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report mediobanca securities report mediobanca securities Document Transcript

  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comIMPORTANT DISCLOSURE FOR U.S. INVESTORS: This document is prepared by Mediobanca Securities, the equity research departmentof Mediobanca S.p.A. (parent company of Mediobanca Securities USA LLC (“MBUSA”)) and it is distributed in the United States byMBUSA which accepts responsibility for its content. The research analyst(s) named on this report are not registered / qualified asresearch analysts with Finra. Any US person receiving this document and wishing to effect transactions in any securities discussedherein should do so with MBUSA, not Mediobanca S.p.A.. Please refer to the last pages of this document for important disclaimers.Italy17 June 2013 Country Update-ItalyAntonio GuglielmiEquity Analyst+44 (0)203 0369 570antonio.guglielmi@mediobanca.comRiccardo RovereEquity Analyst+39 02 8829 604riccardo.rovere@mediobanca.comItaly seizing up – caution requiredA lot has changed, nothing has changed - déjà vu of 1992Italy’s investment case seems a revival of 1992, when a political and macro crisis forced it to devaluethe Lira and exit the EMS with €140bn austerity and disposal. Debt service was 12% of GDP thenversus 6% now but current macro situation is worse and devaluation is no longer an option. Henceit cannot be ruled out Italy having to apply for an EU bailout. The 250 bps spread tightening sincethe Nov 2011 peak merely shows the market’s reward for monetary news from Frankfurt (LTRO,OMT), NY and Tokyo (QE) rather than for political news from Rome. Argentina’s default risk, apossible bailout of Slovenia, more macro pain, unplugging of QE, German court issues on OMT, alack of delivery from Letta could all lead to spread widening again, in our view.The recession is spreading to large corporates – take the ILVA caseApril data show Italy’s macro entered its acute phase with €2.3bn new NPLs in the month, VATcollection at -7% YoY, consumers -4.4% YoY (vs -3.3% last year), and further credit tightening (-1.1% YoY vs -0.7% in March). Unemployment subsidies are now up 7x since 2007 and we foreseemore welfare burden on the public accounts. The pain has now spread to large corporates, 160 ofwhich are under special crisis care. Banks’ exposure to ILVA for instance is capped to just 12bpsCT1 risk, but 40k jobs are at risk (12k directly) equivalent to 10% of the total jobs Italy lost in 2012.Italian banks: Real estate and funding the threat, SME ABS the missed chanceResidential RE deals are down 26% YoY to 430k, the lowest since 1985. With 0.044constructions per inhabitant in 2000-10, Italy is nowhere near Spain, which is 2.5x higher.However, at the current coverage (10 p.p. below 2007), a further 10% RE price drop would wipeout 170bps of 2012 Basel II.5 CT1: MPS, BP, BPER and BPM would sit below 8%, while ISP andUCG would stay anchored at 9%. Deposits up 6% YoY confirm their stickiness, and €20bn AMinflows in Q1 reversed the €270bn outflows since 2006 thanks to low yields on govies. But heavyreliance on €260bn LTRO could erode c14% of our 2015e EPS when refunded to ECB. Draghi’srecent cooling on the ECB potentially buying SMEs loans does not help. ECB-eligible SME loansin our coverage range between €45bn (AA rated) and €145bn (A rated), i.e. between 6-15% ofItalian corporate loans. No delivery here will be a big missed chance for Italy to sustain growth.No room for a large wealth tax but €75bn seems feasibleThe debate on a large wealth tax aimed at cutting debt/GDP to 100% has three constraints: 1)65% of the €9.5trn Italian wealth is RE already taxed above the EU average (direct real estatetaxes at 1.6% of Gross Disposable Income vs 1%); 2) only €2trn, i.e. 20% of wealth, is liquidassets – 80% of which is retail savings at risk of outflows; and 3) it would hardly change the longterm dynamics of debt now due to >1x fiscal multiplier depressing consumption. We found roomfor €75bn extra resources from: convergence between RE and financial assets tax rate (€3bn);large fortunes tax a la French ISF (€5bn); a progressive wealth tax on the wealthiest 10% of thepopulation (€43bn); the Switzerland deal on repatriated funds (€20bn); and €4bn lower cost ofdebt from the above. The resulting Debt/GDP down 4p.p. and 1p.p. GDP of recurrent growthmeasures could create a virtuous circle but only if Italy can at the same time improve itsextremely poor track record on structural reforms and fight on tax evasion.Mediobanca Italian Corporates Survey: credit access the main problemMore than 50 companies in our coverage responded to our first survey questionnaire aimed atgauging sentiment: 55% of the industrials pointed to credit access as their major issue, which is why85% of them are focused on cost-cutting and only 20% planning to increase their investments. As aresult, 50% foresee no top line growth in 2013. Low revenues and poor macro make less austeritythe clear consensus request: 44% seek growth measures, 26% ask for lower taxes and 21% for PArestructuring vs 6% only for cutting public debt and 3% for complying with the Fiscal Compact.Downgrading BP, BPER, Beni Stabili, Saras, Trevi and YooxAfter a 5% cut post Q1, we keep our EPS estimates broadly unchanged but reflect our cautiousnessin a string of downgrades – analysed separately in the accompanying reports published today: BeniStabili, BPER and Yoox to N from O, BP and Trevi to U from N, and Saras to U from O.Italian Equity TeamSimonetta Chiriotti +39 02 8829 933Gian Luca Ferrari +39 02 8829 482Andrea Filtri +44 203 0369 579Emanuela Mazzoni +39 02 8829 295Fabio Pavan +39 02 8829 633Chiara Rotelli +39 02 8829 931Andrea Scauri +39 02 8829 496Niccolò Storer +39 02 8829 444Alessandro Tortora +39 02 8829 673Massimo Vecchio +39 02 8829 541Change in RecommendationCompany Rating TPBENI STABILINeutral(from Outperform)€0.60BPERNeutral(from Outperform)€5.80BPUnderperform(from Neutral)€0.95SARASUnderperform(from Outperform)€0.95TREVIUnderperform(from Neutral)€4.45YOOXNeutral(from Outperform)€18.1Source: Mediobanca SecuritiesConviction pair trades by sectorSector Long ShortBanks UCG, UBI, PMI ISP, BP, BPERCement Cementir BuzziCapital goods PRY, Danieli TFI, FNCOil ENI SARASBranded /consumersAutogrill GeoxInsurance /assets gath.Unipol, AZM CattolicaTelecom /mediaEl Towers,CairoMediasetAuto Fiat Ind Pirelli, PIASource: Mediobanca Securities
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 2ContentsExecutive Summary 3Recession heading for the worst 14Real Estate – Italy is no Spain, but . . . 25Deposits and Am inflows - the good news 38Tax burden on wealth: Italy versus Europe 46Limited room for a large wealth tax but €75bn seems feasible 52Mediobanca Italian Corporates Survey 2013 63Conviction ideas and ratings changes 68
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 3Executive SummaryWalking on a thin lineA lot has changed, nothing has changed - Reiterating our negative stance on ItalyFour months after the inconclusive elections at the end of February, the investment case of Italy offersa mixed picture, in our view: Not much seems to have changed in Italy on the political side if Italian commentators’favourite game at the moment is guessing how short-lived the Letta large coalitiongovernment will be. However, quite a lot has changed outside of Italy due to the OMT announcement that gainedmomentum and the Japanese QE measures that provided a strong relief to the Italian spread.We believe the lower spread coupled with the removal of the excessive deficit procedure could offerroom for up to €15bn spending boost to Letta, i.e.1 p.p. of GDP. However, we see this as unlikely andsurely not enough to make us feel more positive on the country. Indeed, with this note we reiterate ournegative stance on Italy in light of further macro deterioration that we see ahead. As we show below,the spread contraction of the last 18 months is more related to QE and monetary newsflow from NY,Tokyo and Frankfurt (LTRO, OMT) than the markets’ appreciation of what is happening in Rome.Italian spread (vs German Bund, blue line lhs axis) and short term yield gap betweenBTP and BOT (as a % of BOT yield, red line rhs axis)-200%-100%0%100%200%300%400%0100200300400500600OMTLTRO 2 Japan QEEuropean sovereign crisis withGreeceMonti fiscalconsolidationpackageinconclusiveItalian electionItalian marketlabour reformESM becomesoperativeECB starts buying Italiangovies under theSecurity Market ProgramMonti appointedItalian PrimeMinisterSource: Bank of Italy, Mediobanca Securities analysisThe recession is heading for the worst . . .Italian unemployment subsidy applications increased to more than 1bn hours today from 185m hoursin 2007, highlighting the magnitude of the current crisis. Five years into the recession mean that Italyis heading for the worst, in our view. As recently highlighted by the BoI, over the 2007-12 period,Italian GDP contracted by 7 p.p., disposable income by 9 p.p. and industrial production by 25pp. Itcould still take more than 10 years to return to pre-crisis output levels. Not only are macro data poorper se, but the most recent (April 2013) figures showed a negative second derivatives with macrodeterioration accelerating: €2.3bn new NPLs generation in April, VAT collection down 7% YoY,LTRO 1
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 4consumer expenditure down 4.4% YoY (versus -3.3% YoY last year), and further credit tightening (-1.1% YoY lending in April versus -0.7% in March).. . . and is now hurting the large corporates – the ILVA caseIf SMEs and households were first to be hit by the crisis, it now looks like the time has arrived for largecorporates to also pay their toll. Some 160 large Italian corporates are now under special crisisadministration. We highlight in this note the recent example of the ILVA environmental case, maybethe most problematic large corporate situation in Italy today. The good news is that banks’ exposure toILVA seems to cap the capital erosion risk to 12bps of CT1. The bad news is that it looks very difficultto square the circle between job security (12k employees of ILVA at risk, 40k when consideringindirect workers) and respect for EU environmental directives (high mortality rate in the area ofILVA’s operations proved to be due to the plant’s emissions of a carcinogenic polluting agent).We have been here before - A déjà vu of 1992We see many similarities between the situation in the country today and that of 20 years ago, whenpolitical instability and macro meltdown forced Italy to exit the European Monetary System in spite ofthe Lira devaluation, of some Lit 100bn (€50bn) austerity measures undertaken by the Amatogovernment and of a large privatization plan which followed. We think the situation is worse today asmacro is hurting the economy more heavily and Italy can no longer leverage on currency devaluation.What could go wrong? Argentina and moreThis is why we think time is a very scarce resource for Italy: the next six months will be crucial toassess if the country can leverage on the ‘low spread QE-driven momentum’ and on the newgovernment to reverse the poor macro trends of the last decade, or if it will inevitably end up in a EUbailout request, as we currently suspect.The potential default of Argentina, the likely bailout of Slovenia, the recurring risk for the Lettagovernment to fall short of support from the Parliament or the unplugging of the FED QE measuresare just few examples of what could become triggers of renewed market concern on the sustainabilityof the Italian debt. Argentina in particular worries us, as a new default seems likely.Argentina Sovereign curve yield (Lhs) and debt maturity6.07.08.09.010.011.012.013.014.015.03 mnths 1 yrs 2 yrs 3yrs 4yrs 5yrs10/06/2013 01/01/20132.6 2.5 2.24.21.71.11.715.314.40.02.04.06.08.010.012.014.016.0Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 2014 2015$bnsSource: Mediobanca Securities, BloombergNot only could Argentina’s problems reignite concern on debt sustainability in peripheral Europe, butit could also have a direct impact on the Italian economy given the exposure to Argentina of manyItalian corporates. TI and Tenaris, for instance, have double-digit turnover exposure to the country.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 5Italian companies’ exposure to ArgentinaRating TP Turnover exposure EBITDA exposure EPS exposureTenaris Underperform 13.6 30.0% 23% 20%Telecom Italia Not Rated - 13.0% 10% 2%Campari Neutral 5.45 2.9% 2.5% 2.5%Fiat Neutral 4.5 2.0% n.m. n.m.Pirelli Underperform 7.0 4.0% n.m. n.m.Trevi Underperform 4.45 3.2% 5.9% 7.9%Generali Neutral 15.0 0.8% n.m. n.m.Source: Company data, Mediobanca SecuritiesNo deposit outflows and AM back to inflows – the good newsBanks deposits’ stickiness . . .Most recent data show that Italian banks are not suffering deposit outflows as the amount of depositsshowed a 6% annual growth as at March 2013, and the stock is broadly stable at c.€1.45trn. Depositssoared by roughly €20bn in March 2013 versus February 2013, almost equally split between timedeposits and current accounts. This trend offset the €20bn monthly drop in bonds. As a result, theEur20bn net funding increase at Italian banks in March versus February is almost entirely explainedby repos.. . . and strong AM inflowsAs well as deposits confirming their stickiness, appetite for risk has emerged when looking at recentstrong AM inflows: after Eur270bn of cumulated outflows since 2006, 1Q 2013 brought Eur20bninflows, benefiting both assets gatherers and banks. Our correlation analysis points to the drop ingovernment bond yields post the OMT announcement as a key driver of the recent AM inflows (Rhschart below).Italian Banks – Funding Mix, € bn Inverse correlation: AUM inflows vs 2Y BTP yield-2505007501,0001,2501,5001,7502,0002,2502,500Dec-98Jun-99Dec-99Jun-00Dec-00Jun-01Dec-01Jun-02Dec-02Jun-03Dec-03Jun-04Dec-04Jun-05Dec-05Jun-06Dec-06Jun-07Dec-07Jun-08Dec-08Jun-09Dec-09Jun-10Dec-10Jun-11Dec-11Jun-12Dec-12Deposits Fixed Maturity Current… Deposits Reedem. at Notice Repos Bonds1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%5.00%-50,000-40,000-30,000-20,000-10,000010,00020,00030,000IT asset management sector - flows Yield 2YR IT BTPSource: Bank of Italy, ABI, Mediobanca Securities analysis
