, CVAL), Mediobanca Securities analysis
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Fair value of collaterals cover 100% of the gross deteriorated exposures
The fair value of collaterals backing deteriorated assets tends not to be disclosed in most of the EU
countries outside of Italy. In 2012, Italian banks’ value of collateral covered c.100% of gross problem
loans, bringing the total coverage ratio to well above 100% in all the banks under scrutiny. Italian
banks disclose the fair value of collateral as follows:
Since 2012 banks disclose the fair value of collateral backing deteriorated exposures, not just
up to a contractual limit (generally the exposure itself). This explains why the fair value of
the collaterals is above the gross deteriorated exposure. The limit of such disclosure is that it
is not possible to ascertain whether a valueless collateral is allocated to a large NPL and vice
versa.
Italian banks disclose the fair value of collaterals, breaking it down in real estate collaterals,
securities collaterals, other real collateral and personal guarantees. Real estate accounts for
c.75% of the fair value of collaterals, while personal guarantees account for an additional
20%.
Banks disclose the fair value of collateral covering >100% of the secured exposure and the fair
value of collateral offering just a partial coverage. In 2012, c.90% of the collaterals’ fair value
was allocated to exposures whose collaterals cover >100% of the exposure itself.
Coverage Ratio of Problem Loans Including Fair Value of Collaterals, 2012
Breakdown of Fair Value of Collaterals, 2012
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
Aggre
gate
UBI
CRED
EM
CREVAL
BP
BPER
ISP
MPS
UC
G
BPM
Cash Coverage Ratio Fair Value of Collaterals
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
Aggre
gate
UBI
CRED
EM
CREVAL
BP
BPER
MPS
ISP
BPM
UC
G
Fair Value of Collaterals as % of Gross Deteriorated Exposure
Fair Value of RE Collaterals as % of Gross Deteriorated Exposure Source: Company Data, Mediobanca Securities analysis
Breakdown of Fair Value of Collaterals, 2012 Breakdown of Fair Value of Collaterals, 2012
74%
1%
4%
20%
Real Estate
Securities
Other Real Guarantees
Personal Guarantees
93%
7%
Fair Value of Collaterals
Allocated to Exposures
Covered >100% by Collaterals
Fair Value of Collaterals
Allocated to Exposures
Covered 0% - 100% by Collaterals
Source: Company Data, Mediobanca Securities analysis
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17 June 2013 ◆ 33
Stressing Italian banks capacity to cope with R.E. correction
Nominal prices fell by just 4% in 2012 in Italy
In 2012, nominal real estate prices decreased 4% and, as we show below, the consensus expectation is
for further de-rating this year and a modest pick-up in 2014.
Nominal Real Estate Prices - YoY change
-11%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
e
2014
e
Residential Office Retail Source: Nomisma, Mediobanca Securities
As shown in the table below, nominal real estate prices dropped by a low double-digit figure since their
peak in 2007. Although Italy is nowhere near the real estate bubble that Spain is currently
experiencing, it is not impossible to expect further real estate price contraction. What would be the
impact on the collateral value of Italian banks?
Italy – Real Estate Prices Drop from 2007 Peak
Residential Office Retail
Nominal prices -12.3% -10.2% -12.5%
Real prices -19.8% -17.2% -19.4%
Source: Nomisma, Mediobanca Securities analysis
Option 1: extra 45% RE price drop would still leave total coverage above 100%
We run a simulation on the fair value of real estate collaterals aiming at showing what kind of
devaluation would be needed to reduce the overall coverage ratio to 100%. We proceed as follows:
We start from the stock of gross problem loans, as disclosed by each bank at the end of 2012.
We assume the cash coverage (allowance for loan impairments) as at 2012 unchanged. Such
allowance includes the evidence of the inspections carried out by the Bank of Italy at the end
of 2012, and hence should account for the partial repayment of problem loans and the
updated fair value of collaterals (real estate and personal guarantees).
We leave 2012 fair value of personal guarantees unchanged, as we assume the financial
strength of the counterparties providing personal guarantees unchanged.
We start from the fair value of collaterals, as disclosed by each bank. We flag that in 2012
Italian banks’ reporting was homogeneous, as all banks under scrutiny reported the total fair
value of collaterals (in 2011 some banks were still reporting the value of collaterals up to a
contractual limit).
We simulate what reduction in the fair value of real estate collaterals would be required for
the overall coverage ratio (unchanged cash allowance for loan impairments plus unchanged
fair value of personal guarantees plus revised fair value of real estate collaterals) to hit 100%.
If the coverage fell below 100%, a replenishment of the cash coverage would be necessary.
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17 June 2013 ◆ 34
The outcome of our analysis (lhs chart below) shows that the aggregate sample of Italian banks under
scrutiny could bear a 45% downwards revision of the fair value real estate collaterals without suffering
total coverage ratio below 100% (lhs chart below). We regard 45% maximum downward revision of the
real estate collateral value as plausible in an auction process. However, the outcome of our analysis is
scattered:
UBI, BP and CREDEM could afford a severe revision of collaterals’ fair value, without
necessitating a replenishment of cash coverage. Around 100% maximum downwards revision
of real estate collaterals would mean that every deteriorated position is allocated personal
guarantees covering a large portion of the exposure. This is an overstatement of the
effectiveness of collaterals, but explains the low cash coverage (26% at UBI and BP).
CREVAL, BPER, MPS and ISP could suffer a revision of real estate collaterals ranging
between 60% and 40%, a level compatible with the likely outcome of an auction sale.
UCG and BPM could suffer only 20% devaluation of collaterals, a level unlikely to match the
haircut of fair value in the case of an auction sale.
Option 2: extra 10% RE price drop would erode 17% of CT1 if coverage unchanged
As a second approach, we calculate the impact on the Italian banks capital assuming the following:
Unchanged total coverage ratio as at 2012, including the fair value of collaterals (real estate
and personal guarantees).
A further 10% reduction in the fair value of the real estate collaterals backing deteriorated
exposures, almost matching the descent of real estate prices experienced in Spain since the
peak in 2007.
The amount of provisions needed to replenish the coverage ratio, after having marked-down
the fair value of real estate collaterals by 10%.
The outcome of our analysis is as follows (rhs chart below):
We calculate c17% of the CT1 capital of Italian banks under scrutiny would be washed-out.
The Basel II.5 CT1 ratio as at 2012 would fall to 8.7% at aggregated level, i.e. c170bps drop.
50% of the banks in the sample (MPS, BP, BPER, BPM and CVAL) would fall below 8%, but
adoption of IRBA models would restore the regulatory capital ratios at more comfortable
levels in three out of five (i.e. BPER, BPM and CVAL).
The CT1 ratios of the two national champions (ISP, UCG) would remain anchored above 9%.
Estimated max revision of RE collaterals values to hit 100% coverage ratio, 2012
Estimated CT1 Impact from 10% drop in market price of RE collaterals, 2012 (coverage unchanged)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Agg
rega
te
UBI
BP
CRED
EM
CREV
AL
BPER
MPS
ISP
BPM
UC
G
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Agg
rega
te ISP
UC
G
MPS
BP
UBI
BPER
BPM
CRED
EM
CREV
AL
CT1 Impact CT1 after RE Collaterals Mark-down Source: Company Data, Mediobanca Securities analysis
The landscape tables in the following page provide all the numerical details and the key findings of our
simulation.
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17 June 2013 ◆ 35
Italian Banks – Estimated Maximum Fall of Fair Value of Real Estate Collaterals to Match 100% Coverage Ratio, 2012
€bn GROSS
PROBLEM LOANS
ALLOWANCE FOR LOAN
IMPAIRMENTS
SIMULATED DROP IN R. ESTATE PRICES
FV OF REAL ESTATE COLLATERALS
FV OF PERSONAL GUARANTEES
FAIR VALUE OF COLLATERALS
CASH COVERAGE
COVERAGE OF COLLATERALS
TOTAL COVERAGE
Aggregate 203.0 82.3 44% 82.4 39.0 121.4 41% 60% 100%
ISP 49.7 21.2 36% 23.3 5.2 28.5 43% 57% 100%
UCG 79.8 35.7 18% 36.4 7.6 44.1 45% 55% 100%
MPS 29.5 12.1 36% 14.0 3.4 17.4 41% 59% 100%
BP 16.2 4.3 98% 0.2 11.7 11.9 27% 73% 100%
UBI 11.0 2.9 100% - 8.7 8.7 26% 80% 106%
BPER 8.2 3.0 54% 4.1 1.1 5.2 37% 63% 100%
BPM 4.2 1.4 18% 2.6 0.2 2.8 34% 66% 100%
CREDEM 1.1 0.4 97% 0.0 0.7 0.7 35% 65% 100%
CREVAL 3.2 1.1 65% 1.7 0.4 2.1 35% 65% 100%
Source: Mediobanca Securities estimates
Italian Banks – Estimated Maximum Basel II.5 CT1 Impact from 10% Fall in Fair Value of Real Estate Collaterals, 2012
€bn GROSS
B LOANS
ALLOWANCE LOAN
IMPAIR.
DROP IN RE PRICES
FV RE COLLATERALS
FV PERSONAL
GUARANTEES
FV COLLATERALS
CASH COVERAGE
COVERAGE OF
COLLATERALS
TOTAL COVERAGE
DELTA COVERAGE
INCREASE IN PROVISIONS
CT1 IMPACT
CT1 IMPACT
CT1 IMPACT
CT1 Ratio 2012
Aggregate 203.0 82.3 10% 131.5 39.0 170.5 41% 84% 125% -13% 25.7 18.7 17% -1.7% 8.7%
ISP 49.7 21.2 10% 32.6 5.2 37.8 43% 76% 119% -11% 5.6 4.0 12% -1.4% 9.9%
UCG 79.8 35.7 10% 40.1 7.6 47.8 45% 60% 105% -14% 11.4 8.3 18% -1.9% 9.1%
MPS 29.5 12.1 10% 19.7 3.4 23.1 41% 78% 119% -10% 3.0 2.2 25% -2.3% 6.8%
BP 16.2 4.3 10% 12.7 11.7 24.4 27% 150% 177% -12% 2.0 1.5 26% -2.6% 7.4%
UBI 11.0 2.9 10% 10.1 8.7 18.8 26% 172% 198% -15% 1.7 1.2 15% -1.6% 8.7%
BPER 8.2 3.0 10% 8.1 1.1 9.2 37% 111% 148% -13% 1.1 0.8 21% -1.7% 6.6%
BPM 4.2 1.4 10% 2.8 0.2 3.0 34% 72% 106% -8% 0.3 0.2 8% -0.6% 6.7%
CREDEM 1.1 0.4 10% 1.1 0.7 1.8 35% 161% 196% -14% 0.2 0.1 7% -0.7% 8.7%
CREVAL 3.2 1.1 10% 4.3 0.4 4.7 35% 145% 180% -18% 0.6 0.4 30% -2.1% 5.0%
Source: Mediobanca Securities estimates
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17 June 2013 ◆ 36
SME lending: a missed opportunity
In the occasion of the last ECB meeting, the ECB Governor Mario Draghi confirmed the governing
council had detailed discussions of all potential measures available: asset-backed-securities market for
SME loans, LTROs, credit claims, collateral policies, negative rates on deposit facility. According to the
Governor, some of them are ready to be implemented if needed.
However, with regard to ways and means to revive the SME lending and facilitate the flow of credit to
the real economy, the Governor admitted disagreements on how to rate and price SME loans, among
other issues. Most importantly the Governor stated that, whatever the decision will be, this is not
going to be a short term delivery, as it would require a new EU discipline on liquidity and capital
treatment of ABS.
Despite having been postponed, we try to quantify the size of Italian banks’ portfolio of SME loans that
may be involved in ECB measures. We calculate that Italian banks’ SME lending eligible for the ECB
could hover over €145bn at best, representing c15% of Italy’s corporate loans. If we raised the bar on
the quality of the eligible loans to AA (max 20% risk-weight), the amount of eligible portfolios would
reduce to €45bn, i.e. c6% of Italy’s corporate book. In estimating the amount we assume:
Only SME loans of good quality could be accepted by the ECB, as we believe the Central Bank
cannot take on board excessive risk.
We started from the exposure to SME and corporate in general, when exposure to SME is not
available disclosed in the Pillar III. In our view, using the corporate exposure when the SME
exposure is not available should not overstate excessively the outcome of the analysis, as the
Italian banks economy is largely dominated by SME.
With regard to the exposures under the Standardised Approach, we use the exposures
weighted not less than 50%, as the Standardised Approach imposes a rating not below A. We
believe exposures rated below A are unlikely to be accepted by the ECB.
With regard to the exposures under the IRB Approach, we use only the exposures whose PD
and LGD models lead to a maximum risk-weight of 50%, assuming a maximum 50% IRB
risk-weight to coincide A rating under the Standardised Approach.
In estimating the SME portfolio of UCG, the only one with sizeable exposure outside of Italy,
we assume only 45% of the consolidated exposures rated not below A under the Standardised
Approach and with risk-weight.
Claims on Corporate – Credit Assessment and Risk-Weights Standardised Approach
AAA to AA- A+ to A- BBB+ to BB- Below BB- Unrated
Risk-weight 20% 50% 100% 150% 100%
Source: Mediobanca Securities estimates
Italian Banks – Estimated SME Portfolios Eligible for ECB Measures, 2012, €bn
€bn IRB
Max 50% RW Standardised Min A Rating
Total IRB
Max 20% RW Standardised Min AA Rating
Total
Total 115 29 144 37 8 45
UCG 16 2 19 6 1 7
ISP 30 8 38 10 6 17
MPS 17 1 18 4 0 4
UBI 6 3 9 1 0 2
BP 38 1 39 12 0 12
BPER 0 5 5 0 0 0
BPM 0 5 5 0 0 0
CREDEM 7 0 8 3 0 3
CREVAL 0 4 4 0 0 0
Source: Mediobanca Securities estimates
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17 June 2013 ◆ 37
In trying to revive the SME lending across Europe, we see two possible ways to proceed:
Conferring SME portfolios pro-solvendo – Good quality portfolios could be used as
collaterals with the ECB in exchange of liquidity.
Conferring SME portfolios pro-soluto – Good quality portfolios could be sold to the
ECB and off-loaded from the banks’ balance sheet.
The first solution has already proved unsuccessful at the time of the LTRO auctions, when the majority
of the €1trn liquidity injected by the ECB in the European banking system remained parked at the ECB
itself for the banks operating in countries not suffering a sovereign debt crisis or used to buy
Government bonds and avoid the access to the institutional market for banks operating in countries
suffering a sovereign crisis. In other words, there is little evidence that the liquidity injected by the
ECB eased banks’ credit standards or revived credit demand from corporations.
The second solution could be problematic as:
We are firmly convinced that the ECB could not take excessive risk and would accept only
good quality portfolios. In other words, we do not see Germany accepting the ECB to embark
Italy, Spain’s SMEs risks.
Should the ECB buy SME portfolios, we believe the ECB would likely apply a haircut, despite
the portfolios being of good quality, generating e problems related to the quantification of the
haircut.
Aside the quantification of the haircut, we see little reasons why banks should sell at discount
portfolios of performing loans. Banks would aspire to offload non-performing loans rather
than good quality SME portfolios.
Should these portfolios being securitised, it is not sure that banks would benefit from a
capital requirement point of view.
Recent comments from ECB governor Draghi highlighted the many controversial issues surrounding
this plan and contributed to cool down high markets’ expectations. A lack of delivery on SME ABS
would be a missed opportunity for Italy in its attempts to try and boost growth.
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17 June 2013 ◆ 38
Deposits and AM inflows the good news
Market concerns of potential deposits outflows at Italian banks post the Cyprus events
have now receded somewhat. Recent evidence showed that Italian banks are not
suffering deposit outflows, as the amount of deposits (net of repos) showed +6% annual
growth in March 2013, and the stock is broadly stable at c.€1.4trn. The most recent
system data show the stock of deposits soared by roughly €20bn in March 2013 versus
February 2013, almost equally split between time deposits and current accounts. This
trend offset the €20bn monthly drop in bonds. As a result, the Eur20bn net funding
increase at Italian banks in March versus February is almost entirely explained by
repos. It is also worth flagging the seasonality of deposits’ collection at Italian banks: in
13 of our 16 years’ observation period we found a descent trend in the stock of deposits
in the first two months of the year and 2013 makes no exception.
Whilst current accounts outflow does not seem to be an issue, the ECB data confirm
Italian banks funding is still over reliant on the central bank. Italian banks have taken
c.€260bn from the ECB and have deposited just €12bn with the Central Bank, meaning
the vast majority of the LTRO liquidity is still sitting on Italian banks’ liabilities,
providing a crucial although temporary buffer to their funding needs. The refunding of
such ECB liquidity is scheduled for late 2014/early 2015. Should Italian banks’ cost of
funding remain at high levels, the Italian banking system may be forced to cut back its
sovereign exposure or replace the LTRO funding with more expensive liquidity at
detriment of some 14% of 2015 profitability at current market conditions, based on our
estimates. Not only deposits confirm their stickiness, but appetite for risk emerges
when looking at recent strong AM inflows: after Eur270bn of cumulated outflows since
2006, Q1 2013 brought Eur20bn inflows – benefiting both assets gatherers and banks.
Our correlation analysis points to the drop in government bond yields post the OMT
announcement as a key driver of the recent AM inflows.
A reality check on deposits’ stickiness
Elections, Cyprus and MPS data raised deposits outflows concerns . . .
Concerns about the risk of potential deposits outflow at Italian banks started to emerge among the
investors community following the inconclusive outcome of the Italian elections at the end of February
this year, and more significantly, following the events that occurred in Cyprus at the end of March. The
release of MPS fourth quarter results on 15 May exacerbated market concerns, given a surprising 6%
QoQ drop in current accounts.
. . . which have receded with Q1 results
Recent central bank data and Italian banks Q1 results seem to offer room for reassurance, at least for
the time being. The graph below illustrates the historical trend of Italian banks’ funding sources, over
the period June 1998 to March 2013.
The stock of Italian banks’ funding reached €2.4trn in March 2013, up €25bn versus February 2013.
The stock of deposits soared by roughly €20bn in March 2013 versus February 2013, almost equally
split between time deposits and current accounts. This trend offset the Eur20bn monthly drop in
bonds, so that the Eur20bn funding increase at Italian banks in March versus February is almost
entirely explained by repos which grew of a similar amount over the month.
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17 June 2013 ◆ 39
Italian Banks – Funding Mix, € bn
-
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2,500
Dec-
98
Jun-
99
Dec-
99
Jun-
00
Dec-
00
Jun-
01
Dec-
01
Jun-
02
Dec-
02
Jun-
03
Dec-
03
Jun-
04
Dec-
04
Jun-
05
Dec-
05
Jun-
06
Dec-
06
Jun-
07
Dec-
07
Jun-
08
Dec-
08
Jun-
09
Dec-
09
Jun-
10
Dec-
10
Jun-
11
Dec-
11
Jun-
12
Dec-
12
Deposits Fixed Maturity Current … Deposits Reedem. at Notice Repos Bonds
Source: Bank of Italy, Mediobanca Securities analysis
Funding mix unchanged
Italian banks’ funding mix has not changed much over the last 12 months, with time deposits
amounting to 14% of total funding, current accounts to 30%, deposits refundable with notice to 13%,
repos to 6% and bonds to 37%. It is worth noting the higher share of fixed maturity deposits at the
expense of current accounts over the last two years, driven by customers seeking higher yields on
deposits.
Italian Banks funding mix, Mar 2011- Mar 2013
Deposits Fixed
Maturity Current Accounts
Deposits Redeem. at Notice
Repos Bonds
Mar-13 13.9% 29.7% 13.5% 5.7% 37.1%
Mar-12 12.4% 29.6% 13.5% 4.6% 39.8%
Mar-11 10.1% 32.8% 14.2% 6.2% 36.6%
Source: Bank of Italy, Mediobanca Securities analysis
Some slowdown in deposits’ collection emerged recently . . .
The average annual growth rate of total funding over the last decade is equal to +9%. However, such a
growth pattern has stalled over recent months (i.e. +3% in Feb 2013 and Mar 2013). In March, banks’
deposits amounted to €1.44trn, after reaching a maximum in Dec 2012 (€1.52trn).
