A far-reaching change in the valuation rules for banks that are not listed in financial markets is happening in Italy – thanks to MiFID II. And, as was anticipated by many analysts, the chances for a large number of savers to discover that their investments in such banks actually worth much less than what they thought are extremely high.
Moreover, according to a survey conducted by Consultique, a consultancy firm that guides the actions and decisions of many Family Offices and independent financial brokers in Italy, the figures at stake are pretty big: over 60 small-to-medium banks are involved, more than 650,000 private savers, and an invested amount near to €11bn.
MiFID II: The Revolution Round the Corner
For investors that have these kind of stocks in their portfolio, harsh times may be very close – starting from April 18th. The reason is represented by the new MiFID II, the European directive on markets and financial instruments. It will oblige private banks to provide to CONSOB – the authority that regulates the functioning of financial markets in Italy – more details about their stock’s valuation methods and the trading system they intend to use in order to offer their shares to private investors. Currently, such securities are exchanged through systems of multilateral negotiations or ad-hoc investment vehicles that act as intermediaries.
Currently, such securities are exchanged through systems of multilateral negotiations or ad-hoc investment vehicles that act as intermediaries. The latter kind of system – which is very different from the processes in place in listed companies – is not only particularly intricate, but is also not subjected to a strict supervision and proper regulatory framework.
The more dangerous and inefficient consequences of such systems is that they cannot guarantee the liquidity of stocks, and that prices easily get to fanciful levels (to say the least). These criticalities have played a major role in the disastrous occurrences that hit the investors of Veneto Banca and Popolare di Vicenza – two non-listed banks, deeply connected with their respective territories, whose share prices have collapsed to almost zero.
These dramatic events, combined with the terrible health of the Italian banking system, have pushed CONSOB to emit a series of recommendations, urging financial intermediaries to adopt more transparent and illiquidity-proof systems.
The first consequence of this move by CONSOB, which also aims reduce the risks of seeing discrepancies between banks’ behaviour and shareholders’ interests, is that many stock valuations made autonomously by banks are likely to reveal their overly optimistic nature. Indeed, for banks whose stocks are not listed in financial markets, the main risk is related to the overestimation of their shares – a practice as common as any moral-hazardous practice that yields to unrealistic financial ratios that are able to impress inexperienced and naive investors, but that are not supported by any fundamental value.
The example of Banca Popolare di Bari, a non-listed small bank located in one of Italy’s worst regions for credit quality, is emblematic: its share’s price-to-book value is close to 17. The same ratio for Intesa-San Paolo, meanwhile, the biggest banking group in Italy, is slightly below the unitary value.
Many banks are thus prone to seeing their shares’ value drastically lowered, as the number of non-listed banks that can be considered solid and with good credit rating is low: just 10 out of a total of 60 banks. Moreover, there are several regional banks whose shares already have a serious liquidity problem, like Banca Popolare di Cividale, “Banca di Puglia e Basilicata, and Cassa di Risparmio di Rimini.
In the case of Volksbank, the regional bank of Alto Adige (one of the most virtuous provinces of the country due to the high number of fiscal concessions enjoyed by its inhabitants), the situation is dramatic – with totally illiquid stocks and investors still unable to sell since last November.
Fortunately, according to Andrea Cattapan, equity analyst at Consultique, many banks are devoting efforts and coordinating with authorities to predispose new infrastructures for shares negotiations that could help them avoid strong shocks in prices. The preferred solution seems to be the multilateral trading facility offered by Hi-MTF, in cooperation with a strong market-maker.
As a response to what is at stake with MiFID II, this solution – which has already been adopted by a consistent number of medium banks and enterprises – matches the demands of CONSOB in terms of transparency, liquidity and efficiency. But many doubts remain as to its capability to avoid a potentially infinite number of long-lasting legal disputes and the umpteenth occasion of social and political turmoil caused by the Italian banking sector.