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 6Heavy reliance on ECB funding the bad newsWhilst current accounts’ outflow does not seem to be an issue for now, the ECB data confirm Italianbanks’ funding is still over reliant on the central bank. Italian banks have taken c.€260bn from theECB and have deposited just €12bn with it, meaning the vast majority of the LTRO liquidity is stillsitting on Italian banks’ liabilities – thus providing a crucial albeit temporary buffer to their fundingneeds. The refunding of such ECB liquidity is scheduled for late 2014/early 2015. Should Italian banks’cost of funding remain at high levels, the Italian banking system may be forced to cut back itssovereign exposure or replace the LTRO funding with more expensive liquidity, at the detriment ofsome 14% of their 2015 profitability, based on our calculations.Italian Banks – ECB Deposits and funding (€bn) ECB Funding by country-275-250-225-200-175-150-125-100-75-50-25025Dec-04Apr-05Aug-05Dec-05Apr-06Aug-06Dec-06Apr-07Aug-07Dec-07Apr-08Aug-08Dec-08Apr-09Aug-09Dec-09Apr-10Aug-10Dec-10Apr-11Aug-11Dec-11Apr-12Aug-12Dec-12Apr-13Deposits at the ECB Liabilities from the ECB0.30.50.70.91.11.31.50%10%20%30%40%50%60%70%80%€ trnGR IRE IT ES PRT Total ECB Facility (RHS)Source: Datastream, Company Data, Mediobanca Securities analysisReal estate: Italy is no Spain, but asset quality will get worstItaly is no SpainRecent data show an ongoing marked slowdown of the Italian real estate market with residentialtransactions down 26% YoY to 430k, the lowest level since 1985. Real estate prices in Italy contractedby 12% since their 2008 peak versus a 25% correction in Spain. There are very good reasons for Italynot to fear a ‘Spanish-like’ real estate contraction: 1) some 40% of the national value added in Spaincame from real estate in 2007, 10 p.p. higher than Italy; 2) housing completions over the last decadewere 2.5x larger in Spain than Italy despite a 30% larger population in Italy: 0.11 houses perinhabitant in Spain versus 0.044 in Italy; 3) Italian households’ indebtedness is the lowest in EU; and4) average loan-to-value stands at 65% in Italy versus 72% in Spain.Italy - Number of RE residential transactions (000) Nomisma Retail real estate prices464558687769835866 87781668961461760344840045050055060065070075080085090019851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120127080901001101201301401501601701801902001H921H931H941H951H961H971H981H991H001H011H021H031H041H051H061H071H081H091H101H111H12Residential Office RetailSource: Agenzia del Territorio, Nomisma, Mediobanca SecuritiesSimulation 1: up to 45% RE price correction would still leave coverage above 100%Whilst Italy is no Spain, we think it fair to assume that a likely further real estate price correctioncould affect Italian banks’ balance sheets currently sitting on a cash coverage of 41%, some 10 p.p.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 7below the 2007 levels within our coverage universe. In the first approach of our simulation, we findthat Italian banks could bear up to 45% downward revision of their real estate collaterals and stillmaintain coverage above 100%.Simulation 2: 10% RE price drop would erode 17% of CT1 if coverage stays unchangedAlternatively, we are interested in quantifying the capital erosion stemming from 10% real estateprices drop subject to keeping unchanged total coverage ratios at current levels. The result is thatsome 10% lower collateral value at constant coverage ratio would wash out some 17% of the aggregateCT1 capital of our banks with CT1 ratio dropping by 170bps to 8.7% (Rhs chart below).Estimated Max Revision of RE Collaterals Values toHit 100% Coverage Ratio, 2012Estimated CT1 Impact from 10% Drop in Market Priceof RE Collaterals, 2012 (coverage unchanged)0%10%20%30%40%50%60%70%80%90%100%AggregateUBIBPCREDEMCREVALBPERMPSISPBPMUCG0%1%2%3%4%5%6%7%8%9%10%AggregateISPUCGMPSBPUBIBPERBPMCREDEMCREVALCT1 Impact CT1 after RE Collaterals Mark-downSource: Company Data, Mediobanca Securities analysisFive banks would sit below 2012 Basel II.5 8% CT1: MPS, BP, BPER, BPM and CVAL, but the last threeshow room to restore capital ratios through IRB models. ISP and UCG would remain anchored above9% CT1 ratio. In summary, although we recognise Italy is no Spain, we foresee further balance sheetclean-up ahead for Italian banks, possibly triggered by the asset quality stress test that the ECB is setto carry out next year.Tax burden on wealth – Italy versus EuropeSome 15 years of divergence from Europe . . .From 1995 to 2010, Italy has pursued a fiscal policy divorcing from the rest of Europe, i.e. lowering thetax burden on capital and wealth (and consumption) at the expenses of taxes on income. Based on2010 figures, we calculate that taxes on the stock of capital and wealth accounted for 2.5% of ItalianGDP in 2010 (aligned to the EU average) from c.4% in 1995. The reduction of the taxation of the stockof capital/wealth in Italy has to be ascribed mostly to the progressive relative reduction of the taxationon real estate, culminating in the elimination of ICI on the main property in 2010. In 2010, theamount of direct real estate taxes amounted to €9bn versus almost €13bn in 2007, less than 0.6% ofGDP in 2010 versus 0.85% in 1995.Italy – Taxes on Wealth as % of GDP, 1995-2010 Tax receipts breakdown, 20102.02.22.42.62.83.03.23.43.63.84.01995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010ITALY EU 27 AVGBE BG CZ DK DE EE IE EL ES FR IT CY LV LT LU HUMT NL AT PL PT RO SI SK FI SE UK NO EU27PERSONALINCOME TAXCORPORATEINCOME TAXTAXES ONSTOCK OF CAPITALSource: Eurostat, Mediobanca Securities analysis
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 8. . . reversed in 12 months (2012) due to higher real estate taxesThe trend has been reversed in 12 months as the IMU (real estate) and the additional 0.15% taxation ofcustodian assets brought the burden of capital taxation to the level of 1995, making Italy the nationwith the third highest taxation of capital in EU-27 after France and the UK. IMU brought the recurrenttaxation of capital and wealth at almost €60bn p.a., equal to c.4% of Gross Disposable Income, thelevel of 1995. The trend of the past 15 years was thus reversed in one year (2012).Italy – Taxes on Capital as Percent of GDP, 1995-2010€bn 1995 2010Extra Revenues(IMU + Fin. Assets)2010(incl. IMU + Fin. Assets)Real Estate Taxes 13.0 19.6 +16 35.1Financial Assets 5.4 7.9 +5 12.9Total Taxes on Capital 33.8 38.9 +21 59.4GDP 865 1,556 1,556 1,556Taxes on Capital as % of GDP 3.9% 2.5% +1.3% 3.8%Source: Company data, Mediobanca Securities analysis and estimatesSuch jump has to be ascribed to a much more severe taxation of real estate assets. Using Eurostat data(i.e. the items named 29A in Eurostat statistics), we calculate that taxes on real estate assets (€8.6bn)represented 0.57% of the Italian Gross Disposable Income in 2010. The Italian level of propertytaxation was below EU 27 (arithmetic) average of the same year, equal to 0.68% of Gross DisposableIncome. Using a weighted average for the EU, we calculate that taxes on real estate assets wouldaccount for c.1.0% of Gross Disposable Income, pushed upwards by the high level of taxation in Franceand UK, more than balancing the low taxation in Germany. In this case, the taxation of Italian realestate assets was much lower than the EU average.Today we could not make the same statement. Including the incremental revenues from theintroduction of IMU in 2012 (equal to €15.5bn) in respect of ICI in 2010, the total taxes on real estatewould hit c.€24bn, and the weight of real estate taxation would account for c.1.6% of Gross DisposableIncome in 2010, among the highest in the Euro Area and well above the EU average. Hence, with theintroduction of the IMU tax, the direct real estate taxation moved in Italy from 0.6% of grossdisposable income to 1.6% versus 1% EU weighted average.EU – Real Estate Taxation as Percent of Gross Disposable Income, 20102010 Real Estate Taxes (€bn, A) Gross Disp. Income (€bn, B) A / BBE 4.4 359 1.2%CZ 0.3 138 0.2%DK 3.2 237 1.4%DE 11.3 2,511 0.5%IE 1.4 129 1.1%ES 9.5 1,026 0.9%FR 45.7 1,942 2.4%IT 8.6 1,528 0.6%IT (including IMU) 24.1 1,528 1.6%HU 0.3 91 0.3%NL 3.0 570 0.5%AT 0.7 283 0.2%PL 0.8 344 0.2%PT 1.0 168 0.6%RO 0.5 126 0.4%SK 0.2 64 0.3%FI 0.0 179 0.0%SE 2.7 352 0.8%UK 26.2 1,705 1.5%EU Weighted Avg 1.0%Source: Eurostat, OECD, Mediobanca Securities analysis and estimates
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 9Taxation of financial wealth already looks high as well . . .In 2010, also taxation of financial assets at 0.5% of GDP in Italy stands above the Eu average, as thetotal amount of taxes on financial assets accounted for 0.5% of GDP in Italy versus 0.25% average forFrance, Germany, Spain and UK. In other words, already in 2010 Italy showed the highest tax burdenon financial assets. The situation will change in 2013 with the introduction of the 0.15% taxation offinancial wealth. If we added the estimated €5bn tax receipts, the taxation of financial assets wouldreach approximately €13bn, more than double the amount charged in France (excluding the ISF).Selected EU Countries – Breakdown of Taxes on Stock of Capital/Wealth, 2010€bn ITALY ITALY (IMU/Fin. Ass) FRANCE GERMANY SPAIN UKReal Estate 20 35 56 17 20 66Financial Assets 8 13 6 n.a. n.a. 3Wealth Tax 0 0 5 n.a. 0 0Inheritance Tax 0.5 0.5 8 4 2 3Other 11 11 9 4 3 1Total 39 59 83 25 26 74Source: Eurostat, Mediobanca Securities analysisAlthough being the highest among the five largest countries, the taxation of financial assets accountedfor just 0.22% of the Italian households’ wealth in 2010, below the 0.35% calculated as taxation of realestate assets as percent the Italian households’ wealth in real estate. Adding the estimated additionaltax receipts from IMU (€16bn) and financial assets (€5bn), the gap will widen further to c.25bps.Italy – Tax Receipts on Real Estate and Financial Assets as Percent of Wealth, 2010€bn Wealth Tax ReceiptsTaxes as %of WealthTax Receipts(incl. IMU, Fin. Assets)Taxes as %of WealthReal Assets 5,541 20 0.35% 35 0.63%Financial Assets 3,546 8 0.22% 13 0.36%Source: Eurostta, Bank of Italy, Mediobanca Securities analysis and estimates. . . and will move from 2.5% of Gross Disposable Income in 2010 to 3.9%Another way to look at the weight of taxation of capital is to measure it against Gross DisposableIncome. In 2010, we calculate taxation of capital in Italy accounted for c.2.5% of Gross DisposableIncome (GDI), aligned to the EU average. Adding €21bn from the newly-introduced taxes the ratiowould soar to 3.9%, making Italy the third highest taxation of stock in the Euro Area after UK, Franceand Norway. Hence, we conclude that the taxation of capital in Italy is already among the highest inEurope and is also high in respect of the income generated by the country annually.EU – Taxes on Capital as Percent of Gross DisposableIncome, 2010Italy – Taxes on Capital as Percent of GrossDisposable Income, 1995 - 20100.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%NOUKFRLUIT (Imu + Others)BEISDKHUIEESEU 27 WavgITPTCYPLNLFISEELRODEATLVSIBGCZEESKLT0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%19951996199719981999200020012002200320042005200620072008200920102010+IMUSource: Company data, Mediobanca Securities analysis and estimates