Italy – Deposits YoY Growth, Jun 1999 to Mar 2013 Italy – Deposits MoM Growth, Jan 2011 to Mar 2013
-5%
0%
5%
10%
15%
20%
25%
30%
Jun
-99
No
v-9
9
Ap
r-0
0
Se
p-0
0
Fe
b-0
1
Jul-
01
De
c-0
1
Ma
y-0
2
Oc
t-0
2
Ma
r-0
3
Au
g-0
3
Jan
-04
Jun
-04
No
v-0
4
Ap
r-0
5
Se
p-0
5
Fe
b-0
6
Jul-
06
De
c-0
6
Ma
y-0
7
Oc
t-0
7
Ma
r-0
8
Au
g-0
8
Jan
-09
Jun
-09
No
v-0
9
Ap
r-1
0
Se
p-1
0
Fe
b-1
1
Jul-
11
De
c-1
1
Ma
y-1
2
Oc
t-1
2
Ma
r-1
3
deposits YoY bonds YoY
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%deposits MoM bonds MoM
Source: Bank of Italy, ABI, Mediobanca Securities analysis
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17 June 2013 ◆ 40
. . . but watch seasonality
Italian banks’ deposits follow a cyclical trend, as their growth seems to stop and become negative
during the first two months of each year (i.e. in 13 years out of 16 years under scrutiny, with 2011,
2005 and 200o being the exceptions). Hence, we could argue that the drop experienced in February
2013 versus December 2012 could be related to seasonal factors, such as tax payments and the
Christmas season.
Italy – Deposits Growth in the First two Months of the Year vs Year-end, 1998-2013
€bn 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Dec 443 485 511 550 597 663 671 708 807 867 1,053 1,138 1,227 1,466 1,418 1,520
Avg Jan/Feb 439 483 511 531 587 632 658 738 796 843 1,049 1,129 1,221 1,440 1,424 1,471
Change -0.9% -0.5% +0.1% -3.5% -1.8% -4.7% -1.9% +4.1% -1.3% -2.7% -0.4% -0.8% -0.5% -1.8% +0.4% -3.2%
Source: Bank of Italy, ABI, Mediobanca Securities analysis
Reassuring message from Italian banks’ Q1 results on funding . . .
The data disclosed by Italian banks at their Q1 2013 results lead to similar reassuring conclusions:
We calculate approximately stable stock of customer deposits in March 2013 versus
December 2012. We note no major difference in the growth pattern shown by the different
banks (most of which hovering over -1%/+1% range, with the exclusion of Banco Popolare (-
4%) and Creval (+7%).
We calculate current accounts – i.e. potentially the easiest source of funding to move –
remained stable in March 2013 versus December 2012, with MPS alone showing a marked
drop (c.6%). In any case, such a drop was balanced by the growth in other sources of funding
accounted as deposits, which brought the total deposits up c.2% in March 2013 versus
December 2012 in MPS too, despite a turbulent period and extremely negative press
campaign.
We calculate the stock of bonds issued by Italian banks (including those classified at fair
value) is down c.2% in March 2013 versus December 2012. We believe this is mostly due to
the LTRO liquidity drained by Italian banks in late 2011 and early 2012, which allowed Italian
banks not to tap the institutional funding markets.
Italian Banks – Growth in Customer Deposits and Current Accounts
€bn Deposits –
Dec 12 Deposits –
Mar 13 q-o-q
Deposits Curr. Acc. –
Dec 12 Curr. Acc. –
Mar 13 q-o-q
Curr. Acc.
UCG 410 408 -0% 240 239 -0%
ISP 218 220 +1% 195 203 +4%
MPS 81 83 +2% 56 53 -6%
UBI 54 55 +2% 45 45 +0%
BP 50 48 -4% 37 36 -2%
BPER 32 33 +2% 24 25 +3%
BPM 26 26 -1% 22 22 +2%
CREDEM 14 14 -1% 13 13 -2%
CREVAL 16 17 +7% 12 12 -1%
Aggregate 901 903 +0% 644 648 +1%
Source: Company Data, Mediobanca Securities estimates
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The table below shows that Q1 2013 outflows affected almost all the banks on the bonds issuance side,
with a quarterly drop in the mid-single digit region.
Italian Banks – Growth in Securities Issued by Banks
€bn Securities Issued - Dec12 Securities Issued - Mar13 q-o-q
UCG 171 162 -5%
ISP 186 184 -1%
MPS 54 52 -4%
UBI 45 44 -3%
BP 45 45 +1%
BPER 15 14 -4%
BPM 12 12 +2%
CREDEM 5 5 -5%
CREVAL 6 6 -4%
Aggregate 540 526 -2%
Source: Company Data, Mediobanca Securities estimates
. . . but Italian banks are still over-relying on ECB facilities
The fact that deposits are not showing any significant outflow does not necessarily mean that the
funding of Italian banks is immune from risks. This is particularly evident when considering the over-
reliance of Italian banks on ECB funding. The lhs chart below shows that the amount deposited to the
ECB by Italian banks (net of the minimum reserve) stands at approximately €12bn in March 2013. We
also show the liabilities that Italian banks have with the ECB, amounting to c.€260bn in March 2013,
basically the same amount of liquidity drained at the time of the two LTRO auctions in late 2011 and
beginning of 2012. If Italian banks have taken c.€260bn from the ECB and have deposited just €12bn
with the Central Bank, it follows that the vast majority of the LTRO liquidity is still sitting on Italian
banks’ liabilities providing a crucial although temporary buffer to their funding needs.
Italian Banks – Deposits at the ECB versus Funding from the ECB (€bn)
ECB Funding by country
-275
-250
-225
-200
-175
-150
-125
-100
-75
-50
-25
0
25
Dec-0
4
Apr-
05
Aug-0
5
Dec-0
5
Apr-
06
Aug-0
6
Dec-0
6
Apr-
07
Aug-0
7
Dec-0
7
Apr-
08
Aug-0
8
Dec-0
8
Apr-
09
Aug-0
9
Dec-0
9
Apr-
10
Aug-1
0
Dec-1
0
Apr-
11
Aug-1
1
Dec-1
1
Apr-
12
Aug-1
2
Dec-1
2
Apr-
13
Deposits at the ECB Liabilities from the ECB
0.3
0.5
0.7
0.9
1.1
1.3
1.5
0%
10%
20%
30%
40%
50%
60%
70%
80%
€ trn
GR IRE IT ES PRT Total ECB Facility (RHS)
Source: Datastream, Company Data, Mediobanca Securities analysis
The ECB funding ballooned since the end of 2011 and at the start of 2012, coinciding with soaring
exposure in domestic sovereign (up €75bn in March 2013 versus December 2011, +47%, looking just at
nine banks under MB coverage). The dependence upon ECB funding has not reduced recently, despite
the drop in Italy’s and Italian banks’ CDS, meaning that the regained access to the institutional
markets still remains too expensive for the Italian banking system.
In the absence of a renewal of the LTRO auctions (something that may still be possible, although likely
for a smaller amount than the €1trn injected with LTRO1 and LTRO2), the refunding of the massive
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liquidity drained by Italian banks is scheduled for late 2014/early 2015. Should Italian banks’ cost of
funding remain at high – although bearable – levels, the system may be forced to cut back its
sovereign exposure or replace the LTRO funding with more expensive liquidity at detriment of
profitability in both cases. A back of the envelope calculation suggests that at current funding
conditions LTRO money could erode on average 14% of our 2015e EPS when refunded to ECB.
5 Years Senior CDS (bps) Italian banks - Domestic Sovereign Exposure (€bn)
0
100
200
300
400
500
600
700
800
900
1000
1100
1-A
ug-0
8
1-N
ov-0
8
1-F
eb-0
9
1-M
ay-0
9
1-A
ug-0
9
1-N
ov-0
9
1-F
eb-1
0
1-M
ay-1
0
1-A
ug-1
0
1-N
ov-1
0
1-F
eb-1
1
1-M
ay-1
1
1-A
ug-1
1
1-N
ov-1
1
1-F
eb-1
2
1-M
ay-1
2
1-A
ug-1
2
1-N
ov-1
2
1-F
eb-1
3
1-M
ay-1
3
ITALY ISP UCG MPS BP
0
25
50
75
100
125
150
175
200
225
250
UCG ISP MPS UBI BP BPER BPM CREDEM CREVAL TOTAL
1Q13 FY12 FY11
Source: Datastream, Coampny Data, Mediobanca Securities analysis
Asset management back “en vogue” due to low interest rates
Eur20bn AM inflows in Q1 2013
2013 looks to be marking a strong turning point for the asset management industry as a whole. As
shown in the chart below, the Italian asset management sector reported more than €270bn of
cumulated outflows in the 2006-2012 period, or some €40bn outflows per year. Such a gloomy picture
strongly reverted in 1Q13 as the industry turned in positive territory, posting €20bn net inflows and
such trend is confirmed by the latest figures reported by Assogestioni, which shows additional €7bn
inflows in April.
Italian Asset Management Sector – Net Inflows by Quarter, (€m, 2006-Mar-13)
-1,466
-9,721
-5,676-6,766
-12,431
-10,170
-12,451
-20,676
-36,794
-29,100
-25,602
-40,054
-12,934
-680
6,2174,125
1,665
-4,586
-2,221
-7,034 -6,514 -6,990 -7,658
-17,871
-2,507-3,886
2,382
-4,945
20,222
-50,000
-40,000
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
Source: Assogestioni
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In the table below, we show inflows and assets under management of the ten major asset management
companies. As a general comment, we see improving momentum, with the sector turning positive in
3Q and 4Q 2012, after the negative start reported in the first two quarters of the year. While asset
gatherers are confirming their already positive performance, it is interesting to note the strong
recovery of banks.
Italy – Top 10 Italian Asset Management Firms Inflows and AuM into Open Funds, 2012-13
1Q13A 4Q12A 3Q12A 2Q12A 1Q12A
(€ m) Inflows AuM Inflows AuM Inflows AuM Inflows AuM Inflows AuM
INTESA SAN PAOLO GROUP 2,132 112,405 546 109,047 -902 106,711 -2,309 104,057 -2,218 107,803
UNICREDIT GROUP 1,300 56,223 217 53,864 -82 52,698 -1,159 51,033 -1,254 52,724
GENERALI GROUP 264 41,923 -3,005 41,266 -70 18,432 -172 17,819 50 18,411
AM HOLDING 206 28,905 424 28,412 345 27,056 -249 25,843 -238 26,526
MEDIOLANUM 883 25,929 943 23,972 418 23,038 466 21,696 238 21,638
AZIMUT 758 17,337 588 16,387 457 15,810 178 15,244 385 14,679
ARCA 33 15,998 25 15,470 -79 14,579 -293 14,085 1,521 14,474
BNP PARIBAS ITALY -117 14,354 -317 14,072 -317 14,516 7 14,417 -445 14,564
AMUNDI -9 11,944 -69 11,812 -493 11,785 371 11,907 3 11,745
TOTAL ITALIAN AM SECTOR 13,905 507,150 1,544 481,551 2,515 445,957 -1,551 428,065 -1,452 434,811
Source: Assogestioni
NNM/AuM annualised
1Q13 4Q12 3Q12 2Q12 1Q12
INTESASANPAOLO GROUP 7.6% 2.0% -3.4% -2.2% -2%
UNICREDIT GROUP 9.2% 1.6% -0.6% -2.3% -2%
GENERALI GROUP 2.5% -29.1% -1.5% -1.0% 0%
AM HOLDING 2.8% 6.0% 5.1% -1.0% -1%
MEDIOLANUM 13.6% 15.7% 7.3% 2.1% 1%
AZIMUT 17.5% 14.4% 11.6% 1.2% 3%
ARCA 0.8% 0.6% -2.2% -2.1% 11%
BNP PARIBAS ITALY -3.3% -9.0% -8.7% 0.0% -3%
AMUNDI -0.3% -2.3% -16.7% 3.1% 0%
TOTAL ITALY AM SECTOR 11.0% 1.3% 2.3% -0.4% -0.3%
Source: Mediobanca Securities
AuM vs short term rates on govies
We believe there is an evident inverse correlation between short term interest rates on Italian
Government bonds and inflows into asset management products (but such correlation is valid for the
new business of traditional life insurance too). As we show in the chart below, inflows into asset
management always recovered in a context of falling yields, while proved to be negative during periods
with increasing or high yields on short terms Government bonds.
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Italy – Inverse Correlation Between AUM inflows and Yield on 2-Years BTP
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
-50,000
-40,000
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
IT asset management sector - flows Yield 2YR IT BTP
Source: Datastream, Assogestioni
A commonly asked question relates to where these inflows are coming from, given that the saving rate
of Italian households is constantly decreasing (from c13-14% in 2002-2008 to the current 8%) and
Italians’ financial wealth is stable at €3.6trn.
Where are inflows coming from?
Analysing the composition of Italian households’ financial wealth, we conclude that the re-
composition is benefiting AUM products to the detriment of custodian assets. In our view, government
bonds’ low yields and high volatility on equities are triggering an increasing demand for advice and
potentially higher returns offered by managed products.
The stock of wealth in cash is increasing slightly year-on-year (latest available figures from
Italian Banking Association ABI relates to 3Q12), though the low 3% increase is equivalent to
a €37bn increase in absolute terms.
The amount of mutual funds and technical reserves increased over the period. Mindful of the
fact that such trend could be affected by the market performance, we note that the starting
point discounts the severe outflows reported by the industry in 3Q11 and 4Q11. Thus, we
believe the YoY increase in mutual funds and life technical reserves reported in 3Q12 is even
more relevant and expect the growth pattern to have strengthened in 4Q12 and in 1Q13.
Italy – Composition of Financial Assets of Italian Households (€bn)
3Q11 3Q12 Y/Y Delta abs
Cash 1,111 1,149 3% 37
Fixed income 701 691 -1% -10
Equities 714 637 -11% -78
Mutual funds 250 274 10% 24
Life technical reserves 679 691 2% 12
Credits 171 178 4% 6
Total 3,627 3,619 0% -8
Source: ABI, April 2013 Bulletin
The table above includes the fair value of Italian households, and therefore our conclusions might be
affected by market performance. As for fixed income, the Bank of Italy provides a detailed picture of
the fixed income held by Italians at nominal value. We note a vast reduction in the direct ownership of
fixed income, falling to the current €658bn from €734bn at end of 2011.
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Italy – Fixed Income Investments Held by Households vs Total (Nominal Value, €bn)
Italian Households Total %
2011 734.0 1,562.0 47%
Mar-12 738.0 1,557.4 47%
Apr-12 731.3 1,541.4 47%
May-12 730.5 1,551.8 47%
Jun-12 728.5 1,545.4 47%
Jul-12 726.0 1,546.2 47%
Aug-12 725.1 1,541.6 47%
Sep-12 717.1 1,538.7 47%
Oct-12 714.4 1,524.0 47%
Nov-12 709.1 1,522.1 47%
Dec-12 689.6 1,503.4 46%
Jan-13 683.1 1,487.9 46%
Feb-13 672.8 1,487.0 45%
Mar-13 667.3 1,479.1 45%
Apr-13 658.3 1,468.2 45%
Source: Bank of Italy; Mediobanca Securities analysis
Also, we focus on the quarterly variation in the stock of fixed income investments held by Italian
residents and by foreign investors (external debt). We note how the quarterly variation among the two
investor types was somewhat similar in the first two quarters of 2012, while the trend diverged in 3Q
and 4Q with Italian households being net sellers of bonds and foreign investors being net buyers.
Fixed Income Investments– IT households vs foreign owners, quarterly trend – € bn
4.0
-5.5
-11.4
-27.4
3.9
-3.0
24.721.3
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
1Q12 2Q12 3Q12 4Q12
Italian households External debt
Source: Bank of Italy
In conclusion, we explain the current inflows of Italian households as follows:
The financial wealth of Italian households is no longer growing, due to the drop in the savings
rate of Italian families.
Within the existing €3.6tn of financial wealth, we note a decreasing direct exposure to
equities and fixed income, while Italians are asking for more advice and returns increasing
their exposure towards managed products such as mutual funds and life insurance policies.
This is also confirmed by our analysis, which shows an inverse correlation between inflows
into asset management products and yields on short term government bonds.
In such a context, we do not see deposit outflows, but rather an increase in cash (small in
relative terms, but significant in absolute).
Analysing the current quarterly trend of fixed income assets, we see that in the last few
quarters a decrease in the direct investments held by households, while we contextually
observe an increase in the assets held by foreign investors.
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Tax burden on wealth: Italy vs Europe From 1995 to 2010 Italy has pursued a fiscal policy divorced from the rest of Europe,
lowering the tax burden on capital/wealth (and consumption) at the expenses of taxes
on income. Based on 2010 figures, we calculate that taxes on the stock of capital and
wealth accounted for 2.5% of Italian GDP (aligned to the EU average) from c.4% in 1995.
Such a trend has been reversed in the past 12 months as the IMU (real estate) and the
additional 0.15% taxation of custodian assets brought the burden of capital taxation to
the level of 1995, making Italy the nation with the third highest taxation of capital in the
EU-27 after France and UK. IMU brought the recurrent taxation of capital and wealth at
almost €60bn p.a., equal to c.4% of Gross Disposable Income. Hence, with the
introduction of the IMU tax, the direct real estate taxation moved in Italy from 0.6% of
Gross Disposable Income to 1.6% versus 1% EU weighted average. Also taxation of
financial assets at 0.5% of GDP in Italy stands above the Eu average of 0.25% in France,
Germany, Spain and UK. Despite being taxed more than in the other large EU countries,
taxation of financial assets is lower than that of property in Italy and the introduction of
IMU widened the gap further given that real estate taxes account for 0.63% of wealth
(real estate, land, excluding plants/machineries and valuables) in Italy versus 0.36% on
financial assets. In conclusion, after benchmarking the Italian tax profile of wealth,
both capital and real estate, with its EU peers we find no room to close the gap as Italy
already sits above the average. This fact leads us in the following chapter to explore
alternative ways for the country to try and find resources should this be required to
support public accounts but without harming consumers too much.
Italy: 15 years of divergence from Europe . . .
Eurostat’s data on tax revenues distinguish between income taxes, taxes on capital (including stock of
capital/wealth), taxes on consumption and social contribution. It should be noted that Eurostat
regards as taxes on the stock of capital/wealth stamp duties and registration fees (stamp taxes), taxes
on financial transactions and financial capital and those on land, buildings and their use. Such a
definition in Italy comprises mostly financial wealth taxes (stamp duty on securities portfolios,
imposta di bollo su conti correnti, conto titoli) on both financial transactions and on real estate assets
(Imposta Comunale Immobili, ICI in 2010).
EU – Tax Receipts Breakdown (excluding Social Contribution), 2010
EU – Tax Receipts Breakdown (excluding Social Contributions and Consumption), 2010
54%46%
37%
44%
9% 10%
BE BG CZ DK DE EE IE EL ES FR IT CY LV LT LU HUMT NL AT PL PT RO SI SK FI SE UK NO EU
27INCOME TAXES
TAXES ON CONSUMPTION
TAXES ON STOCK OF CAPITAL
BE BG CZ DK DE EE IE EL ES FR IT CY LV LT LU HUMT NL AT PL PT RO SI SK FI SE UK NO EU
27PERSONAL INCOME TAX
CORPORATE INCOME TAX
TAXES ON STOCK OF CAPITAL
Source: Eurostat, Mediobanca Securities analysis
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Selected EU Countries – Breakdown of Taxes on Stock of Capital/Wealth, 2010
ITALY FRANCE GERMANY SPAIN UK
Real Estate 51% 67% 65% 77% 90%
Financial Assets 20% 7% n.a. n.a. 4%
Wealth Tax 0% 5% n.a. 0% 0%
Inheritance Tax 1% 9% 17% 9% 4%
Other 28% 11% 17% 13% 2%
Total 100% 100% 100% 100% 100%
Source: Eurostat, Mediobanca Securities analysis
Lower taxes on wealth, higher taxes on income . . .
