In Tuesday’s 3-Minute Market Minder, Teeka warned of the coming European bank collapse. He highlighted Italy as “ground zero”… with over $400 billion in bad loans on Italian banks’ balance sheets.
Today we share critical insight on the issue from someone who just returned from Italy: Chris Mayer. Chris is Agora Inc.’s (PBRG’s parent company) all-time best analyst (17% annual returns over 10-plus years).
I couldn’t wait to share his “boots-on-the-ground” Italian banking “intel” with the Palm Beach audience…
 |
From Chris Mayer, chief investment strategist, Bonner Private Portfolio: The drama unfolding in Italy could shake out some major bargains for investors.
Italy is the third largest economy in the eurozone. And it’s the eighth or 12th largest economy in the world, depending on how you figure it.
But the economy is stagnant…
Real GDP per person is lower now than it was in 1999. The official unemployment rate is 11.6%. The banks are saddled with lots of non-performing assets, or “NPEs” (loans that are more than 90 days past due).
About 18% of Italian bank assets are non-performing. That’s a big problem…
| Recommended Link | ||
|
||
| — |
Banks are highly leveraged, and Italian banks especially so. You can see this by looking at equity as a percentage of assets. A 7% figure is typical. That means every $100 in assets is financed with just $7 of the bank’s own money.
It’s like a $300,000 house with a $279,000 mortgage. If the value of the house drops 10%, you’re underwater. It works the same way with banks.
So even if half of those NPEs wind up being zeros, it could wipe out Italian stockholders—and cause the bank itself to fail.
That’s why Italian banks are down by more than half this year. It’s also why they trade for fractions of their book values (the value of the bank’s assets on its books less liabilities). The market is anticipating losses.
The latest issue of Grant’s Interest Rate Observer (July 15) had a nice table summarizing the Italian banking landscape:
Banca Monte dei Paschi di Siena, the third bank on the list, is in real trouble. It’s the oldest surviving bank in the world. It opened for business in 1472 and has been in operation ever since.
As Grant’s put it:
|
It must say something about the present era in finance that Banca Monte, founded 20 years before Columbus discovered America, is on the rocks now. After raising capital of almost 15 billion euros since 2008, the bank commands a market cap of just 909 million euros today… |
On a 10-day trip through Italy with my senior analyst, Thompson Clark, we stopped at Banca Monte to get cash in the city of Lecce.
Well, we got the cash. But we wondered how long Banca Monte had left…
We’re not investing in Italian banks in Bonner Private Portfolio. But the turmoil has taken the market down 30% off its highs and shaken loose some great values in global companies. In an upcoming partner letter, I’ll share more of what we found.
Reeves’ Note: You can gain access to Chris’ partner letters (and all his market-beating recommendations) right here. Remember, there’s a reason Chris beat the market by over 40%—and made money on the year—during 2008’s financial wipeout…
| Recommended Link | ||
|
||
| — |