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 10After benchmarking the Italian tax profile of wealth – both capital and real estate – with its EU peers,we find no room to further close the gap through higher taxation as Italy already sits above theaverage. This leads us to investigate alternative ways for the country to quickly raise taxes should thisbe needed in the case of further pressure on public accoutns.Wealth tax - In search of €75bn alternative sourcesThree reasons to avoid a large wealth taxThe need for a large wealth tax is a recurring debate in Italy. We estimate a €400bn wealth tax wouldbe needed to bring the debt / GDP ratio below 100% without disposals. We think such an approach isnot feasible when considering that: Some 65% of the €9.5trn Italian wealth is already accounted for by real estate, offering noroom for further tax rises relative to Europe. Only 20% of the Italian wealth is constituted of liquid assets, i.e. c.€2trn, 80% of which isretail savings: (bank deposits 30% of total liquid assets, postal savings 15%, banks bonds 18%and Italian govies 9%). Raising €400bn from this pot means 35% of Net Liquid Wealth, fartoo high not to run the risk of deposits outflows and over penalisation of small retail savers. A large one-off wealth tax spread over the whole population would hardly change the long-term dynamics of Italy’s debt, when assuming current >1x fiscal multiplier expected todepress consumers as already confirmed by the lower than expected VAT tax collectionfollowing recent austerity measures.Italy – Breakdown of Gross Wealth, 2011Amount - €bn As % of TotalResidential Property 5,027 53% Not LiquidValuables 125 1% Not LiquidNon-Residential Buildings 342 4% Not LiquidPlants, Machineries et cetera... 237 2% Not LiquidLand 247 3% Not LiquidTotal Real Estate and Physical Assets 5,978 63%Equity in Non-Listed Limited Corporations 421 4% Not LiquidEquity in Non-Limited Firms 205 2% Not LiquidLife Technical Reserves 680 7% Not LiquidOthers (Commercial Loans, Shareholders Loans to Cooperatives, Others) 119 1% Not LiquidBanknotes, Coins 114 1% LiquidBank Deposits 651 7% LiquidPostal Savings 327 3% LiquidItalian Gov. Bonds and T-Bills 184 2% LiquidItalian Corporate Bonds 3 0% LiquidItalian Banks Bonds 373 4% LiquidForeign Securities 146 2% LiquidEquity in Listed Limited Corporations 73 1% LiquidMutual Funds Units 248 3% LiquidTotal Financial Assets 3,542 37%Total Gross Wealth 9,519 100%Source: Bank of Italy, Mediobanca Securities analysisOur doable €75bn wealth tax proposal . . .Adversely affected by such constraints, we investigate the room for up to €75bn alternative sources forthe government, taking tax progression into account aimed at minimizing the negative impact onconsumers. €3bn (up to €7bn if including SMEs) from converging the fiscal treatment of financial assetsto that of real estate. €5bn from a large fortunes tax replicating the French ISF. €43bn wealth tax on 10% of the wealthiest population.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 11 €20bn from an agreement with Switzerland on repatriated funds. €4bn from lower interest service on debt stemming from the above measures.Italy – Summary of Interventions€bn Total GoalRecurring Interventions 8Alignment Taxes Fin. Assets 2013 3 Reduce Income TaxesWealth Tax on Wealthy Population 5 Reduce Income TaxesUna Tantum Interventions 67Wealth Tax 43 Debt ReductionTaxation of Repatriated Funds 20 Debt ReductionLower Cost of Debt 4 Reduce Income TaxesTotal 75Source: Eurostat, Mediobanca Securities estimates. . . resulting in 4 p.p. of debt/GDP reduction and growth measures for 1 p.p. GDPThe conclusion would be a mix of 4 p.p. of debt/GDP reduction, not necessarily over-penalisingconsumers as it would come from the wealthiest population, and room for recurring growth measuresamounting to 1 p.p. of GDP. A proper attack on tax evasion and the black economy would clearly bringus to a much larger number, but the poor track record of Italy in this regard leads us to prefer not toinclude such options in our analysis.Mediobanca Italian Corporates SurveyCredit access is the main problem for 55% of our sample; 50% expect no top line growthMore than 50 Italian companies in our coverage responded to our survey questionnaire aimed atgauging expectations on the back of the recent political deadlock. Although roughly one out of threecompanies considered the latter as a very negative on their economics, it is not politics per se the mainsource of concern. Some 55% of industrials point to credit access as their major problem, whilst banksmentioned the high and volatile cost of funding (lhs chart below). If 85% of the banks foresee a decenttop line growth this year, more than 50% of industrials expect no top line growth (rhs chart).Worrying factors for the coming future Revenue growth expectations in 201329%57%23%16%43%10%11%13%45%55%0%10%20%30%40%50%60%70%80%90%100%MB Sample Financials IndustrialsCredit access Capital markets access Interest rates volatility Interest rates30%37%14%14%13%11%13%27%33%16%71%3%3%14%0%10%20%30%40%50%60%70%80%90%100%MB Sample Financials IndustrialsExtremely A lot Moderatly Neither much nor little Slightly NoSource: Mediobanca Securities85% focus on cost-cutting and only 20% is increasing investments versus last yearThis is why 85% of our sample are considering further costs rationalisation and only 20% are planningto raise investments versus last year. The recent decree to speed up payments to corporate by theItalian PA does not seem to represent a game changer, as only 24% say this could have a significant
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 12impact. Some 80% of the panel expects that the weak scenario could lead to some sector consolidation,but only 8% believe M&A opportunity would come from distressed PA assets.Plan to increase investments Plan to further optimise costs, 2013No17%Slightly30%Neither much norlittle20%Moderatly13%A lot17%Extremely3%Slightly10%Neither muchnor little14%Moderatly31%A lot28%Extremely17%Source: Mediobanca SecuritiesPriorities: growth (44%), lower taxes (26%), public debt (6%), Fiscal Compact (3%)The companies interviewed are all well aligned in terms of their priorities for the new Lettagovernment. As shown in the chart below, out of the five options proposed, 44% of the pool indicatedgrowth strategies as a necessity to revitalise the stagnant economy. The rest of the companiesprioritise the reduction of fiscal pressure (26%) and the restructuring of the Public Administration(21%). Surprisingly, only 6% of the pool believe the reduction of the high public debt is a priority, andonly 3% care about respecting the Fiscal Compact. Austerity.Priorities for the next government3% 3%6% 7%21%22%21%26%22%26%44%56%43%0%10%20%30%40%50%60%70%80%90%100%MB Sample Financials IndustrialsGrowth strategy Reducing fiscal pressureRestructuring Public Administration Reducing public debtComply with fiscal compactSource: Mediobanca SecuritiesConclusion: softening austerity is the government conundrumThe overall picture of our survey is for a country in a ‘wait and see’ mood with companies reluctant toinvest, more focused on cost-cutting plans and in strong need of increasing their credit conditions.Low prospects for revenues and poor macro expectations make the softening of the austerity stancethe clear consensus request emerging from our survey.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 13Stocks ideas and rating changesPair trades by sectorFollowing a weak set of Q1 results, we ended up downgrading our 2013 and 2014 estimates by 5% onaverage on our Italian coverage. We remain cautious on the growth prospects for 2013 and 2014, andexpect further downgrades in 2H 2013, driven by the macro outlook further deteriorating. As a result,we maintain a cautious stance on Italy, which leads us to favour defensive stocks and names with highearnings diversification outside of the country or stocks with corporate action/ restructuring potential.Our key high conviction pair trades are: Banks: long UCG, PMI and UBI vs short ISP, BP and BPER Cement: long Cementir vs short Buzzi Capital goods: long Prysmian and Danieli vs short Trevi and Finmeccanica Oil: Long ENI vs short Saras Branded and consumers: long Autogrill vs short Geox Insurance and asst gatherers: long Unipol and Azimut vs short Cattolica Telecom and media: long El Towers and Cairo vs short Mediaset Auto: long Fiat Industrial vs short Pirelli and PiaggioRating changesIn light of our incrementally negative view we downgrade the following stocks: Banco Popolare (Underperform from Neutral, TP € 0.95 ) Beni Stabili (Neutral from Outperform, TP € 0.60) BPER (Neutral from Outperform, TP € 5.80) Saras (Underperform from Outperform, TP € 0.95) Trevi Fin. (Underperform from Neutral; TP €4.45) Yoox (Neutral from Outperform, TP € 18.10)
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 14Recession heading for the worstTime is a very scarce resource for Italy. Five years into recession mean that theeconomy is now heading for the worst with unemployment subsidies up to more than1bn hours from 185m hours in 2007. April data show a rise of €2.3bn in NPLs in thebanking system, VAT collection down 7% YoY, consumer expenditures down 4.4% YoY(versus -3.3% YoY last year), and further credit tightening (-1.1% YoY lending in Aprilversus -0.7% in March). Not only is the second derivative turning more negative andsignalling further deterioration ahead, but if SMEs and households were hit first by thecrisis, it looks like the time has now arrived for large corporates to pay their toll as well.Some 160 large Italian corporates are now under special crisis administration.In this note, we take a closer look into the ILVA environmental case, probably the mostproblematic large corporate situation in Italy today. The good news is that banks’exposure to ILVA seems to cap the capital erosion risk to 12bps of CT1. The bad newstough is that it looks very difficult to square the circle between job security (12,000employees of ILVA at risk) and respect for EU environmental directives (high mortalityrate in the area proved to be due to the plant’s emissions of a carcinogenic pollutingagent).We see many similarities between the situation in the country today and that of 20 yearsago, when political instability and macro meltdown forced Italy to exit the EuropeanMonetary System in spite of the Lira devaluation, of some Lit 100bn (50bn) austeritymeasures undertaken by the Amato government, and of a privatization plan ofLit180trn (€90bn). We think the situation is worse today as the macro headwinds arehurting the economy more heavily, and Italy cannot leverage on currency devaluationanymore. This is why we think the next six months will be crucial to assess if the countrycan leverage on the ‘low spread QE driven momentum’ to reverse the poor macro trendof the last decade, or if it will inevitably end up in a EU bailout request. The potentialdefault of Argentina, the likely bailout of Slovenia, the recurring risk for the Lettagovernment to fall short of support from the Parliament or the unplugging of the FEDQE measures are just few examples of potential events triggering renewed marketconcern on the sustainability of the Italian debt.Turnaround story or is it too late?Little has changed in Italy . . .Four months after the inconclusive elections at the end of February, Italy offers a mixed picture. Onthe one hand it is difficult to indentify major discontinuity signs: Same President. After several attempts, the Italian parliament ended up appointing MrNapolitano as President of the State for the second time – based on no agreement among thevarious parties on any other potential candidate. It is the first time in the history of theItalian Republic that the same President has secured a double-seven years mandate. Same large coalition government. PD and PDL, the two opposite parties that reluctantlysupported Monti’s technocrat cabinet in 2011/2012 have now both agreed to fully endorse anew large coalition government under the premiership of PD deputy head Letta. This is inline with our expectations set out in our Perfect Storm note (26 February) when immediatelyafter the elections we attached a 70% probability to a Grosse Koalition outcome. Same macro picture. The Italian macro situation has not improved over the last quarter,rather the contrary, as we show later.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 15 Same high public debt issues. The Italian debt has reached record levels of €2.035trnand is now expected to reach 135% of GDP in 2014. This was, still is, and will remain, in ourview, the priority number one for the country.. . . but much has changed outside Italy Spread contraction. The contraction of the Italian spread could become a real gamechanger if it were to prove sustainable. The OMT announcement from the ECB and the QEstrategies in place at FED, BoE and most importantly at BoJ provided a significant window ofopportunity for the Italian momentum to build up on the back of spread contraction. SinceJapan’s QE announcement at the beginning of April, the spread versus German bundscontracted by almost 100bps. EDP. The removal of the EU excessive deficit procedure (EDP) on Italy could we believe pavethe way for Italy to access EU funds aimed at providing some support to its economy. Softening austerity. France and Spain have recently been given extra time from Europe torevert to the 3% deficit threshold. Whether Italy has sufficient argument to aim for the sameremains to be seen, but France and Spain represent the precedent on which Italy could rely toobtain similar concessions.Some €15bn gift on the table but . . .Our back-of-the-envelope calculation suggests that spread contraction + EDP removal + extra deficitspending allowance might create a ‘little treasury’ in the hands of the Letta government in the regionof €15bn – offering scope for a nice spending boost to the economy without harming Italy’s fiscaltargets. This means some 1.0 p.p. of GDP, which couples with the boost potentially stemming from the€40bn late payments of the public administration debt (the total amount being estimated byConfindustria above the €100bn region) to Italian SMEs. Were we facing a marked positive u-turn inEU growth prospects (to potentially benefit the Italian export driven GDP) coupled with a clearroadmap towards EU convergence, we could conclude that the new government has a nice window ofopportunity to try and push for Italy to become a successful EU restructuring story. Unfortunatelythough, this is far from being our base case scenario.. . . time is running out fastWe actually think the reality is quite different, and we have little faith in the above materialising: Spread. Relying on low spreads for extra budget spending is risky. The yield on Italian BTProse sharply in few days last couple of weeks on market concern on the unplugging of QEmeasures from the FED and on the German court ruling on OMT, showing that it is far tooearly to assume the EU sovereign crisis has normalised. We do not believe Italy can rely inthe long term on lower interest service of its debt as a driver of extra deficit spending. EDP. Accessing EU funds is a potential 2014 option which needs local authorities (regionsand municipalities) to be operating with best practice in terms of governance and publicaccounts in order to gain access to such funds. It remains very unlikely to us to expect that Italy will be allowed to temporarily exceed the 3%deficit cap in light of its high public debt. Recent macro data point to further deterioration. Chances are high in our view that macrodata, recently revised downwards both for Italy and Europe, will face further downgrades in2H 2013. Also, as we argued in our recent downgrade of the EU banking sector to Underperform(Banks Briefing – Risk up and capital not enough, dated 25 March) we fear the speedtowards EU convergence is slowing down too much, and we believe the risk for the sovereigncrisis to resurface is high. The potential delay or the weak implementation of the bankingunion project for instance would be particularly negative for Italy in our view.