According to Eurostat data, in the period 1995-2010 Italy has pursued a fiscal policy divorced from
that of the rest of Europe, lowering the tax burden on wealth at the expenses of taxes on income. As
shown below, in 1995 Italy was among the countries with the higher share of tax revenues coming
from the taxation of capital (9.8%), not far from the UK (10.5%) and France (9.9%). Germany, the
exception among the major economies of the EU, in 1995 came a little over 3% of total tax revenues. In
2010, the share of revenues from taxes of capital in Italy had fallen by almost 4%, to 5.9% of tax
revenues, a level lower than the weighted EU average (6.6%), in turn strongly influenced by Germany’s
soft taxation. In respect of GDP, Italy reduced the fiscal burden on stock from c.4% of GDP in 1995 to
c.2.5% in 2010. Such a number remained unchanged in 2012 – effectively realigning Italy to the
European average, which floated around this level between 1995 and 2010.
Italy – Taxes on Stock of Capital/Wealth as Percent of Tax Revenues, 1995 - 2010
Italy – Taxes on Stock of Capital/Wealth as Percent of Domestic GDP, 1995 - 2010
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ITALY EU 27 AVG
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ITALY EU 27 AVG Source: Eurostat, Mediobanca Securities analysis
. . . largely due to real estate
The reduction of the taxation of the stock of capital/wealth in Italy is ascribed mostly to the
progressive relative reduction of the taxation on real estate, culminating in the elimination of ICI on
the main property in 2010. In 2010, the amount of direct real estate taxes amounted to €9bn versus
almost €13bn in 2007, less than 0.6% of GDP in 2010 versus 0.85% in 1995.
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Italy – Real Estate Taxation Breakdown as Percent of GDP, 1995-2010
Taxes (€bn) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ICI Immobili/Terreni 6.7 7.2 7.7 7.9 8.3 8.4 8.7 9.6 10.0 10.4 10.9 11.4 12.0 9.1 8.9 8.6
ICI Aree Edificabili 0.7 0.8 0.9 0.9 0.9 0.9 1.0 1.0 1.1 1.1 0.8 0.6 0.8 0.6 0.6 0.6
Direct RE Taxes 7.4 8.0 8.6 8.8 9.2 9.3 9.7 10.6 11.1 11.5 11.7 12.0 12.8 9.7 9.5 9.2
Imposta Registro 3.3 3.2 3.5 3.8 4.3 3.7 3.8 4.6 4.6 5.3 5.0 6.1 6.4 5.9 5.3 5.7
Imposta Ipotecaria 0.7 0.9 1.3 1.4 1.2 1.1 1.0 1.3 1.2 1.2 1.5 2.3 2.5 2.3 2.1 2.1
Diritti Catastali 0.2 0.3 0.6 0.7 0.6 0.6 0.5 0.7 0.7 0.7 0.8 1.1 1.2 1.1 1.0 0.9
Imposta Surr. Registro 1.4 1.5 1.5 1.8 1.5 1.5 1.2 1.3 1.4 1.4 1.4 1.5 1.5 1.5 1.8 1.7
SOCOF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
INVIM 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total RE Taxes 13.1 14.0 15.6 16.6 16.9 16.3 16.3 18.5 19.0 20.1 20.4 23.0 24.4 20.5 19.7 19.6
Total RE Tax % GDP 1.51% 1.40% 1.47% 1.52% 1.49% 1.36% 1.30% 1.42% 1.42% 1.44% 1.42% 1.54% 1.57% 1.30% 1.29% 1.26%
Direct RE Tax % GDP 0.85% 0.80% 0.81% 0.80% 0.81% 0.78% 0.77% 0.81% 0.83% 0.82% 0.81% 0.80% 0.82% 0.62% 0.62% 0.59%
Source: Eurostat, Mediobanca Securities analysis
Looking at the tax revenues composition, Eurostat data show that in 2010 taxes on capital accounted
for c.6% of total tax revenues in Italy, not far from the EU average. Overall, we conclude that in 2010
the taxation of capital in Italy was broadly aligned to the European average, despite having pursued a
different strategy in taxation.
EU – Taxes on Capital as % of Tax Receipts, 2010 EU – Taxes on Stock of Capital as % of GDP, 2010
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
NO
UK
FR
BE IS ES IE PT
LU
HU
EU
27 W
Avg
DK IT PL
CY
EU
27 A
vg
MT
NL
RO EL LV FI
SE
BG
DE
LT SI
AT SK
CZ
EE
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
NO FR
UK
BE
DK IS LU ES IT HU
EU
27 W
Avg
PT IE CY
NL
PL
EU
27 A
vg
MT FI
SE
EL
RO DE LV AT SI
BG
CZ LT EE
SK
Source: Company data, Mediobanca Securities analysis
. . . reversed in 12 months (2012)
IMU tax changed the picture
Despite the relatively low taxation of real estate assets, the taxation of wealth in Italy in 2010 was
aligned to the EU average, either in respect of GDP or in respect of the weight on total tax revenues. In
2011, the Berlusconi government introduced a mini-tax on financial wealth and real estate assets
(IMU), starting from 2014. At the end of 2011 and in 2012, the Monti Government corrected the tax on
financial assets and anticipated the IMU to 2012. The Italian Treasury is estimated to have collected
€24bn from the possession of real estate assets (IMU, first indications pointed to €19bn, then upped
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due to ballooning municipal brackets), while the 0.15% tax on financial wealth is expected to generate
c.€5bn.
The aggregate of the two new taxes on wealth should stand at c.€28/30bn, c.70% of the tax revenues
on capital in 2010 (€39bn). As in 2010, direct taxes on land, building and other structures amounted
to €9bn according to Eurostat, and we add €15.5bn revenues from real estate tax (IMU) and €5bn
from the new tax on financial wealth. Adding €21bn to the €39bn total taxes on capital in 2010, we
calculate the taxation on capital would stand at 3.8% of 2010 GDP, the level of 1995. The trend of the
past 15 years was reversed in one year (2012).
Italy – Taxes on Capital as Percent of GDP, 1995-2010
€bn 1995 2010 Extra Revenues (IMU + Fin. Assets)
2010 (incl. IMU + Fin. Assets)
Total Real Estate Taxes (Direct/Indirect) 13.1 19.6 +16 35.1
Financial Assets 5.4 7.9 +5 12.9
Total Taxes on Capital 33.8 38.9 +21 59.4
GDP 865 1,556 1,556 1,556
Taxes on Capital as % of GDP 3.9% 2.5% +1.3% 3.8%
Source: Company data, Mediobanca Securities analysis and estimates
Property taxation in Europe
Accounting real estate assets for c66% of Italy’s net wealth, we start assessing if the current level of
taxation of property assets in Italy is below/above the EU AVG. Being real estate an asset class that
cannot be considered as cash or cash-equivalent, in our view it is correct to measure it against the
Disposable Income of a nation, rather than against GDP.
From 0.6% of GDI in 2010, below the EU average . . .
Using Eurostat data (i.e. the items named 29A in Eurostat statistics), we calculate direct taxes on real
estate (€9bn, excluding indirect taxes such as stamp duties, cadastral taxes et cetera…) assets
represented 0.57% of the Italian Gross Disposable Income in 2010, the Italian level of property
taxation was below EU 27 (arithmetic) average of the same year, equal to 0.68% of Gross Disposable
Income. Using a weighted average for EU, we would calculate that taxes on real estate assets would
account for c1.0% of Gross Disposable Income, pushed upward by the high level of taxation in France
and UK, more than balancing the low taxation in Germany. In this case, the taxation of Italian real
estate assets was much lower than the EU average.
. . . to 1.6% in 2012 post the introduction of IMU, above the EU average
Today we could not make the same statement. Including the incremental revenues from the
introduction of IMU in 2012 (equal to €15.5bn) in respect of ICI in 2010, the total direct taxes on real
estate would hit c€24bn, and the weight of direct real estate taxation would account for c1.6% of Gross
Disposable Income in 2010, the second-highest in the Euro Area after France and well above the EU
average.
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EU – Direct Real Estate Taxation as Percent of Gross Disposable Income, 2010
2010 Real Estate Taxes (€bn, A) Gross Disp. Income (€bn, B) A / B
BE 4.4 359 1.2%
BG 0.1 36 0.3%
CZ 0.3 138 0.2%
DK 3.2 237 1.4%
DE 11.3 2,511 0.5%
EE 0.1 14 0.4%
IE 1.4 129 1.1%
EL 0.0 214 0.0%
ES 9.5 1,026 0.9%
FR 45.7 1,942 2.4%
IT (ICI on Buildings and Land) 8.6 1,528 0.6%
IT (incl. extra €16bn Taxes from IMU) 24.1 1,528 1.6%
CY 0.1 17 0.6%
LV 0.1 19 0.7%
LT 0.1 28 0.3%
LU 0.0 26 0.1%
HU 0.3 91 0.3%
NL 3.0 570 0.5%
AT 0.7 283 0.2%
PL 0.8 344 0.2%
PT 1.0 168 0.6%
RO 0.5 126 0.4%
SI 0.2 35 0.5%
SK 0.2 64 0.3%
FI 0.0 179 0.0%
SE 2.7 352 0.8%
UK 26.2 1,705 1.5%
NO 1.1 318 0.3%
IS 0.2 8 2.7%
EU Average
0.7%
EU Weighted Avg
1.0%
Source: Eurostat, OECD, Mediobanca Securities analysis and estimates
Taxation of financial wealth looks the highest in Italy, but below real estate
Our analysis compares the taxation on financial assets across Europe. We neglect taxation of capital
gains and the withholding tax on deposits for households and corporations, and we limit our analysis
to a sample including the five major European countries (Italy, France, Germany, Spain and the UK).
Unlike real estate, the levies on financial wealth are heterogeneous and more difficult to compare.
Eurostat does not provide data for Germany and Spain, for which taxation on financial wealth looks to
be very low: if we assume all taxes on the stock of capital/wealth other than real estate and inheritance
to be allocated to financial assets, we calculate the residual would account for 0.2% of GDP in
Germany and 0.3% of GDP in Spain.
In 2010, the total amount of taxes on financial assets accounted for 0.5% of GDP in Italy versus 0.3%
in France and 0.15% in the UK. In other words, already in 2010 Italy showed the highest tax burden on
financial assets. The situation changed in 2013 with the introduction of the 0.15% taxation of financial
wealth. If we add the estimated €5bn tax receipts, the taxation of financial assets would reach
approximately €13bn, more than doubling the amount charged in France (excluding the ISF).
Although being the highest among the five largest countries, the taxation of financial assets accounted
for 0.2% of the Italian households’ wealth in 2010, below the 0.33% calculated as taxation of real
estate assets as a percentage of the Italian households’ wealth in real estate. Adding the estimated
additional tax receipts from IMU (€16bn) and financial assets (€5bn), the gap will widen further to
c.25bps, by our estimates.
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Selected EU Countries – Breakdown of Taxes on Stock of Capital/Wealth, 2010
€bn ITALY ITALY (IMU/Fin. Ass) FRANCE GERMANY SPAIN UK
Real Estate 20 35 56 17 20 66
Financial Assets 8 13 6 n.a. n.a. 3
Wealth Tax 0 0 5 n.a. 0 0
Inheritance Tax 0.5 0.5 8 4 2 3
Other 11 11 9 4 3 1
Total 39 59 83 25 26 74
Source: Eurostat, Mediobanca Securities analysis
Italy – Tax Receipts on Real Estate Assets and Financial Assets as Percent of Wealth, 2010
€bn Wealth Tax Receipts Taxes as % of Wealth
Tax Receipts (incl. IMU, Fin. Assets)
Taxes as % of Wealth
Real Assets (RE, ex Valuables, Plants) 5,541 20 0.35% 35 0.63%
Financial Assets 3,546 8 0.22% 13 0.36%
Source: Eurostat, Bank of Italy, Mediobanca Securities analysis and estimates
Capital taxation at 2.5% of Gross Disposable Income
Another way to look at the weight of taxation of capital is to measure it against Gross Disposable
Income, i.e. the amount of money that a nation has available for spending and saving after income
taxes have been accounted for (disposable income is often monitored as one of the many key economic
indicators used to gauge the overall state of the economy).
In 2010, we calculate taxation of capital in Italy accounted for c.2.5% of Gross Disposable Income
(GDI), aligned to the EU average. Adding €21bn, we calculate the ratio would soar to 3.9%, making
Italy the country with the fourth highest taxation of stock in Europe after Norway and the third highest
in the Euro Area after the UK and France and excluding a marginal nation such as Luxembourg.
Hence, we conclude that the taxation of capital in Italy is already among the highest in Europe and
proves to be high in respect of the income generated by the country annually.
EU – Taxes on Capital as Percent of Gross Disposable Income, 2010
Italy – Taxes on Capital as Percent of Gross Disposable Income, 1995 - 2010
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
NO
UK
FR
LU
IT (Imu + Others)
BE
IS
DK
HU
IE
ES
EU 27 Wavg
IT
PT
CY
PL
NL
FI
SE
EL
RO
DE
AT
LV
SI
BG
CZ
EE
SK
LT
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2010+IM
U
Source: Company data, Mediobanca Securities analysis and estimates
In summary, there seems to be very limited room for Italy to increase its taxes on wealth, both on real
estate and on financial assets. The comparison with its EU peers does not in fact show any significant
gap to be closed, given the already above-average tax rate of wealth in Italy. Harmed with such finding,
in the following chapter, we investigate the room that the country has to realistically tap a potential
emergency situation eventually forcing it to quickly try and raise extra taxes should it be needed.
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Limited room for a large wealth tax The need for a large wealth tax is a recurring debate in Italy. We estimate that a €400bn
wealth tax would be needed in order to bring the debt / GDP ratio below 100% without
disposals. We believe such an approach is hardly feasible when considering that: 1)
some 65% of the €9.5trn Italian wealth is real estate, offering no room for further tax
rises relative to Europe; 2) only 20% of the Italian wealth comprises liquid assets, i.e.
c.€2trn, 80% of which is retail savings (bank deposits 30% of total liquid assets, postal
savings 15%, banks bonds 18% and Italian govies 9%). Raising €400bn from this pot
means 35% of Net Liquid Wealth (net of €900bn debt), far too high not to run the risk of
deposit outflows and over penalisation of small retail savers; 3) a large one-off wealth
tax spread over the whole population would hardly change the long-term dynamics of
Italy’s debt when assuming current > 1x fiscal multiplier to depress consumers.
Harmed by such constraints, we investigate the room for up to €75bn alternative
sources for the government, taking tax progression into account: 1) €3bn (up to €7bn if
including SMEs equity) from converging the fiscal treatment of financial assets to that
of real estate; 2) €5bn from a large fortunes tax replicating the French ISF; 3) €43bn
wealth tax on 10% of the wealthiest population; 4) €20bn from an agreement with
Switzerland on the repatriated funds; 5) €4bn from lower interest service on debt
stemming from the above measures. We also looked into the feasibility of another
building amnesty and concluded that the potential €2bn extra funds are not worth the
political cost, hence we have not include it in our exercise. Our conclusion would be a
mix of 4 p.p. of debt/GDP reduction, not necessarily over-penalising consumers as it
would come from the wealthiest population, and room for recurring growth measures
amounting to at least 1 p.p. of GDP. A proper attack on tax evasion and the black
economy would clearly bring us to a much larger number, but the poor track record of
Italy in this regard leads us to prefer not to include such options.
Some €9.5trn wealth in Italy but only €2trn is liquid assets
Real estate is 65% of Italian wealth
As the fiscal pressure on personal and corporate income has reached untenable levels, it is generally
debated in Italy the fact that any further large fiscal intervention should involve Italy’s wealth. In 2011,
Italy’s wealth amounted to €9.5trn (gross of €900bn debt), with c.65% of such wealth comprising real
estate and physical assets. The residual third comprises financial wealth, scattered in a constellation of
asset classes, of which only bank deposits and life technical reserves show a relatively high weight (7%
of total wealth in both cases).
Only 20% of Italian wealth is easily sellable . . .
In our view, the most important feature of Italy’s wealth is that c.80% of it cannot be regarded as
liquid or easily sellable (cash-equivalent). A further tax levied on real estate assets for instance would
have a cash impact on households, but real estate property cannot be converted in cash in a short
period of time. In our view, the asset classes that could be considered cash/cash-equivalent are:
Bank deposits and postal savings (€980bn), accounting for 10% of Italy’s gross wealth.
Italian corporate bonds (€375bn), which should all be relatively easy to transform in cash. We
assume banks’ bonds to be listed and sellable, although bid and ask may be distant.
Italian T-bonds and T-bills (€185bn), as we assume levying a tax on a debt the Government
owes to Italian people does not constitute a credit event.
We assume foreign securities (€150bn) held by Italians to be sellable, as we assume those to
be mostly constituted of Government bonds and liquid foreign corporate bonds.
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Equity in Italian and foreign listed corporations (c€75bn).
Mutual funds units (c€250bn).
We regard life technical reserves as not entirely liquid (i.e. easily sellable), as:
Investors may incur severe penalties when selling the assets underlying reserves ahead of the
scheduled timing
Contracts may have capital and yield protection, potentially affecting the capital of insurers in
absence of an appropriate legislation.
Italy – Breakdown of Gross Wealth, 2011
Amount - €bn As % of Total
Residential Property 5,027 53% Not Liquid
Valuables 125 1% Not Liquid
Non-Residential Buildings 342 4% Not Liquid
Plants, Machineries et cetera... 237 2% Not Liquid
Land 247 3% Not Liquid
Total Real Estate and Physical Assets 5,978 63%
Equity in Non-Listed Limited Corporations 421 4% Not Liquid
Equity in Non-Limited Firms 205 2% Not Liquid
Life Technical Reserves 680 7% Not Liquid
Others (Commercial Loans, Shareholders Loans to Cooperatives, Others) 119 1% Not Liquid
Banknotes, Coins 114 1% Liquid
Bank Deposits 651 7% Liquid
Postal Savings 327 3% Liquid
Italian Gov. Bonds and T-Bills 184 2% Liquid
Italian Corporate Bonds 3 0% Liquid
Italian Banks' Bonds 373 4% Liquid
Foreign Securities 146 2% Liquid
Equity in Listed Limited Corporations 73 1% Liquid
Mutual Funds Units 248 3% Liquid
Total Financial Assets 3,542 37%
Total Gross Wealth 9,519 100%
Source: Bank of Italy, Mediobanca Securities analysis
. . . and 80% of such ‘liquid wealth’ is retail savings
Excluding life technical reserves, we calculate that the Gross Liquid Wealth (GLW) would amount to
c.€2.1trn, reaching €2.8trn including life technical reserves. Taking into consideration the debt of
Italian households (€900bn), the Net Liquid Wealth (NLW) would reduce to €1.2trn (excluding life
reserves) and to €1.9trn including life technical reserves. Overall, we could argue that approximately
€2trn is the amount of liquid wealth that could be considered for extra wealth taxation. The vast
majority of such gross liquid wealth (c.70/75%) typically comprises retail savings, i.e. bank deposits
(30% of total), postal savings (15% of total), banks bonds (18% of total), Italian Governments and T-
Bills (9% of total).
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Italy – Breakdown of Gross Wealth, 2011 Italy – Breakdown of Gross Liquid Wealth, 2011
71%
7%
26%
Not Liquid Life Technical Reserves Liquid
46%
18%
12%
9%
7%
5%3%
Deposits IT Corporate Bonds Mutual Funds IT Gov Bonds
Foreign Securities Banknotes, Coins Listed Equity Source: Bank of Italy, Mediobanca Securities analysis
Why a large wealth tax aimed at reducing debt is hardly feasible
€400bn wealth tax would bring debt / GDP below 100% but . . .
We simulate the magnitude of a wealth tax aimed at increasing the tax pressure and reducing the
Debt/GDP ratio from the 127% reported in 2012 to 100%. In this simple exercise shown in the table
below, we start from €1.99trn Public Debt and €1.57trn GDP at the end of 2012 – as reported by the
Italian Treasury.
