I'm still running Portfolio Guru, LLC's world operations from Italy, and continuing to marvel at the news coming from the local banking sector. Banca dei Monte Paschi di Siena (BMPS), widely considered to be the world's oldest continually operating bank with a founding date in 1472, continues to teeter on the brink of insolvency. BMPS shares are hanging in there today at e0.29 after being halted yesterday. After an 84% decline in the past year, though, the markets have declared BMPS's equity essentially worthless. That this is a bank founded 20 years before famous Genoa-native Christopher Columbus made his noted discovery is interesting to me.
Continental Europe's banking system has severe pockets of weakness on a country-by-country level, but the market probably cares more about the micro. On the macro level, the European Banking Association's stats paint a terrible picture of certain national banking systems. As of the most recent EBA report (data as of March 2016) Italy (17%), Portugal (19%) and Ireland (15%) all had non-performing loan ratios in the mid-to-high-teens. This is a problem that won't go away on a sovereign level, but obviously affects individual banks, as well.
On that note, the EBA will publish its 2016 stress-test results this Friday, July 29. The results will be absolutely crucial to understanding the health of Europe's banks -- 53 individual banks will be covered -- but it seems that the boffins at the European Union are not interested in widespread consumption of the results.
Why? Well, for starters, the EBA's stress-test results will be published at 10 p.m. local time on Friday. There's nothing I enjoy more than quaffing negronis with my amici in the local bars on Friday nights and discussing vitally important micro data on the banking sector. Releasing the results on a Friday night is akin to burying it, and, given the increasing pace of localized jihadist terror attacks on the Continent, it's likely that the news won't hit the front pages, anyway.
Also, there's no regularity to these stress tests. The last batch were published on October 26, 2014, and before that there hadn't been a publication since 2011. In 2014, the headline figure from the test results was the failure of 24 banks, 15 of which were located in Italy (including Banca dei Monte Paschi), Greece and Cyprus. The fact that Banca dei Monte Paschi is now, 20 months after its failing grade, in the throes of a crisis, is an indication that the structural reforms needed in the European banking sector have not occurred.
But that's the big question facing the European banking system: Will the macro problems overwhelm the individual banks? The iShares MSCI European Financials ETF (EUFN) is down a stunning 21.7% so far in 2016 and 32.1% in the past 12 months. If the damage is limited to Banca dei Monte Paschi and other systemically irrelevant banks, that's one thing. If, on the other hand, major players, such as Deutsche Bank (DB) , Commerzbank (which reported a sharp decline in its capital ratio in second-quarter results this morning), Royal Bank of Scotland (RBS) , or the Italian majors -- UniCredit (UNCFF) and Intesa Sanpaolo (ISNPY) -- start showing up in these stress test results, then it's time to worry about the near-term future for pan-European solvency.
Excuse me if I get political for a second here at the end, but can you believe those narrow-minded xenophobes in British towns like Romford, Sunderland and Caerphilly actually voted to leave such a well-run, fully functioning organization as the EU? According to the EBA, Great Britain's non-performing loan ratio was a minuscule 2% as of March. That's not something to be diluted.