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 16Next six months will give us the answer – stay cautious on Italy in the meantimeThis is why we maintain our cautious stance on Italy for now. Time is the crucial variable here, as fiveyears into recession has put Italy in a border-line situation now. We think the next six months will becrucial in assessing the final outcome. Either Italy will soon build momentum in terms of growth bycashing in on the benefits of Monti’s reforms and leveraging on its export-driven GDP, or it will face alikely worsening of the macro and sovereign crisis that might force the country into a bailout request.The spread improvement is mainly related to exogenous monetary factorsThe Italian spread has halved since the resignation of Berlusconi in November 2011. Roughly one-third of this improvement came after the appointment of the Letta large coalition government in April.Hence, at first sight the market seems to have appreciated the austerity measures proposed by Montiand the large coalition backing the recent Letta cabinet. However, as we try and show in the chartbelow, such spread improvement has little to do with the Italian political landscape, and much more todo with monetary action around the world.Italian spread (vs German Bund, blue line lhs axis) and yield gap between BTP and BOT(as a % of BOT yield, red line rhs axis)-200%-100%0%100%200%300%400%0100200300400500600OMTLTRO 2 Japan QEEuropean sovereign crisis withGreeceMonti fiscalconsolidationpackageinconclusiveItalian electionItalian marketlabour reformESM becomesoperativeECB starts buying Italiangovies under theSecurity Market ProgramMonti appointedItalian PrimeMinisterSource: Bank of Italy, Bloomberg, Mediobanca Securities analysis The Monti government took office in November 2011, which basically coincided with Draghi’sLTRO 1 announcement in early December (see Europe’s last minute deal, 5th December2011). Equity and fixed income markets rerated on the back of such newsflow, so that theItalian spread enjoyed three months of marked improvement. It is with the LTRO 2 announcement in March 2012 that the market started questioning sucha facility: if three months after providing €490bn funding to EU banks through LTRO 1 theECB felt the need of an extra €530bn injection, it clearly meant the problem was not fixed.But more importantly, ECB deposits’ data in Q1 2012 confirmed that the vast majority ofLTRO funding ended up being parked at the ECB, hence providing tangible evidence of howthe monetary transmission mechanism was not properly functioning. It appeared evidentthat the ECB’s ability to stimulate the economy in the lack of printing power was capped. TheItalian spread reflected such concern, widening back to pre-Monti levels just three monthsafter the LTRO 2 announcement.LTRO 1
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 17 In November 2012 we would have expected the market (and the spread) to negatively react tothe end of the Monti government. Rather, we noticed that the spread kept narrowing until theFebruary 2013 elections, clearly showing the benefit of the ‘whatever is needed’announcement of Draghi backing his OMT plan as announced at the end of the summer 2012(see Time to Call the German Bluff, 6th June 2012). Not only was OMT the only reason ofsuch spread improvement in 2H 2012, but even today it is on the back of the ECB potentiallyactivating such a tool that sovereign funding conditions remain relatively benign inperipheral Europe. The February inconclusive elections followed by two months of negotiation to form agovernment and to appoint the president of the State started to be reflected in spreadwidening (see Election approaching, uncertainty raising, 18th February 2013). However, it isthe ‘Abenomics’ massive QE announcement from the BoJ at the beginning of April that seemsto have provided another window of spread relief for Italy.Don’t look at the spread but monitor the yield gap between BTP and BOTThe conclusion from the above is that the Italian political uncertainty of the last 18 months playedmore like a second derivative on the spread, whilst it is monetary newsflow from NY, Frankfurt andTokyo that seems to have represented the first derivative of the spread contraction Italy has enjoyed.This means: The low spread does not necessarily mean the market is rewarding the Italian austerity stanceor the unusual Letta grand coalition Government. If we agree that an accommodating monetary policy around the world ended up becoming thefirst ally for the Italian spread, we believe it must follow now that Italy runs the risk ofbecoming a key victim of market concern on the FED starting to unplug its five years’ QEmeasures. Post OMT announcement, the spread lost its relevance as a ‘barometer’ of solvency riskperception on any EU country, given the backup of the ECB.This is why in our recent update on Italy (see Elections approaching, uncertainty raising, of 18February) we introduced a new measure for the Italian solvency risk. This is the yield differencebetween BTP and BOT. Such a gap has no reason to exist unless the market wants to differentiatebetween bonds at risk of restructuring (BTP) and bonds not subject to restructuring (BOT as anymoney market instrument).The chart above shows such a gap (red line) in relative terms, i.e. as a percent of the BOT yield.Reconstructing a proper time series is not an easy exercise, which is why we only show such ratio atspecific times where available data allowed us to construct such ratio minimising the margin of error.The key message is that since 2010, i.e. when the Greek deficit problem emerged and the sovereigncrisis started, the relative yield gap in Italy between BTP and BOT ranged between 1x and 3.5x theyield on BOT, far too much. We interpret such finding as the real underlying solvency concern of themarket, which would have otherwise closed such a profitable arbitrage.A déjà vu of 1992 – we have been here beforeHistory repeating itself . . .History repeats itself and Italy seems to make no exception to this. It is interesting, in our view, to notethe many similarities between the Italian situation today and 20 years ago: Dissatisfaction with politics. Now, as in 1992, the dissatisfaction towards the existingpolitical class has brought Italians to openly and publicly criticise its politicians. Implosion of existing parties. In 1992 the Christian Democrats and the Socialist partiesessentially disappeared under corruption scandals, paving the way for Berlusconi’s arrival.Additionally, the former PCI (Communist party) broke down in its social democrats
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 18component (today PD) and its more leftish representation. Equally today, we have had thedissatisfaction towards Monti and all the central catholic parties disappearing coupled withthe ongoing tension within the PD party, which leads many commentators to expect the PD topotentially break down. It is the strong leadership of Berlusconi that makes the PDL immunefor the time being from internal tensions, but one could reasonably expect that the PDL isalso destined to internal attrition when Berlusconi decides not to lead the party anymoreafter 20 years of strong leadership. New parties. The consequence of such turmoil was dissatisfaction towards existing parties.In early nineties this led to Berlusconi’s new Forza Italia party and the Northern Leaguesuccess at the expense of Socialist and Christian democrats parties, which essentiallydisappeared or converged into Berlusconi’s new party. Twenty years later the two traditionalparties (PD and PDL) together lost almost 10m votes in the February 2013 elections, whichended up rewarding a brand new movement, Five Star, which became the first party at itsfirst election catalysing the Italians’ dissatisfaction against the political class. Institutional bottleneck. Now as then, Italy faced a dangerous institutional bottleneckwith the overlapping between national elections (April 1992) and the appointment of the newpresident of the state (May 1992). It took a record 16 attempts at that time for the newlyappointed Italian Parliament to find a convergence on Oscar Luigi Scalfaro as the newPresident. This time around it only took six attempts, but simply because it appearedimmediately clear there was no room for convergence on any new name but Napolitano. Letta versus Amato. Today (Letta) as then (Amato) it is the former number 2 of the socialdemocrats party to take the lead of the Government.. . . hopefully not in fullWe firmly hope that the similarities will stop here, because what happened next 20 years ago provedvery painful. Then as now the economic situation of Italy was particularly difficult (in the early 1990sit was the emerging markets bubble that triggered the macro slowdown) so to challenge thesustainability of its public debt. The Amato government remained in power for only 10 months. The market speculation against the Lira forced Amato in July 1992 to pass a very painfuldecree (worth almost €50bn in Lira equivalent at that time) aimed at calming down themarkets: from higher retiring age to real estate tax and most importantly a 0.6% tax on bankdeposits. In spite of such austerity measures, three months later Italy was forced to exit the EuropeanMonetary System and devaluate its currency. This was followed by Amato’s resignation, who was replaced by a technocrat governmentheaded by the governor of the Bank of Italy Ciampi.The situation is worse todayItaly transformed the Euro from opportunity to threatWe believe the situation is more problematic today than it was 20 years ago, as the recession is dentingGDP growth much more heavily than in 1992. The lack of room to manoeuvre on currency devaluation today is probably the most negativedifference versus 20 years ago. It is due to the Lira devaluation and assets’ disposals that Italymanaged to put its debt / GDP on a virtuous path starting from 1994 – as shown below. TheEuro straitjacket is clearly not providing a similar currency adjustment flexibility today.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 19Italian growth vs debt evolutionSource: Mediobanca Securities It was due to a Lit 180trn (€90bn) disposal plan that the country managed to improve itsdebt-to-GDP ratio in the following 10 years. But as we show below, that proved short livedand as soon as the crisis started denting Italian GDP growth again, Italy reverted to the>120% debt / GDP region. Essentially over the last ten years Italy has managed to waste thedouble benefit of low funding rates following the Euro introduction and of its disposal plan.Or to put it differently, Italy took the luxury of remaining sited over the last decade ratherthan using the Euro low rates relief as a key opportunity to implement painful but wellneeded structural reforms. The lack of action in leveraging on the Euro-driven low cost offunding and the assets disposal plan, largely explain Italy’s lack of competitiveness today, inour view.Debt / GDP, 1992-2005 Debt / GDP, 2001-12e1001051101151201251992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Withoutprivatizations Withprivatizations95%100%105%110%115%120%2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Mediobanca Securities, Bank of Italy dataRecent macro data do not helpOn the one hand, one should note that the interest service on debt today amounts to ‘just’ 6% of GDP,exactly half of the level registered in 1992. However, with the Lira devaluation Italy managed to inflatedebt away, which it clearly cannot do today. This is why we think the major difference between todayand 20 years ago is that the current recession is the worst ever seen in Italy – as recently stated by theMinister of Finance Saccomanni. Most recent data unfortunately support such a stance: As recently highlighted by the BoI, over the 2007-12 period Italian GDP contracted by 7 p.p.,disposable income by 9 p.p., and industrial production by 25 p.p. It could take more than 10years to revert to pre-crisis output levels.