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Berlusconi`s Government Competes With Banks

Italian retail investors are spoiled for choice as the country’s banks prepare to refinance a third of their debt at a time when the government is offering yields at euro-era records on its securities. The country’s lenders, including UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), have more than 100 billion euros ($145 billion) of bonds to repay by the end of 2012. The government, which has paid more for its money than financial firms for the past four months, will sell quadruple that amount in the same period.

“The maturities of the Italian public debt create a sort of competition with the issues of the banking sector,” Paola Sabbione, an analyst at Deutsche Bank AG (DBK), wrote in a report “Families, thus the banks’ clients, are important holders of Italian public debt.”

The yield on Italian 10-year bonds reached a decade-high 6.3 percent on Aug. 5, slamming the shares of the banks, the biggest holders of government bonds. The plunge in UniCredit and Intesa shares, both down more than 30 percent since the start of July, threaten to deter Italian savers, who traditionally buy the bulk of their debt.

Intesa is currently offering as much as 500 million euros of bonds to retail investors maturing in 2015 at a fixed rate of 5 percent, 85 basis points more than the yield on Italy’s government bonds with a similar maturity.

‘Compelling Spreads’

“Banks have to convince customers that their bonds are more attractive, so they have to offer compelling spreads on yields,” said Alessandro Frigerio, a fund manager at RMJ Sgr in Milan. Italian lenders may have to offer even more sweeteners after the government on Aug. 12 passed a new package of austerity measures that raises the capital gains tax to 20 percent from 12.5 percent, an increase that won’t be applied to holdings of government bonds.

“With reference to banks, what concerns us in the tax measures is that they make bank bonds less competitive versus government bonds,” Francesca Tondi a London-based analyst at Morgan Stanley wrote in a report today. It “may result in structural shifts for banks funding and possibly changes in competitive dynamics over time,” she said.

Banks favor Italian savers for their bonds because they can offer lower returns than to professional investors, and households tend to hold the debt to maturity. Italians have traditionally favored fixed-income investments rather than stocks for their savings.

Local Ownership

Retail investors in the nation own about 63 percent of bank debt, compared with a European average of 48 percent, data compiled by the Bank of Italy and the banking association ABI show. Households own 223 billion euros of government debt, about 14 percent of the total, the central bank estimates.

UniCredit, Italy’s biggest bank, needs to roll over about 32 billion euros in 2012, while Intesa Sanpaolo, the second largest lender, has about 22 billion-euros of bonds expiring next year.

Intesa is offering higher yields to investors who transfer money from other banks to buy its debt. Until Sept. 7 the lender is selling two-year bonds at a 4.5 percent for anyone who transfers money from competitors, while investors paying from their Intesa accounts will receive 4.2 percent.

Even before the July surge in government bond yields, banks were facing rising financing costs. The average funding cost of Italian banks rose to 1.71 percent in May from 1.5 percent at the end of last year as the average interest rate paid on their bonds jumped 24 basis points to 3.15 percent, data compiled by ABI show.

Less to Share


The government and the Italian banks are also chasing a shrinking retail investor base. The saving rate of Italian families plunged to 12 percent of gross domestic product last year from as 17 percent in 2002, sapped by anemic economic growth and inflation, the national statistics institute said. After expanding in 2008 and 2009, households’ holdings of bonds last year declined, Bank of Italy said in its annual report.

Italian households may feel a further squeeze from the new austerity measures Berlusconi adopted on Aug. 12 to balance the budget in 2013, a year ahead of plans, to convince the European Central Bank to buy the country’s bonds to help bring down its borrowing costs. The yield on the benchmark 10-year bond has fallen more than 100 basis points since the ECB began buying on Aug. 8, while the bank shares have continued to tumble.

The government measures includes higher taxes for anyone earning more than 90,000 euros, a tax on profit of energy companies, and cuts in funding to the central and regional governments that may lead to higher levies for local services.

“Bringing forward the balanced budget to 2013 will probably require measures that could hurt household confidence and disposable income, at least in the near term,” said Marco Valli, chief European economist at UniCredit Global Research in Milan.

Source: Sonia Sirletti and Esteban Duarte (Bloomberg)