Italy – Estimated Impact on Debt/GDP Ratio from a Wealth Tax, 2012
Wealth Tax - €trn 0.00 0.05 0.11 0.16 0.21 0.26 0.32 0.37 0.42
Gross Wealth - €trn 9.52 9.47 9.41 9.36 9.31 9.26 9.20 9.15 9.10
Net Wealth - €trn 8.62 8.57 8.51 8.46 8.41 8.36 8.30 8.25 8.20
Gross Liquid Wealth - €trn 2.12 2.06 2.01 1.96 1.91 1.85 1.80 1.75 1.70
Net Liquid Wealth - €trn 1.22 1.16 1.11 1.06 1.01 0.95 0.90 0.85 0.80
Debt - €trn 1.99 1.94 1.88 1.83 1.78 1.73 1.67 1.62 1.57
GDP - €trn 1.57 1.57 1.57 1.57 1.57 1.57 1.57 1.57 1.57
Debt / GDP Ratio 127% 124% 120% 117% 114% 110% 107% 104% 100%
Tax on Gross Wealth 0% 1% 1% 2% 2% 3% 3% 4% 4%
Tax on Gross Liquid Wealth 0% 2% 5% 7% 10% 12% 15% 17% 20%
Tax on Net Liquid Wealth 0% 4% 9% 13% 17% 22% 26% 30% 35%
Source: Mediobanca Securities estimates
. . . it would amount to 35% of net liquid wealth – too much
As shown above, we calculate that a wealth tax exceeding €400bn would reduce the Debt/GDP ratio to
100%. At first sight, €400bn would account for less than 5% of Italy’s gross wealth (€9.5trn in 2011),
but such a finding is clearly misleading for the following reasons:
A wealth tax of such magnitude should be imposed suddenly and rapidly, allowing no time to
transfer the wealth outside the country. This would impose a sudden cash outflow with
banks/insurers implementing a withholding tax, leaving no time to sell the less liquid assets
(i.e. real estate). Hence, the impact would fall only onto the Gross Liquid Wealth (€2.1trn)
and 100% Debt/GDP ratio would impose a withholding tax equal to 20% of GLW.
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As it is reasonable to assume that Italian households will not stop to be obligors (i.e. they will
have to continue to amortise their debts, mortgages, etc), €400bn wealth tax would translate
into a withholding tax equal to 35% of the Net Liquid Wealth (NLW).
The soaring fiscal pressure would hit retail savings the most, as bank deposits, postal savings,
bank bonds and Government bonds represent c.70/75% of GLW, resulting in a politically
unacceptable intervention.
The above calculations not only show that reducing the Debt/GDP ratio to 100% through a wealth tax
is not feasible, but are also overly simplified, as they do not take into consideration the collateral
damage of an intervention of such magnitude on the domestic financial institutions’ liquidity profile:
Representing bank and postal savings the majority of GLW (€650bn bank deposits, €330bn
postal savings), we calculate approximately €200bn sudden outflows from Italian MFIs,
representing c.15% of Italian MFI’s deposits, i.e. unthinkable.
An intervention on corporate bonds would hit banks the most (representing almost 100% of
the Italian corporate bonds held by Italians), potentially denting the trust of Italian savers in
banks.
The impact of a wealth tax on GDP – the fiscal multiplier
Not only is the introduction of a large wealth tax constrained by the largely non-liquid Italian wealth,
but even more importantly it needs to be taken with care when considering the effect of the fiscal
multiplier. If on the one hand it is fair to expect that a wealth tax aimed at reducing the Debt/GDP
ratio would improve the creditworthiness of the Republic of Italy, on the other it would also negatively
affect the already-low growth prospects of the country, and adversely affect the GDP in the medium
term, i.e. potentially affecting the Debt/GDP Ratio too. Recent austerity measures in Europe provide
plenty of evidence on the GDP contraction stemming from consumers shrinkage post tax raises. In its
recent report for instance, the IMF not only states that the late bailout intervention in Greece was a
mistake, but it also admits that the 0.5x estimated fiscal multiplier was overly optimistic as in reality it
ended up depressing GDP more than expected, a common issue for the whole peripheral Europe we
would assume.
Recurring versus one-off taxes and the fiscal multiplier
We know that GDP is equal to the aggregate real income of a country, i.e. to the sum of consumption
(C), savings (S) and taxes (T):
GDP = Consumption + Saving + Taxes, where C + S = Disposable Income = GDP - T
It is necessary to distinguish between ordinary wealth tax and “una tantum” one (one off). An
intervention aimed at reducing the country’s debt would qualify as “una tantum”
intervention. Hence, in year one, we could argue that GDP would not change, as resources
would only be transferred from savings to taxation, with an immediate and sudden
improvement in the Debt/GDP ratio.
From year two though, we argue that an increase in tax pressure would change the disposable
income (DI), i.e. a change in both the consumption and savings in accordance to a Tax
Multiplier (TM), i.e. the change in the aggregate production caused by a change of one unit in
government taxes. The simplest versions of the tax multiplier include only induced
consumptions, while more complex versions also include other components (government
purchases, exports). A Tax Multiplier (TM) is given by the ratio between the negative
marginal propensity to consume (mpc) and marginal propensity to save (mps). The savings
rate would be hit by the one-off intervention, while the marginal propensity to consume
would likely fall, fearing additional actions.
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A large one-off wealth tax alone would hardly improve debt / GDP in the long term
In other words, the introduction of a massive wealth tax would probably result in the freezing of
growth and in the increase of the Debt/GDP ratio, after its temporary reduction. Indeed, a large “una
tantum” wealth tax does not necessarily have any influence on the Debt/GDP ratio, as such a tax
would lower the debt level in the immediate term but it would not change its long-term dynamic, and
after few years Italy could be back to the same level. We should learn from history: this is a road
already travelled in 1992 at the time of the Amato government. In that period, privatisations and
wealth tax (including an intervention on current accounts) reduced the Public Debt/GDP ratio of over
ten percentage points but, due to the absence of political reforms aimed at sustaining growth, the
benefit obtained was lost over the next decade. Hence, we argue the ingredients necessary to reduce
the Debt/GDP ratio are growth, a surplus in public accounts and low interest rates.
Alternative ways to free up €75bn extra resources
The previous sections set the boundaries of the limited manoeuvring room in terms of a wealth tax.
We know that:
including IMU the taxation of real estate is already above the EU average in Italy;
the taxation of financial assets is also in line or above EU standards;
a large wealth tax in Italy is constrained by the fact that 80% of wealth is not liquid;
any one-off large wealth tax would not fix the problem in the long run when considering the
negative impact on growth (and hence on tax collection) due to >1x fiscal multiplier.
Our receipt for €75bn extra resources
We have written extensively in the past about Italy’s urgent need to reduce its public debt (see our
Cassa Depositi e Prestiti – Italy’s gate to debt cut, of 28 February 2012 and Elections approaching,
uncertainty rising, of 18 February 2013). We have highlighted the ample room for the government to
dispose of its assets when considering €110bn worth of gold, €90bn of equity stakes, €30bn worth of
state concessions, and most importantly €450bn of real estate assets. Here we look at alternative ways
to free up resources without harming Italian consumers and before considering any potential disposal.
We will therefore focus on the progressivity of the tax rate.
The analysis that follows identifies room for up to €75bn resources coming from a combination of
recurring and one offs as follows:
€3bn (up to €7bn) from re aligning the tax treatment of financial assets to that of real estate
assets;
€5bn from a recurring tax on large fortunes in line with French ISF;
€43bn one-off tax on the wealthiest 10% of the population;
€20bn from extra taxation on repatriated funds from Switzerland;
€4bn from lower cost of debt.
Aligning the taxation of financial assets to real estate: €3bn
Closing the gap between 0.56% wealth tax on real estate and 0.46% on financial assets...
In this analysis we account only for real estate assets, excluding plants/machineries and valuables
from physical wealth. In the definition of financial assets, we exclude commercial loans and other
assets.
Including the equity owned by the Italian population in small to medium enterprises and family
businesses, we calculate that the taxation of financial assets accounted for 0.22% of the Italian
households’ financial wealth in 2010, below the 0.35% calculated as taxation of real estate assets as a
percentage of the households’ wealth in real estate. In other words, the tax burden on real estate assets
was 50% higher than that on financial assets. As we show in the table below, adding the estimated tax
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17 June 2013 ◆ 57
receipts from IMU (c.€16bn in 2012) and financial assets (€5bn) introduced by the Monti Government
in 2012, the gap widens further to 27 bps (0.63% versus 0.36%).
Italy – Tax Receipts on Real Estate and Financial Assets as a Percentage of Wealth
€bn Real Estate Financial Wealth
(including SME equity)
Financial Wealth (excluding SME equity)
Wealth - 2010 5,541 3,546 2,807
Taxes - 2010 19.5 7.8 7.8
Taxes as % of Wealth - 2010 0.35% 0.22% 0.28%
Additional Taxes from IMU – 2013E 15.5 0.0 0.0
Additional Taxes on Fin. Assets – 2013E 0.0 5.0 5.0
Estimated Real Estate Tax Receipts - 2013E 35.0 12.8 12.8
Taxes as % of Wealth – 2013E 0.63% 0.36% 0.46%
Suspension of IMU on Main Property – 2013E -4.0 0.0 0.0
Estimated Real Estate Tax Receipts - 2013E 31.0 12.8 12.8
Taxes as % of Wealth – 2013E 0.56% 0.36% 0.46%
Extra Tax Receipts from Tax Realignment
7.0 2.9
As % of GDP
0.45% 0.18%
Source: Eurostat, Mediobanca Securities analysis and estimates
. . . but excluding the equity tied up in SMEs and family businesses . . .
We think there is sufficient argument to aim for a convergence between the two fiscal treatments, as in
general terms it is a hard to accept the principle that the taxation of financial wealth has to be lower
than that of real estate. Our calculation above is aimed at closing such gap with a conservative
approach based on the following considerations:
The majority of the financial wealth (especially the liquid part) is composed of current
accounts, postal savings, Government bonds, bank bonds, life technical reserves, i.e. typically
retail investments. In other words, the straight realignment of the taxation would largely
penalise retail savers.
Taxing the equity of SMEs in a country whose economy is largely based on small and medium
enterprises and family businesses could be particularly damaging, discouraging the birth of
new enterprises/initiatives.
If we exclude the equity in SMEs and account only for the equity in Italian and foreign-listed
corporations, the tax burden gap would shrink to 7bps in 2010 (0.35% on real estate versus
0.28% on financial assets ex SME equity), i.e. the taxation of real estate assets would be just
25% higher than that on real estate.
In the attempt to eliminate the taxation of the main property (the one in which Italian
households live), the current Government has suspended the taxation on the main property.
Hence, we may lower the overall impact of IMU introduction to €12bn in 2013E, deducting
the estimated €4bn tax receipts from IMU on main property collected in 2012. This would
reduce the gap between the taxation of real estate wealth and financial wealth to 10bps.
. . . would generate €3bn additional tax receipts
Based on our assumptions of excluding the equity tied in SME and family-businesses from a wide and
indiscriminate taxation and deducting the estimated €4bn tax receipts from IMU on main property
collected in 2012, we calculate €3bn additional tax receipts from aligning the taxation of financial
wealth to that of real estate assets. If we maintain a more aggressive approach by realigning taxation
also on SME equity it would generate up to €7bn tax receipts.
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Wealth tax on large fortunes: €5bn
A wealth tax in Italy should only apply to very large wealth . . .
There is a recurring debate in Italy on the need for a wealth tax. Our analysis so far has showed the
limited room for such intervention on a large scale when considering that the current taxation of real
estate assets in Italy is already above the EU average. Additionally, starting from January 2013, a
0.15% tax on the financial wealth is already in place in Italy, levied on mutual funds, unit-linked, index
linked, equities, bonds, with the exclusion of current accounts (subject to a flat tax of €34) and some
life insurance policies (e.g. pension funds and traditional policies).
. . . like France’s ISF which generates €4bn
Hence, we believe a wealth tax should be focused only on the large wealth. France’s Government
charges the ISF (Impot de Solidarite’ sur la Fortune). In 2013 the ISF will tax net wealth above €800k
in a progressive way, reaching a maximum of 1.50% for wealth above €10m. The French ISF taxes the
main following items: residential property (the value of the property in which the household lives is
reduced by 30%), land, all equity holdings (although holdings in SME are subject just to a
contribution), bonds, bank deposits, mutual funds, valuables. Such tax treatment generates
approximately €4bn p.a. for France as shown below.
France – ISF 2013 (Impot de Solidarite’ sur la Fortune)
Taxable Wealth Tax 2013 2005 2006 2007 2008 2009 2010
<€800K 0%
€800K to €1.3m 0.50%
€1.3m to €2.57m 0.70%
€2.57m to €5.00m 1.00%
€5.0m to €10.0m 1.25%
>€10m 1.50%
Revenues - €m
3,023 3,658 4,390 4,155 3,580 4,461
Source: Eurostat, Mediobanca Securities analysis
€5bn from 0.16% large wealth tax in Italy
According to the Bank of Italy, c.40% of the net wealth in Italy is owned by c.10% of the households,
meaning that 2.5m households own €3.0trn of net wealth, i.e. €1.2m net wealth per household. Based
on such breakdown of the Italian wealth, we estimate in the table below that introducing a tax similar
to France’s ISF could generate €5bn of recurring revenues per annum, implying 16bps recurring tax
rate on large wealth. This could possibly free up resources to reduce the burden on labour taxes for the
whole population, supporting the consumption of 90% of the Italian households.
Italy – Estimated Tax Revenues from Replicating France’s ISF Wealth Tax
Italy Net Wealth
€bn
Wealth of 10% of Households
(40% of Total) €bn
10% of IT Households (millions)
Net Wealth per Household
€m
Tax Per Household
€
Tax Revenues
€bn
Property 5,615
Equities 698
Bonds 705 7
Deposits/Post Savings 978
Valuables 125
Mutual Funds 248
Debt -900
Net Wealth 7,469 (A) 2,988 (B=40%*A) 2.52 (C) 1.19 (B/C)/1000 1,934 (D) 4.9 (E=D*C)
Source: Bank of Italy, Istat, Mediobanca Securities analysis and estimates
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17 June 2013 ◆ 59
One-off wealth tax: €43bn should not endanger consumers
Only progressivity can make a wealth tax work
The €8bn of further tax receipts we have calculated so far stem from a higher taxation of financial
assets and from the imposition of a solidarity contribution levied on the 10% wealthiest population
owning c.40% of the national wealth. These measures have a recurrent nature and would bring the
total taxation on the stock of capital/wealth at 4% of 2010 GDP, above the level reached in 1995 and
well above the EU average (almost matching France and UK).
However, such interventions would not address the debt of the country. In our view, the only way to
start reducing Italy’s debt would be a una tantum levy charged on a larger part of the net wealth of the
richest population to try and minime the negative impact on consumers. In this analysis, and unlike in
France’s ISF, we include €680bn assets held in insurance life technical reserves, bringing the total net
taxable wealth at €8.3trn (€3.3trn owned by 10% of the population). We exclude plants machineries,
and commercial loans, as we believe those are related to the production/manufacturing of domestic
SMEs, which are already under financial pressure due tightening banks’ credit conditions.
A 1.3% tax on 10% wealthiest people generates €43bn, i.e. 5% of liquid net wealth . . .
As the vast majority of the Italians’ wealth is concentrated in real estate, we believe the una tantum
wealth tax could not exceed a certain threshold, in order not to stress the households’ liquidity (albeit
wealthy). We set such a maximum threshold at 1.3% of the Net Wealth, generating €43bn of tax
revenues to be drawn from the 10% wealthiest households. Such an amount would account for c.5% of
the liquid net wealth of the wealthiest Italians, a level we regard as bearable, and unlikely to endanger
the households’ liquidity profile.
. . . and reduces debt / GDP ratio by 3 p.p.
Such an initiative would reduce Italy’s Debt/GDP ratio by c.3 percentage points to 124% – without
reshaping it. Provided the Government takes actions on the spending side to keep the trajectory of the
Central Government Debt under control, it may generate a positive spill-over on the deficit front, as it
would reduce the cost of servicing the Italian debt by some €2bn p.a., again resources that may be
devoted to lower the burden on labour tax and support consumption.
The una tantum wealth tax on the wealthiest 10% of the population would be on top of the €5bn
identified as recurrent. In our view, the payment of the una tantum wealth tax could be done in
instalments.
Italy – Estimated Tax Revenues from Una Tantum Wealth Tax on 10% Wealthiest Households
Italy Net Wealth
€bn
Wealth of 10% of Households
(40% of Total) €bn
10% of IT Households (millions)
Net Wealth per Household
€m
Tax Per Household
€
Tax Per Household as% of
Liquid Assets
Tax Revenues
€bn
Property 5,615
Equities 698
Bonds 705
Deposits/Saving 978
Valuables 125
Mutual Funds 248
Insurance 680
Cash 114
Gross Wealth 9,163
Debt -900
Net Wealth 8,263 3,305 2.52 1.31 17,067 5% 43
-o/w Liquid 2,117 847
0.34
Source: Bank of Italy, Istat, Mediobanca Securities analysis and estimates
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The 2009 tax amnesty: €20bn potential revenues
Only €6bn tax collection from tax amnesty in Italy
Under the last Berlusconi government, Italians holding funds outside the country were permitted to
legalise their money through a 5% taxation. The amnesty was largely a success as c.€100bn was
indicated to be declared (c.60% kept in Switzerland under the so-called “rimpatrio giuridico” while
the remaining 40% was physically repatriated) which generated some €6bn taxes for the Italian
government as shown below.
Italy – Revenues from Tax shield (Imposta straordinaria sui capitali rientrati dall'estero - Scudo fiscale)
€m 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Tax 0 0 0 0 0 0 0 1,480 617 0 0 0 0 0 5,013 656
Source: Eurostat, Mediobanca Securities analysis
Deals between Switzerland/UK/Germany envisage 20-30% burden on repatriated funds
The agreement reached with Switzerland by Germany and the UK pointed to a taxation in the 20-30%
region, largely above the 5% applied by Italy in 2009.
The Tax Agreement between the UK and Switzerland was first signed in October 2011 by the
Exchequer Secretary David Gauke and the Swiss Finance Minister Eveline Widmer-Schlumpf
and came into force on 1 January 2013. The agreement foresees for clients of banks in
Switzerland who are taxable in the UK a path to tax compliance while maintaining their
financial privacy. The maximum tax rate for regularising the past is 34%, but the effective tax
rate for most clients should be 20-25% of total assets.
The bilateral tax treaty agreement between Germany and Switzerland, initially rejected by the
German Parliament provides for a 25% withholding tax (plus solidarity surcharge) on capital
gains received by German taxpayers with accounts held in Switzerland, ensuring that capital
gains realised in Switzerland were in future treated in the same way as in Germany. The
agreement also provides for a 50% tax to be imposed on inheritances in Switzerland, unless
German residents opted to declare their inheritance to the German tax authorities. The tax
deal also provided for the taxation of until now undeclared and untaxed assets held by
German taxpayers in the Confederation’s banks, at withholding tax rates varying from 21-
41%.
Deal between Italy and Switzerland could be worth €20bn
In the previous paragraph, we identified actions to drain wealth out of the country to free up resources
to support internal consumption. The current taxation of the stock of wealth and capital already hits
the whole population, and the measures we have identified would increase the tax burden even
further. Increasing the fiscal pressure without tackling the funds repatriated from the tax amnesty
could be politically unacceptable. During the last electoral campaign, several politicians have referred
to the opportunity to re-open the file of the Italians that benefited from the tax amnesty in 2009. We
estimate that using the average taxation imposed by similar deals struck by the UK and Germany
could generate €20bn additional taxes for Italy.
Feasibility is the key question
However, the feasibility of such initiative may be debatable for the following reasons:
The intervention may be considered as retroactive, possibly generating legal issues.
The intervention may be considered as not compliant with the principle of the so-called
capacita’ contributiva (taxes should be related to the current capacity to contribute, not to the
past or future capacity to pay taxes). Such a principle is part of the Italian Constitution.
The amount of money repatriated with the tax amnesty may have already been used, invested
or injected in corporations.
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Building and fiscal amnesty: upside not worth the political cost
Six large amnesties over the last 40 years
The history of the building amnesties introduced by Italian governments is quite long and complex.
According to Italian Tax Authorities (Agenzia delle Entrate), all amnesties (mainly fiscal and building
amnesties) introduced from 1973 to 2005 generated a total amount of €26bn tax receipts.
The first large fiscal amnesty dates back to 1973 and generated total proceeds equal to
c€1.5bn at current prices.