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 20 The ECB just revised downwards its 2013 GDP growth expectations for the Eurozone to-0.6% from -0.5%. We see downside risk to such a number putting Italy at risk of furtherdowngrades. Low R&D investments explain part of the competitive gap of Italy, given that investmentshave not exceeded 1.2% of GDP over the last decade, versus the EU average of 1.9%. Banks’ asset quality remains a source of major concern. Recent BoI data point to NPLs inApril up 22.3% YoY versus 21.7% YoY growth in March reaching €133bn, i.e. c9% of theItalian GDP. Hence the system generated €2.3bn new NPLs in the month. Additionally,coverage decreased to 50% in April from 51% in March. Unemployment rate reached 12% with 40% youth unemployment. This means 3m people outof the job market in 2012, half a million more than in 2011. Unemployment subsidies may best capture the fast deterioration of the Italian economy:rising to more than 1 billion hours of unemployment subsidy burdening public accountstoday from 185m hours in 2007. It follows that consumers’ expenditure keeps contracting so that in the first four months of2013 it is down 4.4% YoY versus - 3.3% YoY recorded over the same period last year. This explains why VAT tax collection in Q1 2013 is down 7% YoY. Also, credit contraction continues to cap the room for investments. Banks loans were down1.1% YoY in April versus - 0.7% in March.It follows that what really worries us is not the negative picture per se but the fact that the secondderivative keeps turning negative – signalling further deterioration ahead. If households and SMEshave been hit first, it is for sure now the large corporates that are adding further concern to the Italianeconomy, as confirmed by the ILVA case study proposed below.The crisis is moving from SMEs to large corporate – the ILVA caseMore NPLs and less lending for corporatesIf Italian households and SMEs have been the first to suffer from credit contraction, recent data showthat the problem is now expanding to large corporates. The delta €2.3bn NPLs generated in April, forinstance, come entirely from corporates versus a flattish trend in households. Construction and realestate, for instance, show NPLs +33% YoY and +35%, respectively. Lending contraction clearly doesnot help either. BoI data show that if households are facing a stable lending availability scenario nowversus last year, it is the corporate world that is facing an acceleration in shrinkage to lending access:to –4.3% YoY in April from -3.3% YoY in March.Not surprisingly, in our view, some 160 large corporates in Italy are now under special crisisadministration, and ILVA, the eighth largest steel plant in the world, based in Southern Italy, isprobably the most relevant case.ILVA recent events: from the 2010 environmental problems managed by Berlusconi . . .Troubles at ILVA, which is part of one of the main European steel producer groups RIVA FIRE, beganin 2010 when the largest company’s plant (located in Taranto, Southern Italy, and on which some 75%of city’s GDP – directly and indirectly – depends) was blamed by a local association for environmentprotection to be the source of a carcinogenic polluting agent above the limits set by the Italian law. Theproblem was temporary solved by Berlusconi’s government, which waived the law with a decree(155/2010). However, since then the focus on the pollution released by the plant has increasedexponentially and subsequently drawn the attention of public prosecutors. In light of the results ofseveral technical reports showing a clear correlation between the plant’s emissions and the mortalityrate of the area, Italian magistrates disposed the sequestration of all the products coming from theplant as being not compliant with the legal standards.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 21. . . to the 2012 temporary fixing by Monti . . .In 2012 Mario Monti’s government passed a decree (213/2012) to bypass the verdict of the publicprosecutors, thus allowing ILVA to restart production. Despite this move and the resulting inability toreorder the seizure of production, the prosecutors did not give up and disposed the seizure of €8.1bnof assets belonging to the Riva family (owner of ILVA), accused of environmental disaster andtherefore asked to compensate for the damages created.. . . followed by recent Letta decreeAlthough the seizure did not directly affect the production of Taranto’s plant, fears of indirectrepercussions and of cash flow problems led Letta’s government a few weeks ago to pass a decree toun-seize the €8.1bn assets and to appoint a special commissioner (Mr Bondi) to lead the company andto elaborate a plan to tackle the environmental issue, while keeping operations running.Potential clash with EU directiveThe substantial importance given by the last three Italian governments to ILVA derives from the highlevel of employees at risk in the case of a shutdown of the plant: currently some 12,000 people directlywork at ILVA’s plant, but the total number of workers at stake could reach the 40,000 threshold whenconsidering all the Italian companies directly and indirectly linked to ILVA. As shown above, for thetime being the Italian governments have managed to avoid the shutdown of the plant and theconsequent unavoidable bankruptcy of the company with ad-hoc decrees aimed at buying time. Thatnotwithstanding, Italian measures could clash with some EU directives (for example, directive2010/75, which sets limits on industrial emissions, or directive 35/2004, which affirms the ‘polluter-pays’ principle) so that the efforts of the respective Italian governments might still be nullified.According to press reports, ILVA is currently losing some €50m per month and the lack of final fixingplus the potential clash with EU discipline, forces us to attach high probability to the worst casescenario for ILVA.Banks’ potential losses in 3-12bps CT1 regionAnalysing ILVA’s accounts in order to determine the current banks exposure is not an easy exercise forthe following reasons: FY2012 Annual Report for both ILVA and RIVA FIRE (the controlling company) are still notavailable. In 2012, the Riva Group was largely reshaped following a massive restructuring plan aimed atseparating the two main activities of the group, the so-called ‘long products’ from hot andcold rolls, the latter produced in ILVA’s plants. FY2012, ILVA perimeter does not correspond to that in FY2011, as some foreign activitieshave been conferred to another holding, leaving only the Italian operations at ILVA. In FY2011, RIVA FIRE consolidated Annual Report showed €2.7bn of bank debt, of which€0.7bn was allocated to ILVA. As the RIVA Group has been split into two holdings – one ofwhich retaining ILVA activities – the debt of the Group might have been re-allocated, but wedo not know in what way. In 2011, ILVA reported an additional c.€2.2bn debt exposure to Group’s companies. At thecurrent stage, it is not possible to assess whether the beleaguered financial position of ILVAmay put at risk the financial strength of the other entities of the Group.As such, the above-mentioned restructuring of the group means that our calculations should be takenwith considerable caution. Mindful of the fact that the reshaping of the Group may have significantlyaltered the financial position of the different entities within the RIVA Group, we attempt to makesome calculations starting from ILVA’s FY2011 Annual Report.As at the end of FY2011, ILVA’s bank debt exposure amounted to €719m, split as follows: €120m of short term debt.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 22 €599m of long term debt, €175m of which is due to expire within one year (i.e. in 2012). The company had a negligible amount of cash and cash equivalents on balance sheet.As a consequence, at the end of FY2012 we could infer ILVA’s bank exposure to range between €424m(assuming the full repayment and no renewal of the €295m credit lines expired 2012) and €719m (incase of roll-out of maturing debt). In both cases, such amounts should not represent a threat for theItalian banking system: assuming the whole of ILVA’s bank debt is classified as NPLs and covered 66%(we would expect some kind of collateral/guarantees backing the credit line), we calculate the amountof provisions could stand in the €450m region for the system, equal to €350m impact on CT1 capitalas at Mar-13, i.e. 3bps of the aggregate CT1 of the nine Italian banks under MB coverage.Should we expand such a simulation to the entire group, i.e. to the RIVA FIRE consolidated accounts,the potential losses for the banking system could reach the still manageable 12bps region given banks’exposure of €2.7bn, i.e. more than 4x the €720m banks’ exposure of ILVA on which we based ourexercise.Argentina the next source of concern for Italy?The 2001 default secured 93% backing from bondholders . . .Following the 2001 financial crises, Argentina was unable to roll over its debts and following theresignation of President de la Rua the country defaulted on $81.8bn debt, which at that time was thelargest sovereign default in history. Following negotiations with the IMF, the country moved to atender offer on the debt outstanding in 2005 and in 2010. This managed to secure the backing of 93%of the defaulted debt holders who agreed to exchange their holding for new securities at a 65% loss.. . . but litigation on the remaining 7% could open up to a new default . . .The remaining holdouts have been targeting better payment terms or a repayment in par, utilisinglitigation. The old bonds had pari passu clauses, which means that should Argentina be in a positionto pay bondholders of the new securities then the holdouts should also be paid. As such, the holdoutshave proceeded to sue the country for $1.3bn, which was given the backing of US courts. The amounthas been derived from past principal and past interest. Argentina’s reaction so far has been to rejectthe verdict and reiterate the offers of 2005 and 2010, which unsurprisingly have not been accepted.The current Argentine President Cristina Fernandez has vowed not to pay the “vultures”, however, sothat a feasible way to end this story would be to enter another technical default in order to avoidhaving to make any payments to any holder.. . . which is why yields are risingThe yield curve for Argentina is somewhat limited given its reputation as a serial defaulter, but weshow in the chart below how the observable yield levels have increased since the start of the year asinvestor fears increased.Argentina Sovereign curve price (rhs) and yield (Lhs)6.07.08.09.010.011.012.013.014.015.03 mnths 1 yrs 2 yrs 3yrs 4yrs 5yrs10/06/2013 01/01/2013101.387.879.7100.789.383.650.060.070.080.090.0100.0110.0120.03 mnths 1 yrs 2 yrs 3yrs 4yrs 5yrsPrice10/06/2013 01/01/2013Source: Mediobanca Securities, Bloomberg
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 23In the rhs chart below, we also outline the current debt maturity schedule for the country. Whilst themajority of the debt is zero coupon securities, we note there are two floating securities maturing inJuly and August and a fixed coupon in September, which could trigger a technical default in case ofno-coupon payment to the holdouts. Not surprisingly, the risk of an Argentina default coupled withthe Asian and China slowdown and with the recent S&P downgrade of the outlook in Brazil to negativefrom stable have triggered a severe correction, which brought the emerging markets index back tosummer 2012 levels (lhs chart below).Emerging markets index Argentina debt maturity schedule, $bn679.23640.88580.00600.00620.00640.00660.00680.00700.00JPMorgan Emerging Global Total Return Index2.6 2.5 2.24.21.71.11.715.314.40.02.04.06.08.010.012.014.016.0Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 2014 2015$bnsSource: Mediobanca Securities, BloombergTenaris and TI the Italian companies most exposed to ArgentinaThe potential default of Argentina could have a double negative impact on Italy, in our view. On theone hand it could reignite concern on debt sustainability in peripheral Europe, while on the other itcould directly affect the Italian economy particularly exposed to Argentina.The table below summarises the key companies under MB coverage with exposure to Argentina, noneof them on an Outperform rating.Italian companies’ exposure to ArgentinaRating TP Turnover exposure EBITDA exposure EPS exposureTenaris Underperform 13.6 30.0% 23% 20%Telecom Italia Not Rated - 13.0% 10% 2%Campari Neutral 5.45 2.9% 2.5% 2.5%Fiat Neutral 4.5 2.0% n.m. n.m.Pirelli Underperform 7.0 4.0% n.m. n.m.Trevi Underperform 4.45 3.2% 5.9% 7.9%Generali Neutral 15.0 0.8% n.m. n.m.Source: Company data, Mediobanca SecuritiesIt can be seen that the exposure to Argentina ranges from 1% of turnover at Generali up to 30% atTenaris.Some 50% chance of a government crisis in Italy this yearIn conclusion, this introductory chapter points to what we consider the most scarce resource for Italytoday – time. Five years into the most severe recession of the past century means that withoutinverting the trend soon Italy could be facing a very problematic situation ahead. It is fair to argue thatItaly’s destiny is now in EU hands more than in Italian hands. Without Europe, i.e. the ECB, to keep
