At the heart of Carige’s rescue plan is conversion of the EUR 320m 10-year convertible hybrid the Genoese lender sold to the Italian Deposit Protection Fund’s (FITD) Voluntary Intervention Scheme in November 2018 on behalf of Italian banks and which had allowed Carige to regain compliance with 2018 SREP targets.

The hybrid had been intended to be repaid from proceeds of the failed December EUR 400m equity-raise (which the bank’s reference shareholder declined to approve). The Blackrock plan will see the hybrid converted into common equity alongside an equity recapitalisation from the US fund manager, which will at that point gain control the bank. Bearing in mind previous ECB demands, Blackrock’s recap should be in the region of EUR 400m. A shareholders’ meeting to approve the plan is expected to be scheduled for June or July.

According to news reports, FITD chairman Salvatore Maccarone said the banks are prepared to convert the hybrid, which will give them an equity stake of approximately 43% in Carige. Final approval for the conversion is expected at an FITD meeting on May 14, Maccarone was reported as saying, and will be presented to the ECB on May 17.

“The latest turn shows that there is still appetite for systemic solutions, with Italian banks collectively making available EUR 320m. It may not be a fairy-tale ending, but it is clearly better than the alternative of resolution, which could bring with it contagion risk,” said Marco Troiano, deputy head of the financial institutions team at Scope Ratings.

FABI and other banking unions are anxious about the Blackrock plan. Their May 6 statement was certainly softer in tone than hostile earlier statements, however, after they had met with Carige’s special commissioners who denied there would be redundancies beyond the 1,250 already announced in February. On April 30, the unions had referred to the “the feared entry” of BlackRock as a shareholder, with talk of “social carnage” from rumours of 2,000 redundancies, the break-up of the commercial network and outsourcing of a large number of activities.

The Blackrock plan would appear to be the only plan currently under review, as other solutions have failed so far to emerge. If the Blackrock plan or any other private solution fails to cross the line, the fallback option is a State takeover. Carige’s ECB intervention runs to 30 September.

“Bank resolution remains a remote possibility and only a last resort if everything else fails. Supervisory powers have already been extensively applied, but the single supervisor has not yet declared the bank as having failed and has kept looking for alternative solutions,” Troiano said. A government takeover would certainly raise State aid eyebrows; it could also be toxic to Five Star Movement and Lega’s European election campaign.

Key to the success of any rescue plan is the extent to which Carige is able to execute on its February strategy plan; assuming that plan continues intact under new owners. “Carige may have been poorly managed in the past, but it does command a good market share in its home region and, once cleaned up, could be interesting to a number of suitors,” Troiano said. “Blackrock’s interest is likely opportunistic; another Italian or even French bank could see a longer-term value in the network.”

Carige’s ‘Winning back our Future’ Strategic Plan 2019-2023 outlined key steps and a number of business initiatives.

The plan is built around strengthening the balance sheet and capital position this year, hitting break-even in 2020, and building a profitable bank from 2021 onwards – focused around wealth management and a lean, digitally-enabled ‘Commercial Bank 4.0’. On profitability, the ROE target is 5% by 2023 based on EUR 1.9bn of actual balance-sheet equity. Forecast 2023 pre-tax profits are EUR 151m on operating income of EUR 598m.

NPE disposal is key. Carige is targeting a reduction in the NPE ratio from 22% (EUR 3.5bn) at the end of 2018 to 6.3% (EUR 800m) by the end of 2019. To stabilise its funding structure, administrators have developed a 2020 exit strategy for the EUR 3bn in outstanding TLTRO II borrowings, as well as the EUR 2bn of government-guaranteed bonds maturing in January and July 2020.

The release of TLTRO collateral will be repurposed to back the issuance of covered bonds next year. From 2021, the bank said it plans to tap new funding sources, mentioning ‘international retail deposit platforms’ in this regard. The run-off of the final EUR 500m of TLTRO II money as well as covered bond maturities are on the 2021 refi list.

Author: Keith Mullin:  k.mullin@scopegroup.com