In 1982 the Minister of Economics and Finance R. Formica introduced the so-called
“condono tombale”(€5.8bn).
In 1985 Prime Minister Bettino Craxi introduced a building amnesty that was promised as a
one-off action for people who had violated zoning laws and built without the permission of
the local authorities.
In 1994 Berlusconi’s first term as prime minister allowed a building amnesty and a fiscal one
(so-called Concordato Fiscale). The latter mainly targeted autonomous workers/holder of
business income. The taxpayer subscribing to the Concordato Fiscale accepted a higher
taxable income for direct taxes purposes (Irpef, Irpeg, Ilor) and VAT in exchange of any
future claim from the tax authorities. The combination of building and fiscal amnesty
generated €2.6bn tax receipts.
In 2003-04 Berlusconi’s Government introduced a building amnesty (generating c.€4bn tax
revenues) and a fiscal one (generating €23bn tax revenues). The tax amnesty again involved
direct taxes and VAT.
Finally, in 2009 Berlusconi’s Government introduced the “tax shield”, generating c.€5bn tax
revenues.
In our view, another amnesty could only be applied to real estate. A tax amnesty in fact cannot involve
VAT anymore, as VAT is now a European tax and tax amnesties are not permitted on European levies.
With particular reference to a building amnesty, the third and last one was launched in 2003-04 and it
only applied to “breaches” occurred by and not later than the 31 March 2003. As showed in the table
below, the cumulative income related to that amnesty amounted to c.€4.6bn. In our view, a new
building amnesty will generate lower tax revenues than the €4bn collected in 2003-04. Provisionally
and given the table below we could assume €2bn, which we do not consider worth the political risk
and hence do not include in our simulation.
Italy – Building Amnesty
€m 2003 2004 2005 2006 2007 2008 2009 2010 Total
Building Amnesty 0 2,312 1,785 171 142 92 70 59 4,631
Source: Eurostat, Mediobanca Securities
Conclusion: €75bn to reduce debt without harming consumption
In light of the limited scope to introduce a large wealth tax aimed at reducing and reshaping the
Debt/GDP ratio of the country, we focused in this chapter on potential fiscal measures aimed at
freeing-up resources to lower personal and corporate taxation over time and support consumption.
Needless to say all measures should be accompanied by the rationalisation of Government spending,
by the disposal of public assets, and fighting tax evasion. In the absence of such a commitment, any
measure would be useless, as the trajectory of the Central Government debt would remain unchanged.
Our suggested measures can be classified in two groups:
Recurring interventions. A re-alignment of the tax burden for property and financial
assets levied on the whole population could generate c.€3bn revenues. A recurring wealth tax
levied on the wealthiest households (replicating France’s ISF) could generate c.€5bn
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17 June 2013 ◆ 62
revenues. The mentioned interventions would bring the taxation on the stock of
capital/wealth at 4% of GDP as shown below, above the EU average and almost matching the
UK and France.
Italy – Realigning Tax Treatment of Real Estate and Financial Assets
€bn Real
Estate Financial Wealth
Wealth Tax
Inherit. Tax
Others Total
Tax Receipts on Capital 2010 19.5 7.8 0.0 0.5 10.8 38.7
Tax Receipts from IMU 2012 15.5 0.0 0.0 0.0 0.0 15.5
Suspension of IMU Prima Casa 2013 -4.0 0.0 0.0 0.0 0.0 -4.0
Additional Taxes Fin. Assets 2013 0.0 5.0 0.0 0.0 0.0 5.0
Alignment Taxes Fin. Assets 2013 0.0 2.9 0.0 0.0 0.0 2.9
Wealth Tax on Wealthy Population 0.0 0.0 4.9 0.0 0.0 4.9
Total 31.0 15.7 4.9 0.5 10.8 63.0
As % of GDP 2.0% 1.0% 0.3% 0.0% 0.7% 4.0%
‘– France
4.3%
‘- Germany
2.8%
‘- Spain
2.5%
‘- UK
4.3%
Source: Eurostat, Mediobanca Securities estimates
One-off interventions. A wealth tax levied on the wealthiest population could generate
€43bn in of one-off revenues. A more penalising taxation of the wealth repatriated with the
tax shield in 2009 could generate a maximum of €20bn, although the feasibility remains
debatable. A combination of the two could reduce the Debt/GDP Ratio to 123% from 127%.
The table below summarises our findings where we estimate the above initiatives could also bring
some €4bn lower cost of interest on the Italian public debt.
Italy – Summary of Interventions
€bn Total Goal
Recurring Interventions 8
Alignment Taxes Fin. Assets 2013 3 Reduce Income Taxes
Wealth Tax on Wealthy Population 5 Reduce Income Taxes
Una Tantum Interventions 67
Wealth Tax 43 Debt Reduction
Taxation of Repatriated Funds 20 Debt Reduction
Lower Cost of Debt 4 Reduce Income Taxes
Total 75
Source: Eurostat, Mediobanca Securities estimates
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Mediobanca Italian Corporates Survey 2013 More than 50 Italian companies in our coverage universe responded to our first survey
aimed at gauging expectations on the back of the recent political deadlock. Although
roughly one out of three companies considered the latter as a very negative on their
company’s economic situations, it is not politics per se that is the main source of
concern. Some 55% of the industrials responding pointed to credit access as their major
problem, whilst banks mentioned the high and volatile cost of funding. If 85% of the
banks seem confident to report a decent top line growth this year, some 50% of
industrials expect no top line growth, which is why 85% of them are considering further
costs’ rationalisation, and only 20% of them are planning to raise their investments
significantly versus last year. The recent decree to speed up payments to corporates by
the Italian PA does not seem to represent a game changer, with only 24% of respondents
saying this could have a significant impact on their economics. This is probably due to
the fact that large to medium corporates (which is what our panel represents in the
context of the average size of the Italian enterprises) have more bargaining power in
negotiating payment terms. Some 80% of the panel expect that the weak scenario could
lead to some sector consolidation, but only 8% believe the M&A opportunity would
come from distressed PA assets. The final result is that some 44% of the answers point
to growth measures as a priority number one for the government followed by softening
of the fiscal pressure (26%) and restructuring of the public administration (21%). Only
3% call for the respect of the fiscal compact, and 6% are worried about the public debt.
The overall picture is of a country in a ‘wait and see’ mood, with companies reluctant to
invest, more focused on cost-cutting plans and in strong need of increasing their credit
conditions. Low revenues prospects and poor macro expectations make the softening of
the austerity stance to be the clear consensus request emerging from our survey.
A gloomy picture ahead from Italian corporates
We outline in this chapter the key findings of our first Mediobanca Italian Corporates Sentiment
Survey aimed at capturing expectations into 2013 and 2014. Although these kinds of exercises should
clearly be taken with extreme care and should not be seen as fully representative of the entire country,
we stress that the fairly large sample of the companies surveyed under our coverage (more than 50
between corporate and financials) and their size makes the responses to our questionnaire an
interesting reference point on where to set expectations, in our view. Our answers were collected one
week before the appointment of the Letta government, and as such one might argue that expectations
could feasibly have improved post the government appointment compared with our findings.
Financials more than corporates worried for the political deadlock
Italian political instability has had a mixed impact in our sample. According to the questionnaire, 72%
of the Financials interviewed believe that the Italian political deadlock has impacted their economics
somehow versus 55% of industrials. Only one third of our sample though says that such issue had a
very high impact on its activity.
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17 June 2013 ◆ 64
Italian political instability impact on companies’ economics
6% 7%
17%14%
17%
19%
14%
21%
19%
29%
17%
28%43%
24%
11% 14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MB Sample Financials Industrials
Extremely A lot Moderatly Neither much nor little Slightly No
Source: Mediobanca Securities
Easing credit access a prerequisite for growth from 55% of the corporates
We asked our sample to pick, among four options, what makes them more worried about the future.
The results mirror the differences of financial versus industrial businesses. The latter, which need
frequent access to credit in order to increase investments and growth prospective, are in 55% of the
cases more worried about the difficulties in obtaining loans from the banks. Financials, on the other
hand are mainly concerned about the interest rate on Italian government bonds and high rates
volatility in the market.
Factors to be worried about in the future Revenue growth expectations for 2013
29%
57%
23%
16%
43%
10%
11%
13%
45%55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MB Sample Financials Industrials
Credit access Capital markets access Interest rates volatility Interest rates
30%37%
14%
14%
13%11%
13%
27%
33%
16%
71%
3%3%14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MB Sample Financials Industrials
Extremely A lot Moderatly Neither much nor little Slightly No
Source: Mediobanca Securities
Two out of three Italian corporates expect zero or negative growth . . .
The picture offered in the right hand side chart above shows two different views when it comes to
growth expectations.
On the one hand, 85% of Financials in our sample foresee an improvement of the general
economic and political conditions. Therefore they expect an increase of their revenue stream
in Italy in 2H 2013.
For Industrials however, 96% expect either no or moderate future revenues’ growth in Italy in
2013. Indeed, 50% of them expect zero or little revenue growth in 2013 from Italy, and only
3% of the sample expects good revenue increase.
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. . . which is why only 20% of them are investing
As a result of such expectations, Industrials have not only reduced their plan to invest in Italy but they
are also implementing further cost rationalisation plans. As shown in the two pie charts below, only
two companies out of 10 are planning to increase significantly their investments, while the majority
will wait for the economic situation to improve. In addition, 85% of the Industrials are putting in place
cost rationalisation plans, which will most probably translate in a number of job losses.
Few Industrials plan to increase investments (lhs) and many to further optimise costs (rhs), 2013
No17%
Slightly30%
Neither much nor little
20%
Moderatly13%
A lot17%
Extremely3%
Slightly10%
Neither much nor little
14%
Moderatly31%
A lot28%
Extremely17%
Source: Mediobanca Securities
Payment of commercial debt is not considered a game changer . . .
In a second set of questions, we asked the Industrial companies what they think is necessary to boost
the Italian economy. One of the measures that has been announced by the Italian government in the
past weeks is to start repaying around Eur40bn of commercial debt to Italian companies. Although we
welcomed such move, according to the Industrial companies in our pool it won’t help solving the
growth problem of the country. As shown in the right hand side chart below, two thirds of the sample
believe this move will have limited/moderate impact on the Italian GDP. In addition, 62% of the
Industrial companies do not expect any major benefit for themselves from such a payment.
PA payment of commercial debt benefits on Industrial companies (lhs) and on Italian GDP (rhs)
No24%
Slightly31%
Neither much nor little
7%
Moderatly14%
A lot17%
Extremely7%
How much will the speed up of the payment of commercial debts by the public administration impact your company?...
3%
17%20%
33%
17%
11%14%
29%
50%
24%
29%34%
9% 10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MB Sample Financials Industrials
Extremely A lot Moderatly Neither much nor little Slightly No
Source: Mediobanca Securities
. . . as 70% of the sample aims for growth measures and softening of austerity stance
The companies interviewed are all well aligned in terms of their priorities for the new Letta
government. As shown in the chart below, out of the five options proposed, 44% of the pool indicated
growth strategies as a necessity to revitalise the stagnant economy. The rest of the companies
prioritise the reduction of fiscal pressure (26%) and the restructuring of the Public Administration
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(21%). Surprisingly, in our view, only 6% of the pool believe the reduction of the high public debt is a
priority, and only 3% care about respecting the Fiscal Compact.
Priorities for the next government
3% 3%6% 7%
21%
22%
21%
26%
22%
26%
44%56%
43%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MB Sample Financials Industrials
Growth strategy Reducing fiscal pressureRestructuring Public Administration Reducing public debtComply with fiscal compact
Source: Mediobanca Securities
Some 60% of the corporates have credit access issues . . .
We also asked the Industrial companies in our pool to give us more detail on their accessibility to
credit. Some 60% of the interviewed sample confirmed they are currently experiencing difficulties in
opening credit lines.
Italian Industrial relationship with credit market
No
13%
Slightly
20%
Neither much nor
little7%
Moderatly
33%
A lot
17%
Extremely
10%
Do you experience difficulties in opening/increasing credit lines in Italy?
Source: Mediobanca Securities
. . . and more than 50% of them plan to increase their cash position at Italian banks
Some 56% of Industrials in our panel have increased their cash reserves or accessed the capital market
more than needed. Despite the several hurdles they need to overcome to obtain loans by banks,
Industrials seem to look at their relationship with banks in a less negative stance. Although none of the
companies interviewed believe their attitude towards Italian banks will sharply increase in the near
future, 92% of them at least does not expect it to worsen.
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Italian Industrials attitude vs Italian banks in the past 3 months (lhs) and in the future (rhs)
Extremely decreased
4%
Slightly decreased
8%
Stable24%
Moderatly increased
56%
Increased a lot8%
How has your attitude to holding cash/cash equivalents at Italian banks changed in the last three months?...
Slightly decreased
8%
Stable38%
Moderatly increased
54%
…And how will it evolve in the near future?
Source: Mediobanca Securities
The overall picture is for a country in a ‘wait and see’ mood with companies reluctant to invest, more
focused on cost-cutting plans and in strong need of improving their credit conditions. Low revenue
prospects and poor macro expectations make the softening of the austerity stance the clear consensus
request emerging from our survey.
The Questionnaire The Questionnaire - Q&A
Questions No Slightly Neither much
nor little Moderately
A lot
Extremely
How much is the absence of the government impacting your company? 6% 17% 19% 19% 28% 11%
Do you expect revenue growth in Italy in 2013? 30% 14% 11% 27% 16% 3%
Are you considering further costs rationalisations in 2013? 0% 10% 14% 31% 28% 17%
Have you changed your cost structure as a consequence of the crisis? 3% 17% 7% 28% 34% 10%
Do you plan to increase investments in Italy in 2013? 17% 30% 20% 13% 17% 3%
Do you see opportunities for consolidation in your sector? 7% 11% 21% 21% 32% 7%
Have you increased cash reserves or accessed capital markets more frequently? 20% 20% 10% 20% 20% 10%
Do you have difficulties in opening/increasing new credit lines in Italy? 13% 20% 7% 33% 17% 10%
Which portion of your cash/cash equivalents is held at Italian banks? 4% 7% 11% 29% 32% 18%
Has your attitude to hold cash at Italian banks increased in the last 3 months? 4% 8% 24% 56% 8% 0%
Will your attitude to hold cash at Italian banks improve in the near future? 0% 8% 38% 54% 0% 0%
Will your company benefit from the payment of commercial debts by PA? 24% 31% 7% 14% 17% 7%
Will GDP expectation benefit from the payment of commercial debts by PA? 3% 20% 11% 29% 29% 9%
Do you see opportunities to acquire assets from PA given its financing needs? 16% 32% 16% 28% 8% 0%
Source: Mediobanca Securities
Other questions asked were:
Which of the following factors are you more worried about?
Answers: Interest rate: 29%, Interest rate volatility 16%, Capital market access 11%, Credit
access 45%.
How is your liquidity invested?
Answers: Cash/Cash equivalent 85%, EU treasuries 4%, US treasuries 1%, Corporate bonds
3%, Other 7%.
What should be the priorities of the next government?
Answers: Introduction of growth strategies 44%, Restructuring of Public Administration 21%,
Reducing fiscal pressure 26%, Reducing public debt 6%, Respect fiscal compact rules 3%.
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Conviction ideas and ratings changes Following a weak set of Q1 results, we ended up downgrading our 2013 and 2014
estimates by 5% on average for our Italian coverage. We remain cautious on the growth
prospects for 2013 and 2014 and expect further downgrades in 2H 2013, driven by the
macro outlook further deteriorating. As a result, we maintain a cautious stance on Italy,
which leads us to favour defensive stocks and names with high earnings diversification
outside of the country or stocks with corporate action/ restructuring potential. Our key
high conviction longs are: Autogrill, Azimut, Cementir, Cairo, Danieli, EI Towers, ENI,
Fiat Industrial, PMI, Prysmian, UBI, Unicredit and Unipol. Following our more cautious
stance on Italy we downgrade Beni Stabili, BPER and Yoox from Outperform to Neutral,
BP and Trevi from Neutral to Underperform and Saras from Outperform to
Underperform.
Cautious view on Italy
We reiterate our cautious stance on Italy. This leads us to favour defensive stocks with diversification
of their earnings outside of Italy or potential stock specific catalysts. This means:
Long: Autogrill, Azimut, Cementir, Cairo, Danieli, EI Towers, ENI, Fiat Industrial, PMI, Prysmian,
UBI, Unicredit, Unipol;
Short: BPER, Banco Popolare, Buzzi Unicem, Finmeccanica, Geox, IntesaSanpaolo, Mediaset,
Piaggio, Pirelli, Saras, Trevi.
In this chapter we summarise our by-sector overviews suggesting our high conviction pair trades. We
also address the key rational behind our downgrades which are analysed separately in the
accompanying reports published today.
Banks: macro and asset quality put our EPS at risk of downgrade
The uneasy macroeconomic outlook in the foreseeable future leads us to stay cautious:
Vanishing inflationary pressure across the Euro Area and abundant liquidity may prompt further
rate cuts in the ECB policy rates. Euro Area HICP inflation is projected by the ECB to decline from
an average rate of 2.5% in 2012 to 1.4% in 2013 and 1.3% in 2014. Our current estimates are built
on the assumption of a progressive realignment of Euribor 3-Months (currently at 0.2%) to the
current base rate (0.5%). In other words, our estimates incorporate c25bps increase in short-term
rates in 2014E, which may be a debatable assumption given the low inflationary pressure. Should
this not happen, we see further deposit margin pressure, affecting NII negatively.
Long lasting recession in Italy may dent loan growth in the medium-term. First quarter results
showed a reduction in the loan book of many Italian banks (UCG, ISP, MPS, UBI, BP, CE, CVAL).
In general terms, we expect Italian banks loan book to stabilise in 2013E and start growing again in
2014E (+3% nominal in Italy). Such assumption is coherent with the GDP outlook depicted by the
ECB. The Central Bank expects real GDP to increase during 2013 supported by the favourable
impact on export of a gradually rising external demand. Domestic demand should also pick up over
time, initially benefiting from a fall in commodity price inflation and from accommodative
monetary policy stance. In 2014, internal demand should also be supported by progress made in
fiscal consolidation. On the other hand, the ECB itself sees remarkable downside risks and this
holds particularly true for Italy (GDP forecasts have been revised downward several times over the
past few months and economic recovery postponed quarter after quarter). Needless to say that a
longer than expected recession in Italy may dent the forecast resume in lending growth.
Asset quality remains a key concern to us. First quarter results provided a mixed picture from
Italian banks, with management conveying moderately reassuring messages in some cases. On the
other hand, Bank of Italy data show that NPL (sofferenze) kept growing in Apr-13 versus Mar-13
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(+€2.3bn). In our view, it is premature to call a stabilisation in deteriorated loans inflow. Longer
than expected recession may prevent any asset quality improvement, while we currently estimate a
general decrease of loan loss provisions in 2014E;
Aside the impact on the forecast returns, asset quality may become an issue also for regulatory
capital. Italian banks’ capital may come under the spotlight again in light of the steady increase in
the stock of deteriorated loans since the start of the crisis in late 2007 and the possible start of an
ECB-led review of lenders’ asset quality. An exercise stressing banks’ capital adequacy on asset
quality deterioration could be a matter of concern for Italian banks, as the combination of soaring
Gross Problem Loans since 2007 and relaxation of coverage ratios resulted in Net Deteriorated
Loans accounting for c120% of CT1 in Mar-13. Needless to say, stress-scenario assumptions on
something exceeding 100% of CT1 would have a remarkable impact on regulatory capital.
