This weekend, all eyes will be on Italy. That might seem odd, given that Sunday’s referendum is on an arcane constitutional issue, rather than something fundamental like Brexit or Trump. The nation is voting on proposals to allow the Chamber of Deputies to pass laws without consultating the Senate, in a bid to speed up the country’s sluggish lawmaking processes.
Five Star Grillo
So what’s that got to do with the price of British eggs, or British banks for that matter? If the reforms are rejected, as seems likely, prime minister Matteo Renzi has said he will resign. This will be seen as yet another victory for the populist forces, and could lead to an election victory for comedian Beppe Grillo’s Five Star Movement, which wants a referendum on leaving the EU (sounds familiar?) The election could come next spring, and no later than early 2018.
Still can’t see the implications for UK banks? Well, you may have noticed that the Italian banking sector is in a mess, with €360bn of non-performing loans. A No vote will make it even harder to sort this out. Renzi is a reformer, who’s looking to build a more stable political system, and a defeat on Sunday will halt this process.
Eurozone groans
It will also add growing concerns about the Italian banks. Unicredit (Italy’s biggest) and Banca Monte dei Paschi di Siena (Italy’s most indebted) are looking to raise capital in December, and this could make their task harder. Unicredit has lost two-thirds of its stock market value this year. Plans to recapitalise Monte dei Paschi could collapse if the vote leads to months of political turmoil. Other banks, notably MPS, Veneto Banca, or Popolare di Vicenza could get sucked into the vortex.
The Italian government could even face the humiliation of asking the European Central Bank to back a €40bn bailout, which must be approved by the German Bundestag and other eurozone parliaments. Some commentators have argued that the Italian banking crisis could finally sink the single currency as Italy isn’t the only country with a banking problem. Just look at Deutsche Bank.
The Italian bank job
The UK isn’t in the euro and British banks aren’t in the same disastrous state as their Italian counterparts, despite RBS failing a stress test this week. Bad loans amount to less 1.5% of book value in the UK but are 12 times higher at 18% in Italy.
Yet I will still be watching out for Sunday’s result, and keeping a beady eye on the impact on UK banks such as Barclays, Lloyds Banking Group and others on Monday. The sector has had a patchy 2016. Barclays is trailing 7% lower than a year ago (although it’s up 27% in the last three months), Lloyds is down 22%. I reckon that Lloyds looks particularly tempting, trading at 6.78 times earnings and yielding 3.92%.
If ripples do wash across the Channel from Italy, this could be a buying opportunity. Should Italy stumble into a full-blown banking crisis, the buying opportunity could become even greater. But then, so could the dangers.