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 24buying the required time and without Italian politicians using such time for painful but inevitablestructural reforms, we think the country might end up requiring a European bailout support. The largecoalition government is facing a crucial role in implementing structural reforms. But its ability todeliver is dependent on a number of moving parts, which is why Italian commentators and opinion-makers are split: The bullish argue that for various reasons this government can stay together for a long timeand deliver what is needed: the common interest of both PD and PDL in buying time, some70% of new PMs appointed willing to secure their future, Napolitano threatening hisresignation in the case of government crisis, and the time required to implementconstitutional reforms all seem to call for a long life of this government. However, the list of obstacles potentially forcing a short term government is equally if notmore convincing to us: Berlusconi’s trials make the government road particularly bumpy inthe case of conviction, potentially forcing him to unplug his party’s support to Letta and toadvocate new elections. Also, the potential implosion and break-down of the PD party at hiswinter congress could pave the way for this. But more in general, we think that any externalfactor turning against the Italian spread could affect the government: from the unplugging ofthe QE measures to reigniting the sovereign crisis triggered for instance from Argentina orSlovenia or the OMT constitutional debate.Given the above, we think it fair to attach no more than 50% chance for this government to remain inpower longer than this year. This means that the many uncertainties surrounding this unusual largecoalition government could implode any time leaving the market with a totally unpredictable situationon what would happen next.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 25Real Estate – Italy is no Spain, but . . .Recent data show an ongoing marked slowdown of the Italian real estate market, withresidential transactions down 26% YoY to 430k – the lowest level since 1985. Real estateprices in Italy have contracted by 12% since their 2008 peak versus a 25% correction inSpain. We believe there are very good reasons for Italy not to fear a ‘Spanish-like’ realestate contraction: 1) some 40% of the national value added in Spain came from realestate in 2007, 10 p.p. higher than Italy; 2) housing completion over the last decade was2.5x larger in Spain than Italy despite 30% larger population in Italy; 3) Italianhousehold indebtedness is the lowest in the EU; and 4) Average loan-to-value stands at65% in Italy versus 72% in Spain.In spite of such differences, we fear that further real estate price correction could affectItalian banks’ balance sheets, which are currently sitting on a cash coverage of 41%,some 10 p.p. below the 2007 levels within our coverage. We propose two approaches. Inthe first, we investigate how much real estate prices could drop in Italy without itsbanks suffering total coverage (cash + collateral) dropping below 100%. Our reassuringanswer is that by our estimates Italian banks could bear up to 45% downward revisionof the fair value of their real estate collaterals and still maintain coverage above 100%.In our second approach, we aim to quantify the capital erosion stemming from 10% realestate prices drop subject to keeping unchanged total coverage ratios at current levels.The result is that some 10% lower collateral value at constant coverage ratio would washout some 17% of the aggregate 2012 Basel II.5 CT1 capital of our banks with CT1 ratiodropping by 170bps to 8.7%. Five banks would sit below 8% CT1: MPS, BP, BPER, BPMand CVAL, but the last three show room to restore capital ratios through IRB models’adoption. ISP and UCG would remain anchored above 9% 2012 Basel II.5 CT1 ratio. Insummary, although we recognise that Italy is no Spain, we foresee further balance sheetclean-up ahead for Italian banks, possibly triggered by the asset quality stress test thatthe ECB is set to carry out next year. Draghi’s recent cooling on the ECB potentiallybuying SMEs loans does not help. ECB-eligible SME loans in our coverage range between€45bn (AA rated) and €145bn (A rated), i.e. between 6-15% of Italian corporate loans. Nodelivery here will be a big missed chance for Italy to sustain growth.Marked slowdown in Italian real estateWith an owner occupation rate of 80%, Italian households remain among the most exposed to theresidential real estate among large European countries.Selected European Countries – Owner Occupation Rate (%)0102030405060708090Source: EMF, Mediobanca Securities
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 26Residential transactions are down 26% YoY in 2012 . . .In 2012 the total number of residential transactions dropped by 26% YoY to 448,000, the highest droprecorded to-date and the lowest amount since 1985 when residential transactions were 430,000 (Lhschart below). In value terms, residential transactions declined 26.3% to €74.4bn. The magnitude ofthe drop in the number of transactions largely exceeded expectations. In the first months of 2012,Nomisma still expected 594,000 transactions in the year, 33% above the actual number. The pictureworsened during the year as shown by the acceleration in the quarterly drop (Rhs chart below).Number of transaction (000) – Residential Number of quarterly residential transactions, YoY464558687769835866 8778166896146176034484004505005506006507007508008509001985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012-3.0%-2.6%-1.5%0.0%1.2%1.5% 1.7% 1.8% 1.6%1.3%-0.1%-1.9%-3.4%-4.2%-4.6%-4.1%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%1Q092Q093Q094Q091Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q12Source: Agenzia del Territorio, Mediobanca SecuritiesThe number of mortgage loans for house purchases fell by 38.6% in 2012, even more than the overallnumber of transactions. Consequently, transactions that involved a mortgage loan declined to 37% ofthe total, eight percentage points below that in 2011. The amount of total mortgage loans granted tohouseholds for house purchases declined by 43% in 2012 to €19.6bn; and the ratio between mortgageloans and the total value of transactions decreased to 26% from 34%.. . . due to several factorsLower prices coupled with lower interest rates helped to sustain the so-called affordability index,which was unchanged in 2012 at the 2011 level. In light of the stable affordability index, worseningexpectations, higher taxes on houses (IMU), and lower credit availability appear to be the main driversof the drop in transacted volumes.Average number of yearly salary to buy a house House Affordability index for Italian householdsSource: Agenzia del Territorio, Mediobanca Securities
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 27Commercial real estate does not provide a better pictureTransactions in commercial real estate among large professional corporations declined below €2.0bnin 2012, down from around €4.0bn p.a. in the prior three years. Insufficient re-pricing, especially fornon-core assets, is the main driver of the low volumes. Low liquidity in commercial real estate is aproblem in view of the relevant amount of funds approaching maturity and of the potential sale of realestate assets held as guarantees by the banks.Commercial real estate – transaction volumes (€ bn) Transaction volumes by quarters (€ bn)0.01.02.03.04.05.06.07.08.09.02006 2007 2008 2009 2010 2011 20120.00.51.01.52.02.53.03.51Q062Q063Q064Q061Q072Q073Q074Q071Q082Q083Q084Q081Q092Q093Q094Q091Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q121Q13Source: Nomisma, Quotidiano Immobiliare,JLLS, Mediobanca SecuritiesSo far, 2013 point to flat/slightly increasing investment volumes. According to JLLS, in the firstquarter of 2013 total transaction volumes amounted to around €0.6bn, up from €0.5bn in 1Q 12 whilesome important negotiations are ongoing on the market (mainly involving foreign opportunisticinvestors) and should be closed during the year.Real estate overview - Italy versus SpainThe magnitude of Spain’s residential real estate bubble was twice that of ItalyUsing the European Mortgage Federation (EMF) data, we calculate that Spanish residential real estateprices ballooned by c.135% in seven years, a rise that is twice the magnitude of that of Italian realestate (c.+70% in eight years). Since their highs, real estate prices have fallen by c.25% in Spain as ofSeptember 2012, and we expect they have kept falling over the past few months.According to EMF data, residential real estate prices in Italy have stabilised over the period 2008-2011, fluctuating at level c.70% higher than in 2000. As the EMF does not provide quarterly updateson Italy’s real estate prices progression, we cannot provide an exhaustive comparison based on ahomogeneous dataset for what happened in 2012 in Italy.Nomisma data show that the increase in Italy’s retail real estate prices hit 70% of 2000 levels in 2008,similar to that flagged by the EMF. With two different sources showing a maximum 70% increase inreal estate prices in Italy, we conclude the magnitude of Italy’s real estate bubble was much smallerthan that of the Spanish one. Unlike the EMF, Nomisma data show a different picture since the peaks,with retail real estate correcting by c.12% at the end of 2012 from the peak hit in 2008. We regard suchan indication as more realistic than a substantial stabilisation at peak-prices (as shown by the EMFdata till 2011). In addition, such a correction would be equal to 50% of that of Spain’s, i.e. equivalent toa growth of roughly 50% of the Spanish one.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 28Italy and Spain – EMF Residential RE Prices, 2000-07 Italy – Nomisma Retail RE Prices, 1992-201280901001101201301401501601701801902002102202302402000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 III 12Spain Italy7080901001101201301401501601701801902001H921H931H941H951H961H971H981H991H001H011H021H031H041H051H061H071H081H091H101H111H12Residential Office RetailSource: EMF, Mediobanca Securities analysis, NomismaDifferences in Italian and Spanish real estate marketsIn our view, the prices of real estate collateral are theoretically safer in Italy than in Spain, for anumber of reasons listed below. Italian economy less dependent upon real estate and construction. The Spanisheconomy relies more on real estate and construction activity than Italy: at the peak of the realestate market (2007), we calculate that real estate/construction sector accounted for c.40% ofthe national value added in Spain (the EU second highest after the UK), c.10 percentagepoints higher than Italy. In addition, the interdependence between the Spanish economy andthe real estate sector is exacerbated by the ongoing government cost-cutting programmes ininfrastructure after years of heavy spending. Unlike in Spain, Italy’s investment ininfrastructure has been relatively poor, while the so-called Stability Pact imposed by theCentral Government to regions and municipalities virtually stopped any local spending andinvestments. Housing completions 2.5x larger in Spain than Italy. Over the period 1999-2010,housing completions exceeded five million units in Spain versus less than three million inItaly, despite a population 30% larger in Italy. In 2011 housing completions in Spaincollapsed by 75% from the peak hit in 2007 versus -50% in Italy on a number already 50%below Spain’s peak (317,000 in 2006 versus 640,000 in Spain in 2007). Over the period2000-2010, we calculate that Spain completed the construction of 0.11 houses per inhabitantversus 0.044 per inhabitant in Italy, i.e. 2.5x .RE/Construction % of Value Added, 2007 Housing Completions, 2000-110%5%10%15%20%25%30%35%40%45%UKSpainFranceNetherl.DenmarkSwedenEU-27BelgiumAustriaItalyGermanyFinlandIrelandNorwayPolandGreeceCzechR.HungarySlovakiaConstruction/Total VA RE, Rent. and bus. activ./Tot VA050,000100,000150,000200,000250,000300,000350,000400,000450,000500,000550,000600,000650,0002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Spain ItalySource: Bank of Italy, Mediobanca Securities analysis Household indebtedness much lower in Italy. The personal indebtedness in Spain ismuch higher than in Italy. A higher level of debt by definition translates into higherprobability of default and in a higher quantity of real estate assets up for sale. Aside from