Italian Banks – Net Problem Loans as Percent of CT1 Capital, 1Q13-2007 (ex. State Capital)
2007 1H 08 2008 1H 09 2009 1H 10 2010 1H 11 2011 3M 12 1H 12 9M 12 2012 1Q 13
Aggregate 45% 52% 61% 78% 98% 97% 102% 94% 97% 96% 101% 107% 108% 117%
CREDEM 13% 14% 20% 24% 33% 35% 36% 37% 41% 43% 45% 47% 45% 46%
ISP 35% 42% 48% 65% 80% 77% 81% 65% 69% 73% 77% 80% 85% 91%
BPM 22% 23% 35% 71% 80% 81% 99% 101% 71% 76% 75% 81% 89% 93%
UCG 53% 54% 66% 75% 91% 91% 97% 95% 103% 89% 93% 97% 94% 96%
UBI 25% 26% 36% 50% 71% 75% 80% 74% 80% 85% 89% 98% 103% 109%
BPER 45% 50% 57% 90% 108% 111% 110% 119% 118% 135% 141% 149% 140% 151%
CREVAL 28% 35% 52% 63% 101% 128% 108% 116% 124% 149% 132% 154% 148% 174%
BP 70% 75% 98% 109% 235% 220% 235% 163% 162% 167% 188% 200% 215% 228%
MPS 63% 116% 120% 154% 156% 167% 173% 188% 148% 168% 184% 203% 205% 328%
Source: Company Data, Mediobanca Securities analysis
Long UCG versus ISP and long UBI versus BP are our two high conviction pair trades
Long UCG (Outperform, TP €5.1) – Adjusting 2012 reported RoTEs shows underlying
profitability would move to 4.3% already in 2012. Furthermore, the reallocation of UCG’s German
excess capital to CEE (16% RoTE) and the realignment of CIB to EU peer average profitability
imply €1.1bn net profit boost. UCG is a restructuring play with: 1) large cost cutting (we estimate
€780m pending cost cuts at UCG); 2) CIB makeover potential; 2) EPS potential from capital
redeployment into CEE from CIB and GER; 3) faster inversion of LLP trends than ISP from a faster
credit cycle. Finally, in a scenario of possible further macro deterioration in Italy, the weight of
German, Austrian, Polish, Turkish and Russian operations should work as a mitigating factor.
Short ISP (Neutral, TP €1.1) – Adjusting 2012 reported RoTEs shows underlying profitability
at 2.5%. ISP shows positive aspects (capital adequacy, liquidity strength, low leverage and
regulatory risk) and a major weakness: the large incidence of TE to bad loans. We see ISP as a
focused and efficiently run bank. However, its asset quality worsened much faster than UCG (3x vs
2x using since 2006), reflecting Italy’s issues. ISP’s higher carry trade and deposit hedging support
is positive short-term P&L management to us, but it is but unsustainable in the medium-term.
Long UBI (Outperform, TP €4.0) – Our positive stance on UBI is mostly related to the
minorities’ angle: Basel III makes further rationalisation of minorities necessary, adding up to
70bps of CET1. Minorities’ rationalisation could be seen also as a way of weathering potential
further macro deterioration in Italy and surviving a potential EU-wide exercise on asset quality in
the future. We also see some short-term catalyst: we regard the guided 50bps improvement in the
CT1 ratio from the roll-out of retail IRBA models as prudent and the validation expected by Jun-13
may work as a catalyst.
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Short Banco Popolare (Underperform, TP €0.95) – With a fully-phased Basel III CET1
below 8% in 2013E, we see BP as undercapitalised. We view this as light in both absolute terms,
given the magnitude of the deteriorated loan book, and relative to peers. Re-aligning BP to the
peers’ average (10%) would require a €1.3bn capital infusion, making BP trading at 0.5X TE, a
generous multiple in light of 4% return in 2014E. The combination of low CET1 ratio, lack of
options to replenish it, potential risks underlying the large deteriorated loan portfolio and
generous multiples after theoretical recapitalisation lead us to downgrade BP today.
Long BP Milano (Outperform, TP €0.60). The transformation of BPM into a limited
company looks like a remote option. Hence, the premium the market might attach to a speculative
angle related to a change in the governance is unlikely to resurface soon. Nevertheless, we believe
the market has over-reacted to the shattered dream of a radical governance change: based on our
numbers, BPM trades at 0.35X TE 2014E, below UBI and BPER and aligned to BP a multiple hard
to justify in light of the expected c6% return in 2014E. Unlike peers like BP, such low multiples
cannot be justified neither by the asset quality situation (total deteriorated loan coverage ratio at
34% is above peers’ one, net deteriorated loans accounting for 90% of CT1 is below the peers’
average of c120%) nor by the capital outlook (pro-forma Basel II CT1 at 10% in FY12, without IRB
models validation and with marginal impact from Basel III).
Short BP Emilia Romagna (Neutral, TP €5.80). After reducing 2014E earnings by 33%, we
expect BPER to deliver c.5% RoTE in 2014E. This makes the current 2013E 0.5X T/E fair. First
quarter results show that the current profitability hovers over 3% RoTE, unlikely to expand soon
due to the asset quality burden. Moreover, our estimates are based on short-term rates matching
the 0.5% policy rate and on lowering cost of risk, leaving little margin of safety in our forecasts.
Finally, apart from the roll-out of IRB models, we see few options to improve the bank’s capital
ratios, a weakness in a deteriorating macro environment and in light of the ECB-led review of
lenders’ asset quality.
Cement: Cementir is our high conviction long
First quarter results have highlighted a very soft start for the Italian cement market. Cement and ready
mix selling volumes fell by a double-digit amount y-o-y due to a very negative performance by the
residential and public works segments. The picture gradually improved in April and May due to better
weather conditions, but growth drivers for the sector remain limited.
According to our estimates, domestic cement consumption is expected to be some 20.5m tons
in 2013E (down by some 20% Y/Y), reflecting a utilisation rate close to 52%.
Despite this gloomy picture, market leader Italcementi has right-sized its production capacity
significantly (from 15m tons to 9m tons) over the last two years, and now plants are currently
running with a utilisation rate of around 60%.
The other players, including Buzzi Unicem and Cementir have also optimised their
production footprint. This ongoing rationalisation of the Italian cement production footprint
should result in better price discipline than in the past, in our view. Next steps for the
industry are to right-size the ready mix industry plus further plant closures.
The key question for producers remains the visibility on a potential recovery in volumes. In
our opinion, a normalised level of capacity utilisation close to 70% (to be reached in three
years) would be a satisfactory result.
Long Cementir (Outperform TP €2.35) – We reiterate our positive stance on Cementir
based on the wealthy geographical mix combined with the projected cost savings related to
headcount rationalisation;
Short Buzzi Unicem (Underperform TP €11.2) – We reiterate our negative stance on
the stock. The geographical mix is solid due to the group’s exposure to the US, Mexico and
Russia, but we believe that its growth potential has been overvalued by the market. The stock
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is trading at 6.3x, above its mid-cycle multiple of 5.7x. The timing and shape of the cycle
recovery factored in by the market seems too bullish, in our view.
Capital goods: Prysmian and Danieli
First quarter results did not produce a significant trend due to seasonal reasons for our capital goods’
coverage. Delays in payments from Public Administration (PA) have further stressed the companies’
working capital management. The recent news relating to the gradual unlocking of payments from PA
(some €21bn to be released in a first tranche) could inject some liquidity into the sector and
potentially restart some infrastructural projects. The high-conviction buys in our capital goods
universe remain Prysmian and Danieli.
Long Prysmian (Outperform TP €17.50) – The stock reacted quite well after the
warning given by the CEO on the cyclical businesses during the first quarter results. Given the
worsening of the cycle, the company has immediately increased its efforts on production
optimisation and upgraded the cost synergies target from €150m to €175m (at full speed in
2015). This upgrade is mainly related to a second round of production footprint optimisation
to be implemented in Europe;
Long Danieli (Outperform ordinary shares TP €24.90, Outperform €16.20
saving shares) – We see good momentum on backlog. The €3.05bn current backlog does
not include two “jumbo” orders that the company has already won, given its very cautious
accounting policy. It would mean a book-to-build for the plant making of above 1.2x.
Additionally, we expect a positive impact on earnings from the recent acquisition of a steel
plant in Croatia, integrating the ABS mill in Italy;
Short Trevi (Underperform; €4.45 TP) – We downgrade the stock today given the
modest cash flow generation, demanding multiples and our overall bearish stance on Italy.
We cut the TP by 24% to €4.45 (from €5.85). Our valuation is the average of a DCF analysis
(€4.30 fair value) and peer multiples comparison on 2013 and 2014 figures (€4.5);
Finmeccanica (Underperform TP €3.40) – In our view, the stock has been supported
by the speculation surrounding potential disposals. We believe the current government (as
clearly expressed by many of its members several times) would not support asset sales to
foreign companies. Meanwhile, the company’s reputation is badly damaged and this is
evident from the poor order intake. This is expected to translate later into poor cash flows
and P&L numbers.
Oil: ENI remains our core long
In our latest sector report (“1H ’13 outlook: cautiousness with a pinch of M&A”, 15 January 2013), we
suggested an overall cautiousness in the oil and oil service sector, holding onto oil-integrated stocks
rather than oil services/oil-related names in the first half of the year. We confirm this view also for the
second half of 2013:
With the oil service industry currently experiencing further delays in tendering activity and
the award of new contracts, we see opportunities for oil integrated stocks to keep on
outperforming given 1) sustained earnings momentum in the E&P activity; 2) sustained
exploration activity; and 3) stabilisation in the negative trend of the downstream activities.
We assume a scenario of declining oil price. The charts below highlight the historical over-
performance of Oil Integrated stocks vs. Oil Services in this scenario, confirmed also in 1H13.
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Oil Integrated vs Oil Services performance (rebased to 100) in the long term (left) and YtD (right)
70
75
80
85
90
95
100
105
110
115
120
31/12/2010 31/03/2011 30/06/2011 30/09/2011 31/12/2011 31/03/2012 30/06/2012 30/09/2012 31/12/2012 31/03/2013
Oil services Integrated
90
95
100
105
110
01/01/2013 22/01/2013 12/02/2013 05/03/2013 26/03/2013 16/04/2013 07/05/2013 28/05/2013
Oil services Integrated Source: Thomson Reuters Datastream, Mediobanca Securities
Long ENI (Outperform TP €22.20) – ENI remains our high conviction outperform in
the Oil space. We expect earnings momentum to improve in the coming quarters after a slow
start of the year, with a slight improvement in production in 2Q and a robust acceleration in
2H. We feel confident the company will meet its 3% target of production growth, including
the start-up of Kashagan as scheduled. As far as the gas marketing division is concerned,
positive news might come from the take-or-pay contracts renegotiations, driving to a lower
loss than what the market is estimating thanks to the positive contribution of the
retrospective effects that we quantify in some €300m. A 6.5% dividend yield coupled with the
contribution of the share buyback lead us to confirm our preference for ENI among Italian
industrial names. The icing on the cake would be the solving of the SPM issue that could
represent a strong catalyst for both stocks.
Short Saras (Underperform TP €0.95) – Today we downgrade the stock to
Underperform (from Outperform). The reason is twofold: on the one hand M&A appeal
should wane, following last Friday’s termination of Rosneft partial tender offer on 7.29% of
the capital. On the other hand market fundamentals are showing signs of deterioration. Our
new TP points to €0.95, following a revision in estimated profitability from the refining
business.
Branded & Consumers: Autogrill vs Geox
Limited exposure to the Italian risk
On average some 23% of the luxury sector’s turnover is generated in Italy (17% for consumers
companies). This falls below 10% for Luxottica and Ferragamo, while it reaches 40% for Tod’s. Based
on our estimates, the contribution to the turnover generated in Italy by local customers is
approximately 17%, since luxury demand in Italy is mostly driven by travellers’ flows from Asia and
China, and appetite for buying luxury products in Italy is mainly supported by the existing gap in retail
price between Asia and Italy (at 35-40% in China). Tod’s and GEOX are the most exposed to domestic
purchases (28% and 35%, respectively), and Ferragamo and Prada the least exposed (2% and 5%).
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Branded & Consumers Goods: exposure to domestic consumptions
REVENUES IN ITALY o/w domestic
BRANDED 23% 17%
AEFFE 39% 25%
BRUNELLO CUCINELLI 25% 16%
FERRAGAMO 8% 2%
GEOX 35% 35%
LUXOTTICA 5% 5%
PRADA 16% 5%
SAFILO 20% 20%
TOD'S 40% 28%
YOOX 16% 16%
CONSUMERS 17% 17%
AUTOGRILL 20% 20%
CAMPARI 23% 23%
DE LONGHI 11% 11%
INDESIT 12% 12%
Source: Mediobanca Securities on company data
The luxury is in good shape
The branded goods sector has experienced a solid start to the year, reporting average mid-single digit
top line growth in 1Q13, despite a challenging basis of comparison (sales grew double digits YoY in
1Q12 on average). The major macro event affecting the sector in the quarter was the depreciation of
the Yen against the Euro (17% on average), which hit all companies with a high exposure to such a
market, but on the other hand it pushed domestic purchases by Japanese consumers. This was partly
faced by some brands raising retail prices in Japan (more notably Louis Vuitton raised prices by 10-
15% in mid-February, Richemont by 9%, and Gucci is set to do it in 2Q).
Geographically speaking, the driver of the sector has been North America, where the demand was
helped by healthy consumer confidence pushing up domestic consumption.
In Europe the picture is mixed, with Southern Europe (Italy and Spain) being very weak, and France
and the UK outperforming. Overall, performance was softer in March than in January and February,
as the sell-out of Spring/Summer 2013 collections was delayed by poor weather conditions. In the
region, the sector reported mid-single digit growth in 1Q13, mostly driven by travellers’ flows. The mix
is changing as travellers are increasingly from Russia, while tourist flows from Japan and China are
reducing their purchases in Europe due to the narrowing of the price gap, as some luxury companies
increased prices in Europe. On the other hand, local demand for luxury goods has not yet picked up.
Most luxury companies in Europe are now focused on cleaning up their independent wholesale
channels to reduce their credit risk profiles, and implementing a much more cautious retail plan.
The Asia Pacific is again the area where all companies are focused in terms of better brand penetration
and expansion of distribution networks. This seems likely to happen in China, while South Korea is
seen as likely to be in trouble. Although most companies do not expect to replicate in China the
outstanding performance recorded in 2012, the environment there is still buoyant and luxury
companies’ efforts are still focused on expanding the direct retail network in tier II and III cities to
capture new customers and their appetite for luxury goods. The new anti-corruption actions by the
new government might have an impact on the giving of gifts, hitting luxury sales, especially watches,
while some boost might come from increasing consumption in women’s apparel for personal use.
In terms of outlook for the remainder of the year, the common attitude among listed luxury companies
is a more cautious approach to providing indications, but almost all companies reported a solid start to
2Q, with April seen as a continuation of 1Q.
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On the back of buoyant macro conditions in the major luxury markets, the sector experienced a strong
share price performance (+30% YTD on average), and given that consensus estimates were not
materially revised up, there was a rerating of the sector that in most cases is at its all times peak
(i.e.29x 2013 PE on average).
Consumers: a tough start of the year
All consumer companies experienced a weak start to the year, due to depressed demand in Europe and
particularly tough conditions in Italy, partly compensated by good growth in North America and
emerging markets.
Weakness in Italy affected 1Q13 results in particular in terms of one-off destocking activities for
Campari, weak motorways business for Autogrill, and poor volumes for Indesit. Emerging markets
continued to drive the growth, with the exception of Russia for the large domestic appliances industry.
It is worth underlining that the manufacturers of domestic appliances are now increasingly focused on
improving price-mix to protect profitability: Indesit has planned to increase prices in 2Q and 3Q13;
De’Longhi was able to improve its profitability in 1Q13 due to better price-mix and the management
expects further improvements over the year.
After a tough start of the year, consumer companies started to experience improvements in trading
conditions. Autogrill sales grew slightly in the first 18 weeks of the year (+0.5% ex forex) with F&B
supported by less negative trends in Italian motorways and further growth in North America.
De’Longhi and Indesit experienced better growth trends in April and May.
Long Autogrill (Outperform, TP €11.80) – Autogrill is our high conviction long among
Branded and Consumer companies since the forthcoming demerger of the Travel Retail &
Duty Free division is expected to reveal additional value which is currently not priced in and
to be a first step for a consolidation with other operators in the sector.
Short Geox (Underperform, TP €1.30) – Geox is our short idea since quarterly results
and current trading conditions are not showing any reverse in the very negative business
trend, with Italy and Europe still down double digit and a very cautious guidance provided by
the company on the remainder of the year, which put current consensus estimates at risk.
Insurance: Unipol vs Cattolica
First quarter results in the P&C business showed the consequences of the current poor macroeconomic
situation of Italy in two ways:
Top line remains under pressure in Motor, as the fall in new car registrations coupled with
limited tariff increases. In addition, non-mandatory Motor products still reported a mid-
single digit drop as a consequence of lower disposable income.
The flipside of the coin is that frequency remained at historical lows and this translates into
low loss ratios and low combined ratios.
We therefore see some top line pressure in the Italian property and casualty business, but profitability
remains sound. On the financial income side, Italian insurers remain net buyers of Italian BTPs and
are therefore subject to the volatility of this asset class.
Going forward, we believe the mix between the drop in the top line and high margins will be key in
assessing the overall profitability of this business. Against this background, we believe the continued
pressure in the macroeconomic situation of the country will put top line pressure with combined ratios
remaining at the current low levels. We do not expect Motor tariffs to be a game changer, as we see
limited room for increasing prices going forward, particularly after a year of low single-digit increases.
In terms of the Life insurance business, the fall in short term rates increased the appeal of traditional
Life insurance products. Volumes are therefore in an expansion-mode, though the reinvestment yield
remains a concern going forward. In the above-mentioned environment, we favour stories with a
specific catalyst more than a bias on the sector overall.
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Long Unipol (Outperform, TP €3.40) – We remain buyers into the Unipol/Fondiaria
restructuring story, as we still see the two stories trading at a significant discount to peers.
We are aware of the risks that are still surrounding this investment case, but we see an
interesting risk/reward profile in any case. July will be a decisive month, in our view, with the
deadline of the green light from IVASS being the main catalyst. The release of second quarter
results will be the second main catalyst in our view, with the potential marginal good news
coming from the Life business.
Short Cattolica (Underperform – TP €14.5) – lack of upside on fundamentals (our TP
is 4% below current prices) is the main reason of our negative stance on Cattolica, coupled
with limited liquidity and suboptimal governance (per capita vote).
Asset gathering: Azimut
The current year is proving to be a golden year for Italian asset gatherers, as inflows are close to
historical highs and in some cases to record highs. The weighted average performance year-to-date is
good too, and both items are supporting AUM growth. Margins are generally flattish, with average
management fees confirming to be resilient and sustainable, while performance fees were a bit less
generous compared to the first part of 2012, but still above the historical average.
The asset gathering business is confirming to be a low capital intensive business with a strong free
cash flow generation. In this context, sound top line growth couples with high visibility of dividends
which are sustainable, in our view. Recruitment is a positive surprise to us, as the three listed Italian
asset gatherers are finding a good source of recruitment from private bankers working for the major
retail banks.
Azimut (Outperform TP €18.0) – Even though we remain convinced that all the three
listed asset gatherers are high quality names, our preference at the moment is Azimut. We
believe Azimut is cheaper compared to other two names, particularly on P/Es calculated on
recurring earnings. We also see market consensus too low on both inflows and 2013E-2015E
EPS.
Real Estate sector: downgrading Beni Stabili
The disclosure of first quarter results by Italian real estate stocks confirmed the trends highlighted in
the last year and in particular:
Negative impact of IMU on net rental income – while in 1Q 12 companies charged the IMU
tax on the basis of provisional rates then amended in full year results, the application in 1Q 13
of the definitive and higher IMU rates had a negative impact on net rents.
Subdued rental market in retail – falling consumption rates by Italian households was
reflected in an increasing weakness of some shopping malls that saw growing vacancy and
decreasing rents.
Negligible income of trading – not surprisingly considering the low market liquidity and lack
of debt financing, portfolio rotation in the first quarter was very low.
Partially in contrast with the uninspiring picture emerging from first quarter results, the comments on
the prospects for the sector in the rest of the year were generally more positive, highlighting a slight
improvement in the investment market liquidity due to increasing interest by opportunistic investors
for peripheral markets such as Italy after the strong rally of core European markets. Conversely, the
ongoing weakness of the Italian economy coupled with a large vacancy in most markets, points
towards a continuing weakness in the rental market in the coming months.
Beni Stabili (Neutral TP €0.60) – We downgrade Beni Stabili to Neutral since despite
the group’s traditional strength - high quality portfolio, sustainable leverage and good
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management, the stock performance is expected to suffer from worsening macro conditions
and financial volatility.
