Italian banks are trading at enormous discounts to book value.
That implies you believe the book values of Italian banks fully factors in nonperforming loans.
I don’t and neither does reader “Lars” from Europe who pinged me with these thoughts.
We get new Target2 numbers on Monday. Apart from you, nobody seems to be interested in these numbers. Draghi is using a central bank settlement system to finance European banks to the tune of €820 billion, and nobody seems to care. I tried to alert Richard Duncan to the fact that he had forgotten to include Target2 in his numbers, to no avail.
I suspect that Draghi is hoping that the €80 billion monthly QE will help to reduce the Target2 imbalance. Target2 is a financing method used by Draghi to circumvent the democratic process and given the minimal attention Target2 has gotten he has succeeded. But in reality this is sophisticated fraud. Draghi will also resume LTRO, an indication that € banks have funding problems.
The Italian central bank has under Target2 borrowed €250 billion, mainly from Bundesbank. The loan is unsecured, not a single € in collateral. The 250 billion is then lent to Italian banks, all of them insolvent.
Unicredit, the no 1 bank, has book equity end 2015 of €50 billion. The share price was €3.37 yesterday and with 5.979 billion shares outstanding the market value (market cap) of the equity is € 20.192 billion. Monte Dei Paschi has book equity of €9.5 billion and a market cap of € 2.07 billion.
So , based on the free price discovery mechanism, the market´s (smart money) verdict is that Unicredit´s equity is not worth 50 but 20 billion.
All the major Italian banks are in the same situation.
So if one combines the fact that all Italian banks trade at a deep discount to book value (price/book around 0.4 for Unicredit and 0.22 for Monte) , the fact that NPLs are record high and the fact that the banks funding take place through ECBs backdoor, we seem to have a problem.
Mainstream media is not interested in numbers and facts. But that´s not important because the smart money has given its verdict and the only question is how long Draghi can keep his show on the road.
I will post a Target2 update on Monday or Tuesday.
For new readers who do not understand what Target2 is all about please see …
- Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks “Can You Please Explain Target2?”
- Capital Flight Intensifies in Italy and Spain; Curiously, Money Flows Into French Banks
Mike “Mish” Shedlock