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 29Norway, data show that the country with the highest debt (residential mortgage per capita) isDenmark (€43k), followed by Netherlands (€38k), Ireland and Sweden (€30k). Italy actuallyhas the lowest level of debt per capita in Europe. The debt per capita must be put in contextwith the disposable income in each country. In this respect, the highest ratios are shown byDenmark, Ireland, Netherlands, Portugal, Spain, Sweden and the UK. Again Italy is the mostvirtuous country in this respect.Res. Mtg. Debt/Gross Disposable Income per Capita,2005-10Res. Mtg. Debt per Capita,2005-10 (€’000)15%25%35%45%55%65%75%85%95%105%115%NetherlandsIrelandDenmarkUKSwedenNorwaySpainGermanyBelgiumFinlandFranceItaly2005 2006 2007 2008 2009 2010051015202530354045NorwayDenmarkNetherlandsIrelandSwedenUKBelgiumSpainFinlandGermanyFranceItaly2005 2006 2007 2008 2009 2010Source: Eurostat, EMF, Mediobanca Securities analysis Loan-to-Value (LTV) below the average in Italy. Generally, a high LTV is associatedwith high default risk, and a high default risk may translate into a larger number of forcedsellers, i.e. into a larger amount of properties coming to the market. Using the LTV of firsttime buyer provided by the ECB for Eurozone countries and various indications from CentralBanks, we calculate approximately c.73% LTV in Europe, peaking at c.100% in theNetherlands. Italy stands below the EU average and below Spain.Loan-To-Value, 2007-10Country Loan-to-Value %Austria 84Belgium 80Czech Republic 45Denmark 80Finland 81France 91Germany 70Greece 73Hungary 61Italy 65Ireland 83Netherlands 101Norway 48Poland 65Portugal 71Romania 68Slovakia 80Slovenia 65Spain 72Sweden 70UK 80AVERAGE 73Source: ECB, Central Banks, Statistical Offices, Mediobanca Securities analysis
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 30Broad definition of financial distress in ItalyFinancial distress is captured one way or another within the four categoriesThe definition of impaired loans (sofferenze, incagli, ristrutturati, scaduti) in Italy is broader than inmost European countries, as it comprises insolvency, temporary financial difficulty, restructuring(with or without a loss for the lender) and payment overdue. On past-due loans, Italy also looks to bein line with its European peers. Current Bank of Italy guidelines specify that, after 90 days of arrears, aloan must be classified at least as past due, in line with EU best practice. However, management hasthe discretion to classify it as incaglio or sofferenza after just one day of delay in the loan payment. Assuch, we believe that the possibility of not capturing a situation of distress in one of the four Italiancategories is limited. Outside of Italy, the 90-day past due rule dominates as the main criteria toclassify a loan, generally causing the exposure to be classified as Non-Performing and possiblyassigning a 100% probability of default. On the other hand, loans less than 90 days overdue andrestructured loans are generally regarded as performing outside of Italy and not impaired.Italy – Criteria of Classification of Problematic LoansCategory DefinitionSofferenzaNon-Performing Loan: on- and off-balance sheet exposures to borrowers in a state of insolvency (even when notrecognised in a court) or in an essentially similar situation, regardless of any loss forecasts made by the bank,irrespective of whether any collateral or guarantees have been established to cover the exposures. Also included areItalian local authorities in a state of financial distress for the amount subject to the associated liquidationprocedure.IncaglioDoubtful Loan: on- and off-balance sheet exposures to borrowers in a temporary situation of difficulty, which maybe expected to be solved within a reasonable period of time; irrespective of whether any collateral or guaranteeshave been established to cover the exposures. Sub-standard loans should include exposures to issuers who have notregularly honoured their repayment obligations (capital or interest) relating to quoted debt securities.Ristrutturato/In RistrutturazioneRestructured Loan: on- and off-balance sheet exposures for which a bank, as a result of the deterioration of theborrower’s financial situation, agrees to amendments to the original terms and conditions (for example, reschedulingof deadlines, reduction of the debt and/or the interest) that give rise to a loss. These do not include exposures tocorporates where the termination of the business is expected. The requirements relating to the “deterioration in theborrower’s financial situation” and the presence of a “loss” are assumed to be met when the restructuring involvesexposures already classified under the classes of substandard or past due exposures. If the restructuring relates toexposures to borrowers classified as “performing“ or to unimpaired past due/overdrawn exposures, the requirementrelating to the “deterioration in the borrower’s financial situation” is assumed to be met when the restructuringinvolves a pool of banks. This is irrespective of whether any collateral or guarantees have been established.ScadutoPast due Loan: on- and off-balance sheet exposures, other than those classified as doubtful, substandard orrestructured exposures that, as at the reporting date, are past due or overdrawn by over 90 days on a continuousbasis. This is irrespective of whether any collateral or guarantees have been established to cover the exposures.Source: Intesa Sanpaolo, Bank of Italy, Mediobanca Securities analysisCash coverage ratio of problem loans is down 10 pp in five yearsBy our calculations, the cash coverage ratio of Italian banks’ problematic loans dropped by 10percentage points in five years (see table below) to 41% in 2012 from 51% in 2007 within our coverage.Such a calculation does not include the allowance on performing loans, which could add a fewadditional points of coverage ratio. We would point the following: The drop in gross problem loans coverage ratio is partially explained by the fact that theproblem loans category with the highest coverage ratio (i.e. sofferenze) has reduced its weightover time to 55% in March 2013 from 67% of problem loans in 2007. The aggregate data of the sample of banks under MB coverage show that the secured problemloans have only marginally increased in five years, to 76% in 2012 from 75% in 2007.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 31 The aggregate data of the sample of banks under MB coverage show that the fully securedproblem loans (i.e. where the secured exposure is larger than the net residual exposure)ballooned to 63% of total net secured loans in 2012, from 40% in 2007. In our view, thiscould explain why the aggregate data of the sample of banks under MB coverage show adeclining coverage ratio in all the four categories, with the exclusion of past due loans.Italian Banks: Cash Coverage Ratio of Gross Problem Loans, 2007 – March 20132007 1H 08 2008 1H 09 2009 1H 10 2010 1H 11 2011 3M 12 1H 12 9M 12 2012 1Q 13Aggregate 51% 50% 48% 44% 41% 41% 41% 41% 41% 40% 40% 39% 41% 40%ISP 54% 51% 49% 43% 41% 42% 43% 45% 46% 43% 43% 43% 43% 43%UCG 54% 55% 52% 50% 46% 45% 45% 45% 45% 44% 44% 43% 45% 44%MPS 38% 44% 43% 39% 40% 40% 42% 41% 42% 40% 39% 38% 41% 40%BP 37% 31% 35% 34% 27% 27% 27% 27% 26% 25% 25% 24% 27% 26%UBI 37% 37% 36% 32% 29% 30% 30% 28% 27% 26% 26% 25% 26% 26%BPER 46% 44% 43% 40% 37% 37% 37% 36% 34% 32% 32% 32% 37% 36%BPM 47% 46% 42% 32% 27% 26% 24% 24% 28% 28% 29% 28% 34% 34%CREDEM 39% 43% 39% 39% 36% 35% 36% 36% 36% 35% 35% 34% 35% 35%CREVAL 51% 49% 45% 43% 36% 35% 39% 37% 33% 30% 31% 29% 35% 33%Source: Company Data, Mediobanca Securities analysisAggregate Italian Banks: Cash Coverage Ratio of Gross Problem Loans, 2007 – March 2013, break down2007 1H 08 2008 1H 09 2009 1H 10 2010 1H 11 2011 3M 12 1H 12 9M 12 2012 1Q 13NPL 67% 65% 62% 55% 52% 54% 55% 56% 57% 55% 55% 54% 54% 55%Doubtful 23% 24% 27% 31% 34% 33% 31% 29% 28% 28% 28% 28% 30% 30%Restructured 3% 3% 3% 7% 7% 8% 9% 10% 10% 10% 10% 9% 9% 8%Past Due 6% 8% 7% 7% 8% 6% 5% 5% 5% 7% 7% 8% 7% 7%TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Source: Company Data, Mediobanca Securities analysisIT Banks – Breakdown of Secured and UnsecuredNet Problem Loans, 2007IT Banks – Breakdown of Secured and UnsecuredNet Problem Loans, 201240%35%25%Fully Secured Net ProblemLoansPartially Secured Net ProblemLoansUnsecured Net Problem Loans63%13%24%Fully Secured Net ProblemLoansPartially Secured Net ProblemLoansUnsecured Net Problem LoansSource: Company Data (UCG, ISP, MPS, BP, UBI, BPER, BPM, CE, CVAL), Mediobanca Securities analysis
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 32Fair value of collaterals cover 100% of the gross deteriorated exposuresThe fair value of collaterals backing deteriorated assets tends not to be disclosed in most of the EUcountries outside of Italy. In 2012, Italian banks’ value of collateral covered c.100% of gross problemloans, bringing the total coverage ratio to well above 100% in all the banks under scrutiny. Italianbanks disclose the fair value of collateral as follows: Since 2012 banks disclose the fair value of collateral backing deteriorated exposures, not justup to a contractual limit (generally the exposure itself). This explains why the fair value ofthe collaterals is above the gross deteriorated exposure. The limit of such disclosure is that itis not possible to ascertain whether a valueless collateral is allocated to a large NPL and viceversa. Italian banks disclose the fair value of collaterals, breaking it down in real estate collaterals,securities collaterals, other real collateral and personal guarantees. Real estate accounts forc.75% of the fair value of collaterals, while personal guarantees account for an additional20%. Banks disclose the fair value of collateral covering >100% of the secured exposure and the fairvalue of collateral offering just a partial coverage. In 2012, c.90% of the collaterals’ fair valuewas allocated to exposures whose collaterals cover >100% of the exposure itself.Coverage Ratio of Problem Loans Including FairValue of Collaterals, 2012Breakdown of Fair Value of Collaterals, 20120%25%50%75%100%125%150%175%200%225%AggregateUBICREDEMCREVALBPBPERISPMPSUCGBPMCash Coverage Ratio Fair Value of Collaterals0%25%50%75%100%125%150%175%200%225%AggregateUBICREDEMCREVALBPBPERMPSISPBPMUCGFair Value of Collaterals as % of Gross Deteriorated ExposureFair Value of RE Collaterals as % of Gross Deteriorated ExposureSource: Company Data, Mediobanca Securities analysisBreakdown of Fair Value of Collaterals, 2012 Breakdown of Fair Value of Collaterals, 201274%1%4%20%Real EstateSecuritiesOther Real GuaranteesPersonal Guarantees93%7%Fair Value of CollateralsAllocated to ExposuresCovered >100% by CollateralsFair Value of CollateralsAllocated to ExposuresCovered 0% - 100% byCollateralsSource: Company Data, Mediobanca Securities analysis
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 33Stressing Italian banks capacity to cope with R.E. correctionNominal prices fell by just 4% in 2012 in ItalyIn 2012, nominal real estate prices decreased 4% and, as we show below, the consensus expectation isfor further de-rating this year and a modest pick-up in 2014.Nominal Real Estate Prices - YoY change-11%-9%-7%-5%-3%-1%1%3%5%7%9%11%199319941995199619971998199920002001200220032004200520062007200820092010201120122013e2014eResidential Office RetailSource: Nomisma, Mediobanca SecuritiesAs shown in the table below, nominal real estate prices dropped by a low double-digit figure since theirpeak in 2007. Although Italy is nowhere near the real estate bubble that Spain is currentlyexperiencing, it is not impossible to expect further real estate price contraction. What would be theimpact on the collateral value of Italian banks?Italy – Real Estate Prices Drop from 2007 PeakResidential Office RetailNominal prices -12.3% -10.2% -12.5%Real prices -19.8% -17.2% -19.4%Source: Nomisma, Mediobanca Securities analysisOption 1: extra 45% RE price drop would still leave total coverage above 100%We run a simulation on the fair value of real estate collaterals aiming at showing what kind ofdevaluation would be needed to reduce the overall coverage ratio to 100%. We proceed as follows: We start from the stock of gross problem loans, as disclosed by each bank at the end of 2012. We assume the cash coverage (allowance for loan impairments) as at 2012 unchanged. Suchallowance includes the evidence of the inspections carried out by the Bank of Italy at the endof 2012, and hence should account for the partial repayment of problem loans and theupdated fair value of collaterals (real estate and personal guarantees). We leave 2012 fair value of personal guarantees unchanged, as we assume the financialstrength of the counterparties providing personal guarantees unchanged. We start from the fair value of collaterals, as disclosed by each bank. We flag that in 2012Italian banks’ reporting was homogeneous, as all banks under scrutiny reported the total fairvalue of collaterals (in 2011 some banks were still reporting the value of collaterals up to acontractual limit). We simulate what reduction in the fair value of real estate collaterals would be required forthe overall coverage ratio (unchanged cash allowance for loan impairments plus unchangedfair value of personal guarantees plus revised fair value of real estate collaterals) to hit 100%.If the coverage fell below 100%, a replenishment of the cash coverage would be necessary.