Prelios (Neutral TP €0.90) – Prelios remains the riskier name in the sector. Pending the
finalisation of the groups’ recapitalisation and debt restructuring, we see Prelios’ plan of
gradually becoming a pure asset manager as ambitious in the current market environment
while the gradual divestment of its large portfolio of co-invested assets is particularly difficult
in the current market environment.
IGD (Neutral, TP €0.96) – In the first quarter the group’s cashflows were resilient despite
worsening sector’s fundamentals reflected in a decrease of the financial occupancy in Italian
shopping malls from 96.3% in December 2012 to 95% in March on the back of the ongoing
weakness of retail sales (around -5% in the quarter) We are confirming our Neutral
recommendation on IGD with a target price of €0.96 considering on one side its attractive
9.3% yield and on the other the difficult moment of retail sales in Italy.
Telecom and Media: Long EI Towers and Cairo
The release of the first quarter results has confirmed our fears over a prolonged negative trend for the
domestic advertising collection, notwithstanding a less challenging comparison: first feedback on the
second quarter seems to suggest the second derivative is still far from showing any improvement,
while the optimistic stance on the recovery expected for the last months of 2013 is losing momentum.
In the first months of 2013, the domestic telecom market has come under pressure mainly as a result
of increased competition, the weak macroeconomic environment and adverse regulation such as the
most recent reduction in MTR: we believe this trend will persist in the rest of the year, with the
likelihood of a partial recovery from 2014 onwards.
We think the most important topics for the rest of the year in the TMT space are: the continued
weakness of the domestic advertising market, the auction for the new frequencies, the tough situation
of the state-owned RAI TV, the possible spin-off of the Network Business from Telecom Italia, and a
possible market consolidation in the domestic mobile industry.
Italian advertising market down 19% in 4M 13, risks of further audience fragmentation
Our estimates call for 12% YoY decline for the domestic advertising market in 2013 (after the -14% YoY
drop recorded in 2012). This would reduce the Italian advertising market below the €7bn threshold in
2013, the lowest level of the last ten years. We note at the beginning of the year some industry
operators suggested a more optimistic stance, expecting some recovery in the second half, but recent
comments seem to suggest a more cautious approach is needed: unemployment remains at record
levels, and consumptions remain extremely week. Waiting for more visibility to come (for the time
being we are at 10-15 days in the TV space), we note April figures on Italian advertising market
released by Nielsen confirmed a 18% drop. Auditel figures recently confirmed the long tail of
fragmentation, with thematic channels getting close to the 20% threshold, and the core channels of
RAI and Mediaset under severe pressure: Mr Flavio Zanonato – Minister of Economic Development –
recently confirmed the Government will complete the auction to assign three national frequencies (in
order to avoid the EU fine pending on Italy because of the lack of TV pluralism); as a consequence,
new international players could decide to join an already-crowded arena (SKY still extremely
aggressive, Discovery doubled its presence a couple of months ago, Cairo new owner of La7). Online is
the only segment with positive results (+1% YoY growth in 4M 13, now representing 8% of the total
advertising pie), we believe tablet PCs and video content will further sustain this growth, but we note
for the time being there is not a clear winner in the space, net of the over-the-top international giants
(Google, Apple, Amazon, Facebook, Netflix). We also note the circulations figures for newspapers &
magazines are suggesting visible high single-digit drops.
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Network spin-off, possible market consolidation, new attitude from EU regulators
The mixed impact of adverse regulation, a weak macroeconomic environment and a fierce competition
translated in an extremely negative outcome for the telecom industry: in the first quarter, mobile
service revenues posted a double-digit decline, with operators confirming the tough environment for
the next months as well as a straight focus on costs reduction. Waiting for some visibility to come from
the EU regulator (Ms Neelie Kroes, vice-president of EU telecommunications commission and
responsible of the Digital Agenda is expected to unveil measures in order to harmonise the industry,
aimed at helping telecoms companies to speed up the rollout of faster 4G & NGA services), the focus in
Italy will be on the possible spin-off of the TI network. At the end of May, Telecom Italia’s Board of
Directors approved the network spin-off plan: i) the new structure will result in the so-called
Equivalence of Input model of equality of treatment, which could allow for more favourable rules on
the incumbent for what concerns its retail offers, ii) the BoD also confirmed the powers granted to
management in order that contacts continue with CDP about its potential acquisition of a stake in the
access network company’s share capital, and iii) TI has informed the Communications Regulatory
Authority about the plan which now has to assess its impact on the current regulatory framework. At
the same time, local press argued about a potential market consolidation in the mobile industry, with
Hutch’s 3 Italia – that recently became the most aggressive player in the market – rumoured to be
interested in an integration with TIM or Wind.
Long Cairo & EI Towers– short Mediaset
Long EI Towers (Outperform TP €36.1) – In our view, EI Towers has clear options for
emerging as a winner in the space, as the new owner of frequencies will need a tower
company to broadcast the signal and the option of a national tower company could represent
a game changer in the industry. EI Towers seems well-positioned to benefit from the
potential TV Auction and potential M&A activity, in our view;
Long Cairo Communications (Outperform TP €3.58) – We identify Cairo as an
extremely appealing name, because of the turnaround story of La7. La 7 is achieving brilliant
audience results (close to the 5% threshold in 24/7, +50% increase in prime time to 6%) and
a solid cash position. At current prices, Mediaset is implying a 12% year-on-year advertising
growth for the next year, while for La7 estimates are suggesting a flattish trend: the cross
between these data and the audience ones leaves space for interesting upside on Cairo, in our
view;
Mediaset (Neutral, TP €1.70) – The demanding multiples (18x 2014E EV/EBIT, more
than twice the sector average) and new international players that could join an already
crowded arena, identify Mediaset as the short side of our media trade.
Automotive sector – FIAT Industrial the core long
The recent trends in the sector are mixed and vary by geographical area: Central/Northern Europe is
weakening (German car registrations down double digits in May) while Southern Europe seems to be
bottoming out (Italian car sales still negative in May with a positive new orders figure) although with
some discontinuities (2Ws sales still strongly negative although, again, improving versus the YtD
trend).
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German car sales (YoY trend) Italian car sales and order intake (YoY trend)
2.9%
-5.0% -4.7%
-10.9%
0.5%
-3.5%
-16.4%
-8.6%
-10.5%
-17.1%
3.8%
-9.9%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
Jan 13
Feb 13
Mar 13
Apr 13
May 13
-24.0%
-20.9%-19.9%
-25.5%
-12.0%
-19.7%-21.8%
-17.2%-17.0%
-4.5%
-10.8%-8.0%
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
Jan 13
Feb 13
Mar 13
Apr 13
May 13
Car sales Order intake
Source: Thomson Reuters Datastream, Mediobanca Securities
Asia has been deteriorating recently, mostly on the construction side, but also 3Ws and 2Ws seem
volatile. Elsewhere, the reference markets are booming and accelerating or in some cases, as in the US,
are not showing the signs of weakness that some were expecting: the market is growing high single-
digit with solid pricing and supported by cheap financing. Latam is growing at double-digit pace, with
astonishing numbers on tractors/combines (+27% and +65% YtD in Brazil, respectively).
We remain cautious going forward due to the fact that many company indications and consensus
figures factor in a strong 2H13, accelerating versus 1H13. Therefore, the only stock we are positive on
is Fiat Industrial, while we remain negative on Pirelli and Piaggio.
Long Fiat Industrial (Outperform, TP €10.4). Our positive stance on the stock derives
from the fact that the share price valuation does not reflect the benefits of the merger with
CNH, which will be evident from September when the deal will be closed and the company
will meet investors on road shows. Although we remain negative on the macro cycle, the
tractor market is unrelated to GDP, and this is exactly why Fiat Industrial has been a laggard
in the recent industrials’ rebound: a positive going forward if our top-down view is correct.
For the remaining two businesses, Iveco and CE, the former will benefit from some pre-buy
that should help to weather difficult reference markets. The stock trades at a discount both
versus peers (15%) and on its SoP (20%).
Short Pirelli (Underperform, TP €7.0). The stock has been supported by a speculative
appeal that faded away recently when Mr Tronchetti and Mr Malacalza finalised an
agreement on Camfin stabilising the shareholder base. We are now back to fundamentals that
are solid elsewhere but weak in Europe, where we see price pressure and do not share the
+5/6% price/mix embedded in company’s guidance. Industry overcapacity would push price
cuts, and the negative registration figures seen in Germany are making the situation even
worse. The stock trades at premium versus peers and is not as cheap on an absolute basis (11x
2013E earnings versus peers at 9.3x).
Short Piaggio (Underperform, TP €1.6). Our negative stance on the stock is related to
the high exposure of the company to Europe (60% of its annual turnover) and to Italy in
particular (17% of sales), which are still showing a downward trend although the pace of the
decline is somehow improving. Exposure to emerging countries (25% to India and 15% to SE
Asia) is not proving as supportive as expected: macro conditions in India remain difficult and
high borrowing costs and inflation hit demand of vehicles, while the SE Asian sales have been
affected by an economic slowdown in Vietnam (which accounts for c.70% of the sales in the
area) and by some company-specific issues in penetrating the Indonesian market. EPS
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estimates on the stock have continuously been cut in the past months, but this trend has not
been followed by the stock price, which remains resilient. On our estimates, the stock trades
at a 15% premium versus peers on 1YR fwd earnings.
Rating Changes
Banco Popolare (Underperform from Neutral, TP € 0.95 )
Stretched Basel III Capital levels – With a fully-phased Basel III CET1 below 8% in 2013E, we
see BP as undercapitalised. We view this as light in both absolute terms, given the magnitude
of the deteriorated loan book, and relative to peers. Risk of converting €1bn convertible bond
cannot be neglected in case of further macro deterioration;
Multiples after theoretical recapitalisation do not look compelling – Re-aligning BP to the
peers’ average CET1 ratio (10%) would require €1.3bn capital infusion, making BP trading at
0.5X TE 2013E TE, a generous multiple in light of 4% return in 2014E;
The most exposed to risks related to an ECB-led review of lenders’ asset quality – In Mar-13
BP’s net deteriorated loans accounted for more than 200% of CT1 and coverage stood at a low
26%. Adding €1.3bn of shortfall in the stock of provisions for expected loss, the coverage
would rise to 34%, but net deteriorated loans would still account for 200% of CT1 (ex.
collaterals). Needless to say, stress-scenario on something exceeding 100% of CT1 would have
a large impact on capital;
Limited options to replenish capital in case something goes wrong – BP benefits from the
roll-out of IRBA models and cannot count on a sudden reduction of RWA. Aside from organic
capital generation, BP could only count on challenging assets disposal to strengthen
regulatory capital. The sale of the 39% stake in consumer finance arm would free-up 50bps of
CET1, but we do not see CASA as interested. We see no other asset whose sale could
contribute to capital strengthening.
BP Emilia Romagna (Neutral from Outperform, TP € 5.80)
Fairly valued after earnings cut – After reducing 2014E earnings by 33%, we expect BPER to
deliver c.5% RoTE in 2014E. This makes the current 2013E 0.5X T/E fair;
Little margin of safety in our forecasts – Our estimates are based on short-term rates
matching the 0.5% policy rate and on lowering cost of risk, debatable assumptions in absence
of a macroeconomic recovery;
Faint memories of halcyon days – First quarter results show that the current profitability
hovers over 3% RoTE, unlikely to expand soon due to the asset quality burden;
Little room to improve capital ratios – Apart from the roll-out of IRB models, we see few
options to improve the bank’s capital ratios. This is a weakness in a deteriorating macro
environment and in light of the ECB-led review of lenders’ asset quality.
Beni Stabili (Neutral from Outperform, TP € 0.60)
On the back of our cautious stance on the Italian macroeconomic and financial picture, we do
not see room for improvement for the Italian real estate sector for which we expect further
low liquidity and price weakness and we prefer to reduce the exposure to the real estate
sector, downgrading Beni Stabili from Outperform to Neutral (TP from €0.65 to €0.60). We
have updated our 2013-2014 estimates on Beni Stabili, the main change being the inclusion
of some asset write-downs this year, the logical consequence of the macro and sector picture
outlined above.
Relatively speaking, we still regard Beni Stabili as the best name in the Italian real estate
sector, in the light of its high quality and resilient portfolio, lower financial leverage and
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strong management. We think that Beni Stabili is well positioned in the current difficult
environment as the group’s management has reacted to the prolonged crisis of the Italian real
estate sector by focusing on fundamentals:
Sustain rental income and asset value through active asset management – carefully selected
capex and refurbishments and continuous contact with tenants in order to anticipate their
needs, are the basis of Beni Stabili asset management. This activity allowed the group to keep
the vacancy rate at minimal levels (less than 2% in core portfolio) while in 1Q 13 Beni Stabili
has already renewed 95% of the contracts expiring in FY 13 and achieved an overall 1.2%
increase in gross rents.
On the other hand, asset rotation in the current market conditions is marginal and after a
good first quarter, when the group was able to close sales for €64.2m, Beni Stabili has seen a
slow down in the market as even potential Italian buyers are in a wait and see mood in the
current uncertain situation.
Deleverage, early renegotiation of expiring debt and diversification of funding – Beni Stabili
aims to decrease its LTV from the current 49% to 45%, a process that will take time in the
current illiquid environment. On the other hand, after the huge work done in 2012 and in 1Q
13, the group’s financial structure is now secure having covered 2013-2014 maturities. In
particular, in 1Q 13 the group successfully issued €225m of convertible bonds at 3.375%
increasing the diversification of its L/T financial sources.
Saras (Underperform from Outperform, TP € 0.95)
Last Friday, the offer by Rosneft on 7.29% of Saras’ capital terminated. We believe that over
the last two months Saras’ share price has benefitted from the ongoing tender offer, also
given the uncertainty related to the final number of shares delivered by investors (foreign
investors in fact needed special authorization to adhere to the offer, as it was promoted only
in Italy).
Going forward, the lack of M&A support should bring the focus back to fundamentals, which
in 2Q13 were quite weak: so far, EMC benchmark averaged ca. USD-0.9/bll and the factors
which allow Saras to overperform the market have somehow eased (heavy-light spread
almost zeroed and conversion spread fallen to below USD300/ton). In light of these poor
figures and of the adverse macro trends we are cutting our 2013E and 2014E comparable
EBITDA for the refining business to €-29m and €69m (from the previous €18m and €76m
respectively).
Following the revision in estimates our new SoP valuation points to a €0.95 fair value for the
stock. The bulk of the revision stands in the refining business valuation which passes from
€279m EV to €104m. Marketing valuation was increased by some €25m EV as we included
2014E figures in the valuation while Power Gen and Wind businesses were left broadly
unchanged. Although the Rosneft deal gave the market a clear indication on how much the
refining business of Saras might be worth and although we consider it a realistic possibility
for Rosneft to further increase its stake in Saras in the future, we downgrade the stock to
Underperform as we believe that, for the time being, the focus of the market will go back to
fundamentals.
Trevi Fin. (Underperform from Neutral; TP €4.45)
After the stock’s recent rally, driven by US investors’ appreciation of the technological level of
the drilling equipment and management efforts to penetrate new markets and clients, the
stock is currently trading at too demanding multiples in our view.
The overall excitement on drilling business growth prospects is grounded, but the key point is
that the core business, which accounts for 60% of sales and 50% of consolidated EBITDA, is
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still sluggish, with material risks of further contraction on European markets (particularly
with reference to Soilmec).
The US market and the historically rich niche of dam repair are still missing, with few
contracts expected to be awarded. The backlog is broadly stable, but consists of small-scale
contracts that do not generate material synergies with the equipment unit.
Cash flow generation remains the big issue. Although cash flow should peak in 2Q and 3Q,
following the delivery and payments of rigs manufactured in 2012 (for a total amount of
around €80m), net debt is expected to remain stable at €417m by year-end, or 3.5x
debt/EBITDA.
In addition, the current macro picture might lead to a further deterioration in receivables,
increasing the level of write-downs and shaving some percentage points off profitability.
Yoox (Neutral from Outperform, TP € 18.10)
Since our upgrade in November 2012, YOOX has been a strong outperformer, with the share
price jumping by 46% vs. 6% for the Italian market. Since the IPO in November 2009, it has
even trebled its market cap to the current €1bn thanks to its positive track record of growth
and latest business developments, which have supported investor confidence in its unique
growth profile and hidden potential.
Our TGT price of €18.1 per share leaves only 9% upside on current price, and we currently see
no reason for a further re-rating in the short term.
Accordingly we are adjusting our rating to NEUTRAL. We continue to like YOOX business
model but suggest time has arrived for some profit taking profit.
We see no catalyst in the short term, but on a long term perspective we see some industry-
specific growth opportunities YOOX might leverage on and namely m-commerce, and cross
channelling.
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GENERAL DISCLOSURES
This research report is prepared by Mediobanca - Banca di credito finanziario S.p.A. ("Mediobanca S.p.A."), authorized and supervised by Bank of Italy and Consob to provide financial services, and is compliant with the relevant European Directive provisions on investment and ancillary services (MiFID Directive) and with the implementing law.
Unless specified to the contrary, within EU Member States, the report is made available by Mediobanca S.p.A. The distribution of this document by Mediobanca S.p.A. in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. All reports are disseminated and available to all clients simultaneously through electronic distribution and publication to our internal client websites. The recipient acknowledges that, to the extent permitted by applicable securities laws and regulations, Mediobanca S.p.A. disclaims all liability for providing this research, and accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this document or its contents. This research report is provided for information purposes only and does not constitute or should not be construed as a provision of investment advice, an offer to buy or sell, or a solicitation of an offer to buy or sell, any financial instruments. It is not intended to represent the conclusive terms and conditions of any security or transaction, nor to notify you of any possible risks, direct or indirect, in undertaking such a transaction. Not all investment strategies are appropriate at all times, and past performance is not necessarily a guide to future performance. Mediobanca S.p.A. recommends that independent advice should be sought, and that investors should make their own independent decisions as to whether an investment or instrument is proper or appropriate based on their own individual judgment, their risk-tolerance, and after consulting their own investment advisers. Unless you notify Mediobanca S.p.A. otherwise, Mediobanca S.p.A. assumes that you have sufficient knowledge, experience and/or professional advice to undertake your own assessment. This research is intended for use only by those professional clients to whom it is made available by Mediobanca S.p.A. The information contained herein, including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Mediobanca S.p.A. considers it to be fair and not misleading. Any opinions or estimates expressed herein reflect the judgment of the author(s) as of the date the research was prepared and are subject to change at any time without notice. Unless otherwise stated, the information or opinions presented, or the research or analysis upon which they are based, are updated as necessary and at least annually. Mediobanca S.p.A. may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not imply that Mediobanca S.p.A. endorses, recommends or approves any material on the linked page or accessible from it. Mediobanca S.p.A. does not accept responsibility whatsoever for any such material, nor for any consequences of its use. Neither Mediobanca S.p.A. nor any of its directors, officers, employees or agents shall have any liability, howsoever arising, for any error, inaccuracy or incompleteness of fact or opinion in this report or lack of care in its preparation or publication.
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Mediobanca S.p.A. salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein.
ADDITIONAL DISCLAIMERS TO U.K. INVESTORS: Mediobanca S.p.A. provides investment services in the UK through a branch established in the UK (as well as directly from its establishment(s) in Italy) pursuant to its passporting rights under applicable EEA Banking and Financial Services Directives and in accordance with applicable Financial Services Authority requirements.
ADDITIONAL DISCLAIMERS TO U.S. INVESTORS: This research report is prepared by Mediobanca S.p.A. and distributed in the United States by Mediobanca Securities USA LLC, which is a wholly owned subsidiary of Mediobanca S.p.A., is a member of Finra and is registered with the US Securities and Exchange Commission. 565 Fifth Avenue - New York NY 10017. Mediobanca Securities USA LLC accepts responsibility for the content of this report. Any US person receiving this report and wishing to effect any transaction in any security discussed in this report should contact Mediobanca Securities USA LLC at 001(212) 991-4745. Please refer to the contact page for additional contact information. All transactions by a US person in the securities mentioned in this report must be effected through Mediobanca Securities USA LLC and not through a non-US affiliate. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. The research analyst(s) are not associated persons of Mediobanca Securities USA LLC and therefore are not subject to NASD rule 2711 and incorporated NYSE rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst.
ADDITIONAL DISCLAIMERS TO U.A.E. INVESTORS: This research report has not been approved or licensed by the UAE Central Bank, the UAE Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) or any other relevant licensing authorities in the UAE, and does not constitute a public offer of securities in the UAE in accordance with the commercial companies law, Federal Law No. 8 of 1984 (as amended), SCA Resolution No.(37) of 2012 or otherwise. This research report is strictly private and confidential and is being issued to sophisticated investors.
REGULATORY DISCLOSURES
Mediobanca S.p.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Mediobanca S.p.A. or its affiliates or its employees may effect transactions in the securities described herein for their own account or for the account of others, may have long or short positions with the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other services for such issuer or its affiliates. The organisational and administrative arrangements established by Mediobanca S.p.A. for the management of conflicts of interest with respect to investment research are consistent with rules, regulations or codes applicable to the securities industry. The compensation of the analyst who prepared this report is determined exclusively by research management and senior
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17 June 2013 ◆ 83
management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of Mediobanca S.p.A. as a whole, of which investment banking, sales and trading are a part.
For a detailed explanation of the policies and principles implemented by Mediobanca S.p.A. to guarantee the integrity and independence of researches prepared by Mediobanca's analysts, please refer to the research policy which can be found at the following link: http://www.mediobanca.it/static/upload/b5d/b5d01c423f1f84fffea37bd41ccf7d74.pdf
Unless otherwise stated in the text of the research report, target prices are based on either a discounted cash flow valuation and/or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company's products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. All prices are market close prices unless differently specified.
Rating system - methodology 6 months horizon relative to local & European indices
Outperform: >+10% performance vs benchmark;
Neutral: -10% to +10% performance vs benchmark;
Underperform: <-10% performance vs benchmark;
Under review: fair value (and rating) under scrutiny for a possible change;
Not rated: impossible to determine a fair value (and rating) due to either because there is no sufficient visibility on the company's key items
or because it has not been finalized yet a complete analysis of the company. Alternatively, it is applicable pursuant to Mediobanca S.p.A.
policy in circumstances when Mediobanca S.p.A. is acting in any advisory capacity in a strategic transaction involving this company.
Our rating relies upon the expected relative performance of the stock considered versus its benchmark. Such an expected relative performance relies upon forecasts for the company's financials that we now consider accurate but that could change in the future as a consequence of unexpected events. Our recommendation relies upon the expected relative performance of the stock considered versus its benchmark. Such an expected relative performance relies upon a valuation process that is based on the analysis of the company's business model / competitive positioning / financial forecasts. The company's valuation could change in the future as a consequence of a modification of the mentioned items.
Proportion of all recommendations relating to the first quarter 2013
Outperform Neutral Underperform Under Review Not Rated
37,41% 44,22% 17,69% 0% 0,68%
Proportion of issuers to which Mediobanca S.p.A. has supplied material investment banking services relating to the first quarter 2013
Outperform Neutral Underperform Under Review Not Rated
14,55% 6,15% 0% 0% 0%
To access previous research reports and establish trends in ratings issued, please see the restricted access part of the "MB Securities" section of the Mediobanca S.p.A. website at www.mediobanca.it.
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COMPANY SPECIFIC REGULATORY DISCLOSURES
RATING The present rating in regard to AEFFE has not been changed since 14/05/2013.
In the past 12 months, the rating on YOOX has been changed. The previous rating, issued on 13/11/2012, was OUTPERFORM.
The present rating in regard to ANSALDO STS has not been changed since 16/01/2013.
In the past 12 months, the rating on UNIONE DI BANCHE ITALIANE has been changed. The previous rating, issued on 25/03/2013, was NEUTRAL.
The present rating in regard to ASTALDI has not been changed since 23/04/2013.
In the past 12 months, the rating on TREVI FINANZIARIA has been changed. The previous rating, issued on 18/04/2012, was NEUTRAL.
The present rating in regard to AUTOGRILL has not been changed since 06/02/2013.
In the past 12 months, the rating on TENARIS has been changed. The previous rating, issued on 15/10/2012, was NEUTRAL.
The present rating in regard to AZIMUT has not been changed since 14/03/2011.
In the past 12 months, the rating on SARAS has been changed. The previous rating, issued on 18/09/2012, was OUTPERFORM.
The present rating in regard to BANCA MONTE PASCHI SIENA has not been changed since 27/07/2011.
In the past 12 months, the rating on SAIPEM has been changed. The previous rating, issued on 30/01/2013, was UNDERPERFORM.
The present rating in regard to BANCA POP. MILANO has not been changed since 18/01/2012.
In the past 12 months, the rating on SAFILO has been changed. The previous rating, issued on 24/11/2011, was OUTPERFORM.
The present rating in regard to BANCO POPOLARE has not been changed since 17/06/2013.
In the past 12 months, the rating on PRYSMIAN has been changed. The previous rating, issued on 26/11/2012, was NEUTRAL.
The present rating in regard to BENI STABILI has not been changed since 17/06/2013.
In the past 12 months, the rating on PRADA has been changed. The previous rating, issued on 26/09/2012, was OUTPERFORM.
The present rating in regard to BP EMILIA ROMAGNA has not been changed since 17/06/2013.
In the past 12 months, the rating on PIRELLI & C. has been changed. The previous rating, issued on 20/07/2012, was NEUTRAL.
The present rating in regard to BRUNELLO CUCINELLI has not been changed since 12/06/2012.
In the past 12 months, the rating on PIAGGIO has been changed. The previous rating, issued on 13/09/2012, was NEUTRAL.
The present rating in regard to BUZZI UNICEM has not been changed since 27/03/2013.
In the past 12 months, the rating on MEDIOLANUM has been changed. The previous rating, issued on 05/12/2006, was OUTPERFORM.
The present rating in regard to CAIRO COMMUNICATION has not been changed since 26/10/2011.
In the past 12 months, the rating on MEDIASET has been changed. The previous rating, issued on 01/08/2012, was UNDERPERFORM.
The present rating in regard to CAMFIN has not been changed since 23/01/2013.
In the past 12 months, the rating on FINMECCANICA has been changed. The previous rating, issued on 01/08/2012, was NEUTRAL.
The present rating in regard to CAMPARI has not been changed since 29/10/2012.
In the past 12 months, the rating on FIAT has been changed. The previous rating, issued on 04/05/2009, was OUTPERFORM.
The present rating in regard to CATTOLICA ASSICURAZIONI has not been changed since 05/03/2007.
In the past 12 months, the rating on FERRAGAMO has been changed. The previous rating, issued on 05/10/2011, was OUTPERFORM.
The present rating in regard to CEMENTIR has not been changed since 21/05/2012.
In the past 12 months, the rating on DANIELI has been changed. The previous rating, issued on 22/11/2012, was NEUTRAL.
The present rating in regard to CREDEM has not been changed since 05/01/2009.
In the past 12 months, the rating on CAMPARI has been changed. The previous rating, issued on 03/09/2012, was OUTPERFORM.
The present rating in regard to CREDITO VALTELLINESE has not been changed since 06/06/2012.
In the past 12 months, the rating on CAMFIN has been changed. The previous rating, issued on 27/03/2012, was OUTPERFORM.
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The present rating in regard to DANIELI has not been changed since 06/05/2013.
In the past 12 months, the rating on BUZZI UNICEM has been changed. The previous rating, issued on 06/02/2012, was NEUTRAL.
The present rating in regard to DE LONGHI has not been changed since 13/02/2012.
In the past 12 months, the rating on BP EMILIA ROMAGNA has been changed. The previous rating, issued on 06/06/2012, was OUTPERFORM.
The present rating in regard to EI TOWERS has not been changed since 24/10/2006.
In the past 12 months, the rating on BENI STABILI has been changed. The previous rating, issued on 22/02/2010, was OUTPERFORM.
The present rating in regard to ENI has not been changed since 25/02/2004.
In the past 12 months, the rating on BANCO POPOLARE has been changed. The previous rating, issued on 05/07/2011, was NEUTRAL.
The present rating in regard to FERRAGAMO has not been changed since 18/10/2012.
In the past 12 months, the rating on AUTOGRILL has been changed. The previous rating, issued on 02/08/2012, was NEUTRAL.
The present rating in regard to FIAT has not been changed since 31/10/2012.
In the past 12 months, the rating on ASTALDI has been changed. The previous rating, issued on 07/08/2009, was OUTPERFORM.
The present rating in regard to FIAT INDUSTRIAL has not been changed since 19/03/2012.
In the past 12 months, the rating on ANSALDO STS has been changed. The previous rating, issued on 25/07/2012, was OUTPERFORM.
The present rating in regard to FINMECCANICA has not been changed since 09/11/2012.
In the past 12 months, the rating on AEFFE has been changed. The previous rating, issued on 22/03/2011, was OUTPERFORM.
The present rating in regard to GENERALI ASS. has not been changed since 30/07/2012.
The present rating in regard to YOOX has not been changed since 17/06/2013.
The present rating in regard to GEOX has not been changed since 11/05/2012.
The present rating in regard to UNIPOL has not been changed since 14/03/2013.
The present rating in regard to IMMOBILIARE GRANDE DISTRIBUZIONE has not been changed since 20/11/2007.
The present rating in regard to UNIONE DI BANCHE ITALIANE has not been changed since 30/05/2013.
The present rating in regard to IMPREGILO has not been changed since 22/10/2009.
The present rating in regard to UNICREDIT has not been changed since 26/03/2012.
The present rating in regard to INDESIT has not been changed since 04/05/2011.
The present rating in regard to TREVI FINANZIARIA has not been changed since 17/06/2013.
The present rating in regard to INTESA SANPAOLO has not been changed since 08/04/2011.
The present rating in regard to TOD''S has not been changed since 05/10/2011.
The present rating in regard to ITALCEMENTI has not been changed since 10/08/2010.
The present rating in regard to TENARIS has not been changed since 15/01/2013.
The present rating in regard to LUXOTTICA has not been changed since 24/11/2011.
The present rating in regard to TELECOM ITALIA has not been changed since 25/01/2012.
The present rating in regard to MEDIASET has not been changed since 26/11/2012.
The present rating in regard to SARAS has not been changed since 17/06/2013.
The present rating in regard to MEDIOLANUM has not been changed since 25/03/2013.
The present rating in regard to SAIPEM has not been changed since 03/06/2013.
The present rating in regard to PIAGGIO has not been changed since 12/10/2012.
The present rating in regard to SAFILO has not been changed since 22/04/2013.
The present rating in regard to PIRELLI & C. has not been changed since 17/10/2012.
The present rating in regard to PRYSMIAN has not been changed since 01/03/2013.
The present rating in regard to PRADA has not been changed since 09/04/2013.
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The present rating in regard to PRELIOS has not been changed since 13/02/2009.
INITIAL COVERAGE AEFFE initial coverage as of 17/09/2007.
YOOX initial coverage as of 21/01/2010.
ANSALDO STS initial coverage as of 04/07/2006.
UNIPOL initial coverage as of 21/07/2003.
ASTALDI initial coverage as of 22/06/2009.
UNIONE DI BANCHE ITALIANE initial coverage as of 16/04/2007.
AUTOGRILL initial coverage as of 21/02/2003.
UNICREDIT initial coverage as of 30/06/2003.
AZIMUT initial coverage as of 01/08/2005.
TREVI FINANZIARIA initial coverage as of 06/03/2006.
BANCA MONTE PASCHI SIENA initial coverage as of 12/02/2004.
TOD''S initial coverage as of 28/01/2003.
BANCA POP. MILANO initial coverage as of 05/03/2003.
TENARIS initial coverage as of 15/04/2003.
BANCO POPOLARE initial coverage as of 25/07/2007.
TELECOM ITALIA initial coverage as of 12/02/2003.
BENI STABILI initial coverage as of 18/06/2007.
SARAS initial coverage as of 22/05/2012.
BP EMILIA ROMAGNA initial coverage as of 06/06/2012.
SAIPEM initial coverage as of 20/02/2003.
BRUNELLO CUCINELLI initial coverage as of 12/06/2012.
SAFILO initial coverage as of 19/12/2006.
BUZZI UNICEM initial coverage as of 21/03/2003.
PRYSMIAN initial coverage as of 26/06/2007.
CAIRO COMMUNICATION initial coverage as of 12/02/2003.
PRELIOS initial coverage as of 20/02/2003.
CAMFIN initial coverage as of 27/03/2012.
PRADA initial coverage as of 21/02/2012.
CAMPARI initial coverage as of 21/03/2003.
PIRELLI & C. initial coverage as of 12/05/2004.
CATTOLICA ASSICURAZIONI initial coverage as of 11/04/2005.
PIAGGIO initial coverage as of 14/09/2006.
CEMENTIR initial coverage as of 23/01/2003.
MEDIOLANUM initial coverage as of 19/03/2003.
CREDEM initial coverage as of 21/03/2003.
MEDIASET initial coverage as of 19/03/2003.
CREDITO VALTELLINESE initial coverage as of 18/12/2007.
LUXOTTICA initial coverage as of 27/06/2003.
DANIELI initial coverage as of 23/05/2006.
ITALCEMENTI initial coverage as of 31/01/2003.
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DE LONGHI initial coverage as of 28/01/2003.
INTESA SANPAOLO initial coverage as of 16/04/2007.
EI TOWERS initial coverage as of 24/10/2006.
INDESIT initial coverage as of 16/02/2006.
ENI initial coverage as of 25/02/2004.
IMPREGILO initial coverage as of 24/06/2005.
FERRAGAMO initial coverage as of 05/09/2011.
IMMOBILIARE GRANDE DISTRIBUZIONE initial coverage as of 18/06/2007.
FIAT initial coverage as of 07/07/2003.
GEOX initial coverage as of 01/03/2005.
FIAT INDUSTRIAL initial coverage as of 04/01/2011.
GENERALI ASS. initial coverage as of 23/01/2003.
FINMECCANICA initial coverage as of 28/03/2003.
SPECIALIST This report was prepared by Mediobanca S.p.A. in its capacity as specialist of the following companies, in compliance with the obligations set forth by the rules of the markets organized and managed by Borsa Italiana S.p.A.: AEFFE, ANSALDO STS, EI TOWERS, YOOX. Mediobanca S.p.A. expects to prepare research reports on the following companies at least on a semi-annual basis: AEFFE, ANSALDO STS, EI TOWERS, YOOX.
MARKET MAKER Mediobanca S.p.A. is currently acting as market maker on equity instruments, or derivatives whose underlying financial instruments are materially represented by equity instruments, issued by the following companies: ASTALDI, AUTOGRILL, AZIMUT, BANCA POP. MILANO, BANCO POPOLARE, BP EMILIA ROMAGNA, BUZZI UNICEM, CAMPARI, CATTOLICA ASSICURAZIONI, CREDEM, ENI, FIAT, FIAT INDUSTRIAL, FINMECCANICA, GENERALI ASS., GEOX, IMPREGILO, INTESA SANPAOLO, ITALCEMENTI, LUXOTTICA, MEDIASET, MEDIOLANUM, PIRELLI & C. , PRYSMIAN, SAIPEM, SARAS, TELECOM ITALIA, TENARIS, UNICREDIT, UNIONE DI BANCHE ITALIANE, UNIPOL.
MEDIOBANCA REPRESENTATION ON GOVERNING BODIES Mediobanca S.p.A. or one or more of the companies belonging to its group have a representative on one of the governing bodies of the following companies: ANSALDO STS, FINMECCANICA, GENERALI ASS., PIRELLI & C. , TELECOM ITALIA.
MEDIOBANCA SIGNIFICANT FINANCIAL INTERESTS As of the date of publication of this research report, Mediobanca Securities USA LLC's parent company, Mediobanca S.p.A. beneficially owns 1% or more of any class of common equity securities of the securities of the following companies: ANSALDO STS, PRYSMIAN.
Mediobanca S.p.A. or one or more of the companies belonging to its group hold material open positions in financial instruments, or derivatives whose underlying financial instruments are materially represented by financial instrument, issued by the following companies: GENERALI ASS..
Mediobanca S.p.A. or one or more of the companies belonging to its group owns a "major holding" (as defined in the EU Transparency Directive as implemented in each relevant jurisdiction) in the following companies: GENERALI ASS., PIRELLI & C. , PRELIOS. Please consult the website of the relevant competent authority for details. As of the date of publication of this research report, Mediobanca Securities USA LLC's parent company, Mediobanca S.p.A. beneficially owns 1% or more of any class of common equity securities of the securities of the following companies: GENERALI ASS., PIRELLI & C. , PRELIOS.
ISSUER REPRESENTATION ON MEDIOBANCA GOVERNING BODIES Certain members of the governing bodies of the following companies are also members of the governing bodies of Mediobanca S.p.A. or one or more of the companies belonging to its group: ANSALDO STS, BANCA MONTE PASCHI SIENA, CAIRO COMMUNICATION, CAMFIN, CREDITO VALTELLINESE, DANIELI, ENI, FINMECCANICA, INDESIT, INTESA SANPAOLO, ITALCEMENTI, LUXOTTICA, MEDIASET, MEDIOLANUM, PIRELLI & C. , PRELIOS, SAFILO, SAIPEM, TREVI FINANZIARIA.
The following companies have a representative on one of the governing bodies of Mediobanca S.p.A. or one or more of the companies belonging to its group: TELECOM ITALIA, UNICREDIT.
ISSUER SIGNIFICANT FINANCIAL INTERESTS ON MEDIOBANCA The following companies own a "major holding" (as defined in the EU Transparency Directive as implemented in each relevant jurisdiction) in Mediobanca S.p.A.: MEDIOLANUM, UNICREDIT, UNIPOL. Please consult the website of the relevant competent authority for details.
LENDING RELATIONSHIP Mediobanca S.p.A. or one or more of the companies belonging to its group have a significant lending relationship with the following companies or one or more of the companies belonging to their group: AUTOGRILL, GENERALI ASS., TELECOM ITALIA, UNIPOL.
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Disclaimer
MEDIOBANCA – Banca di Credito Finanziario S.p.A. Piazzetta Enrico Cuccia, 1 - 20121 Milano - T. +39 02 8829.1 33 Grosvenor Place – London SW1X 7HY – T. +44 (0) 203 0369 530
CORPORATE FINANCE SERVICE CONTRACTS In the past 12 months, Mediobanca S.p.A. or one or more of the companies belonging to its group have entered into agreements to deliver corporate finance services to the following companies or one or more of the companies belonging to its group: BANCA MONTE PASCHI SIENA, ENI, IMMOBILIARE GRANDE DISTRIBUZIONE, ITALCEMENTI.
Mediobanca S.p.A. or one or more of the companies belonging to its group are currently providing corporate finance services to the following companies or one or more of the companies belonging to its group: BANCO POPOLARE, CATTOLICA ASSICURAZIONI, FINMECCANICA, GENERALI ASS., IMPREGILO, TELECOM ITALIA.
CONTRACTUAL AGREEMENTS RE: FINANCIAL INSTRUMENTS Mediobanca S.p.A. or one or more of the companies belonging to its group are currently fulfilling agreements to issue financial instruments linked to financial instruments of the following companies: MEDIASET.
UNDERWRITING Mediobanca S.p.A. is committed to purchase financial instruments remaining unsubscribed in the context of financial instruments offering of the following companies: BANCA POP. MILANO.
ANALYST'S PERSONAL FINANCIAL INTERESTS
FERRARI GIANLUCA holds no.600 shares of AZIMUT.
PAVAN FABIO holds no.100 shares of EI TOWERS
COPYRIGHT NOTICE
No part of the content of any research material may be copied, forwarded or duplicated in any form or by any means without the prior consent of Mediobanca S.p.A., and Mediobanca S.p.A. accepts no liability whatsoever for the actions of third parties in this respect.
END NOTES
The disclosures contained in research reports produced by Mediobanca S.p.A. shall be governed by and construed in accordance with Italian law.
Additional information is available upon request.
Mediobanca is acting as financial co-advisor to Telecom Italia for the network spin-off.
Mediobanca will act as co-underwriter of the capital increase.