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 34The outcome of our analysis (lhs chart below) shows that the aggregate sample of Italian banks underscrutiny could bear a 45% downwards revision of the fair value real estate collaterals without sufferingtotal coverage ratio below 100% (lhs chart below). We regard 45% maximum downward revision of thereal estate collateral value as plausible in an auction process. However, the outcome of our analysis isscattered: UBI, BP and CREDEM could afford a severe revision of collaterals’ fair value, withoutnecessitating a replenishment of cash coverage. Around 100% maximum downwards revisionof real estate collaterals would mean that every deteriorated position is allocated personalguarantees covering a large portion of the exposure. This is an overstatement of theeffectiveness of collaterals, but explains the low cash coverage (26% at UBI and BP). CREVAL, BPER, MPS and ISP could suffer a revision of real estate collaterals rangingbetween 60% and 40%, a level compatible with the likely outcome of an auction sale. UCG and BPM could suffer only 20% devaluation of collaterals, a level unlikely to match thehaircut of fair value in the case of an auction sale.Option 2: extra 10% RE price drop would erode 17% of CT1 if coverage unchangedAs a second approach, we calculate the impact on the Italian banks capital assuming the following: Unchanged total coverage ratio as at 2012, including the fair value of collaterals (real estateand personal guarantees). A further 10% reduction in the fair value of the real estate collaterals backing deterioratedexposures, almost matching the descent of real estate prices experienced in Spain since thepeak in 2007. The amount of provisions needed to replenish the coverage ratio, after having marked-downthe fair value of real estate collaterals by 10%.The outcome of our analysis is as follows (rhs chart below): We calculate c17% of the CT1 capital of Italian banks under scrutiny would be washed-out.The Basel II.5 CT1 ratio as at 2012 would fall to 8.7% at aggregated level, i.e. c170bps drop. 50% of the banks in the sample (MPS, BP, BPER, BPM and CVAL) would fall below 8%, butadoption of IRBA models would restore the regulatory capital ratios at more comfortablelevels in three out of five (i.e. BPER, BPM and CVAL). The CT1 ratios of the two national champions (ISP, UCG) would remain anchored above 9%.Estimated max revision of RE collaterals values tohit 100% coverage ratio, 2012Estimated CT1 Impact from 10% drop in marketprice of RE collaterals, 2012 (coverage unchanged)0%10%20%30%40%50%60%70%80%90%100%AggregateUBIBPCREDEMCREVALBPERMPSISPBPMUCG0%1%2%3%4%5%6%7%8%9%10%AggregateISPUCGMPSBPUBIBPERBPMCREDEMCREVALCT1 Impact CT1 after RE Collaterals Mark-downSource: Company Data, Mediobanca Securities analysisThe landscape tables in the following page provide all the numerical details and the key findings of oursimulation.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 35Italian Banks – Estimated Maximum Fall of Fair Value of Real Estate Collaterals to Match 100% Coverage Ratio, 2012€bnGROSSPROBLEM LOANSALLOWANCE FORLOANIMPAIRMENTSSIMULATED DROP INR. ESTATE PRICESFV OF REAL ESTATECOLLATERALSFV OF PERSONALGUARANTEESFAIR VALUE OFCOLLATERALSCASHCOVERAGECOVERAGE OFCOLLATERALSTOTALCOVERAGEAggregate 203.0 82.3 44% 82.4 39.0 121.4 41% 60% 100%ISP 49.7 21.2 36% 23.3 5.2 28.5 43% 57% 100%UCG 79.8 35.7 18% 36.4 7.6 44.1 45% 55% 100%MPS 29.5 12.1 36% 14.0 3.4 17.4 41% 59% 100%BP 16.2 4.3 98% 0.2 11.7 11.9 27% 73% 100%UBI 11.0 2.9 100% - 8.7 8.7 26% 80% 106%BPER 8.2 3.0 54% 4.1 1.1 5.2 37% 63% 100%BPM 4.2 1.4 18% 2.6 0.2 2.8 34% 66% 100%CREDEM 1.1 0.4 97% 0.0 0.7 0.7 35% 65% 100%CREVAL 3.2 1.1 65% 1.7 0.4 2.1 35% 65% 100%Source: Mediobanca Securities estimatesItalian Banks – Estimated Maximum Basel II.5 CT1 Impact from 10% Fall in Fair Value of Real Estate Collaterals, 2012€bnGROSSB LOANSALLOWANCELOANIMPAIR.DROP INRE PRICESFV RECOLLATERALSFVPERSONALGUARANTEESFVCOLLATERALSCASHCOVERAGECOVERAGEOFCOLLATERALSTOTALCOVERAGEDELTACOVERAGEINCREASE INPROVISIONSCT1IMPACTCT1IMPACTCT1IMPACTCT1 Ratio2012Aggregate 203.0 82.3 10% 131.5 39.0 170.5 41% 84% 125% -13% 25.7 18.7 17% -1.7% 8.7%ISP 49.7 21.2 10% 32.6 5.2 37.8 43% 76% 119% -11% 5.6 4.0 12% -1.4% 9.9%UCG 79.8 35.7 10% 40.1 7.6 47.8 45% 60% 105% -14% 11.4 8.3 18% -1.9% 9.1%MPS 29.5 12.1 10% 19.7 3.4 23.1 41% 78% 119% -10% 3.0 2.2 25% -2.3% 6.8%BP 16.2 4.3 10% 12.7 11.7 24.4 27% 150% 177% -12% 2.0 1.5 26% -2.6% 7.4%UBI 11.0 2.9 10% 10.1 8.7 18.8 26% 172% 198% -15% 1.7 1.2 15% -1.6% 8.7%BPER 8.2 3.0 10% 8.1 1.1 9.2 37% 111% 148% -13% 1.1 0.8 21% -1.7% 6.6%BPM 4.2 1.4 10% 2.8 0.2 3.0 34% 72% 106% -8% 0.3 0.2 8% -0.6% 6.7%CREDEM 1.1 0.4 10% 1.1 0.7 1.8 35% 161% 196% -14% 0.2 0.1 7% -0.7% 8.7%CREVAL 3.2 1.1 10% 4.3 0.4 4.7 35% 145% 180% -18% 0.6 0.4 30% -2.1% 5.0%Source: Mediobanca Securities estimates
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 36SME lending: a missed opportunityIn the occasion of the last ECB meeting, the ECB Governor Mario Draghi confirmed the governingcouncil had detailed discussions of all potential measures available: asset-backed-securities market forSME loans, LTROs, credit claims, collateral policies, negative rates on deposit facility. According to theGovernor, some of them are ready to be implemented if needed.However, with regard to ways and means to revive the SME lending and facilitate the flow of credit tothe real economy, the Governor admitted disagreements on how to rate and price SME loans, amongother issues. Most importantly the Governor stated that, whatever the decision will be, this is notgoing to be a short term delivery, as it would require a new EU discipline on liquidity and capitaltreatment of ABS.Despite having been postponed, we try to quantify the size of Italian banks’ portfolio of SME loans thatmay be involved in ECB measures. We calculate that Italian banks’ SME lending eligible for the ECBcould hover over €145bn at best, representing c15% of Italy’s corporate loans. If we raised the bar onthe quality of the eligible loans to AA (max 20% risk-weight), the amount of eligible portfolios wouldreduce to €45bn, i.e. c6% of Italy’s corporate book. In estimating the amount we assume: Only SME loans of good quality could be accepted by the ECB, as we believe the Central Bankcannot take on board excessive risk. We started from the exposure to SME and corporate in general, when exposure to SME is notavailable disclosed in the Pillar III. In our view, using the corporate exposure when the SMEexposure is not available should not overstate excessively the outcome of the analysis, as theItalian banks economy is largely dominated by SME. With regard to the exposures under the Standardised Approach, we use the exposuresweighted not less than 50%, as the Standardised Approach imposes a rating not below A. Webelieve exposures rated below A are unlikely to be accepted by the ECB. With regard to the exposures under the IRB Approach, we use only the exposures whose PDand LGD models lead to a maximum risk-weight of 50%, assuming a maximum 50% IRBrisk-weight to coincide A rating under the Standardised Approach. In estimating the SME portfolio of UCG, the only one with sizeable exposure outside of Italy,we assume only 45% of the consolidated exposures rated not below A under the StandardisedApproach and with risk-weight.Claims on Corporate – Credit Assessment and Risk-Weights Standardised ApproachAAA to AA- A+ to A- BBB+ to BB- Below BB- UnratedRisk-weight 20% 50% 100% 150% 100%Source: Mediobanca Securities estimatesItalian Banks – Estimated SME Portfolios Eligible for ECB Measures, 2012, €bn€bnIRBMax 50% RWStandardisedMin A RatingTotalIRBMax 20% RWStandardisedMin AA RatingTotalTotal 115 29 144 37 8 45UCG 16 2 19 6 1 7ISP 30 8 38 10 6 17MPS 17 1 18 4 0 4UBI 6 3 9 1 0 2BP 38 1 39 12 0 12BPER 0 5 5 0 0 0BPM 0 5 5 0 0 0CREDEM 7 0 8 3 0 3CREVAL 0 4 4 0 0 0Source: Mediobanca Securities estimates
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 37In trying to revive the SME lending across Europe, we see two possible ways to proceed: Conferring SME portfolios pro-solvendo – Good quality portfolios could be used ascollaterals with the ECB in exchange of liquidity. Conferring SME portfolios pro-soluto – Good quality portfolios could be sold to theECB and off-loaded from the banks’ balance sheet.The first solution has already proved unsuccessful at the time of the LTRO auctions, when the majorityof the €1trn liquidity injected by the ECB in the European banking system remained parked at the ECBitself for the banks operating in countries not suffering a sovereign debt crisis or used to buyGovernment bonds and avoid the access to the institutional market for banks operating in countriessuffering a sovereign crisis. In other words, there is little evidence that the liquidity injected by theECB eased banks’ credit standards or revived credit demand from corporations.The second solution could be problematic as: We are firmly convinced that the ECB could not take excessive risk and would accept onlygood quality portfolios. In other words, we do not see Germany accepting the ECB to embarkItaly, Spain’s SMEs risks. Should the ECB buy SME portfolios, we believe the ECB would likely apply a haircut, despitethe portfolios being of good quality, generating e problems related to the quantification of thehaircut. Aside the quantification of the haircut, we see little reasons why banks should sell at discountportfolios of performing loans. Banks would aspire to offload non-performing loans ratherthan good quality SME portfolios. Should these portfolios being securitised, it is not sure that banks would benefit from acapital requirement point of view.Recent comments from ECB governor Draghi highlighted the many controversial issues surroundingthis plan and contributed to cool down high markets’ expectations. A lack of delivery on SME ABSwould be a missed opportunity for Italy in its attempts to try and boost growth.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 38Deposits and AM inflows the good newsMarket concerns of potential deposits outflows at Italian banks post the Cyprus eventshave now receded somewhat. Recent evidence showed that Italian banks are notsuffering deposit outflows, as the amount of deposits (net of repos) showed +6% annualgrowth in March 2013, and the stock is broadly stable at c.€1.4trn. The most recentsystem data show the stock of deposits soared by roughly €20bn in March 2013 versusFebruary 2013, almost equally split between time deposits and current accounts. Thistrend offset the €20bn monthly drop in bonds. As a result, the Eur20bn net fundingincrease at Italian banks in March versus February is almost entirely explained byrepos. It is also worth flagging the seasonality of deposits’ collection at Italian banks: in13 of our 16 years’ observation period we found a descent trend in the stock of depositsin the first two months of the year and 2013 makes no exception.Whilst current accounts outflow does not seem to be an issue, the ECB data confirmItalian banks funding is still over reliant on the central bank. Italian banks have takenc.€260bn from the ECB and have deposited just €12bn with the Central Bank, meaningthe vast majority of the LTRO liquidity is still sitting on Italian banks’ liabilities,providing a crucial although temporary buffer to their funding needs. The refunding ofsuch ECB liquidity is scheduled for late 2014/early 2015. Should Italian banks’ cost offunding remain at high levels, the Italian banking system may be forced to cut back itssovereign exposure or replace the LTRO funding with more expensive liquidity atdetriment of some 14% of 2015 profitability at current market conditions, based on ourestimates. Not only deposits confirm their stickiness, but appetite for risk emergeswhen looking at recent strong AM inflows: after Eur270bn of cumulated outflows since2006, Q1 2013 brought Eur20bn inflows – benefiting both assets gatherers and banks.Our correlation analysis points to the drop in government bond yields post the OMTannouncement as a key driver of the recent AM inflows.A reality check on deposits’ stickinessElections, Cyprus and MPS data raised deposits outflows concerns . . .Concerns about the risk of potential deposits outflow at Italian banks started to emerge among theinvestors community following the inconclusive outcome of the Italian elections at the end of Februarythis year, and more significantly, following the events that occurred in Cyprus at the end of March. Therelease of MPS fourth quarter results on 15 May exacerbated market concerns, given a surprising 6%QoQ drop in current accounts.. . . which have receded with Q1 resultsRecent central bank data and Italian banks Q1 results seem to offer room for reassurance, at least forthe time being. The graph below illustrates the historical trend of Italian banks’ funding sources, overthe period June 1998 to March 2013.The stock of Italian banks’ funding reached €2.4trn in March 2013, up €25bn versus February 2013.The stock of deposits soared by roughly €20bn in March 2013 versus February 2013, almost equallysplit between time deposits and current accounts. This trend offset the Eur20bn monthly drop inbonds, so that the Eur20bn funding increase at Italian banks in March versus February is almostentirely explained by repos which grew of a similar amount over the month.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 39Italian Banks – Funding Mix, € bn-2505007501,0001,2501,5001,7502,0002,2502,500Dec-98Jun-99Dec-99Jun-00Dec-00Jun-01Dec-01Jun-02Dec-02Jun-03Dec-03Jun-04Dec-04Jun-05Dec-05Jun-06Dec-06Jun-07Dec-07Jun-08Dec-08Jun-09Dec-09Jun-10Dec-10Jun-11Dec-11Jun-12Dec-12Deposits Fixed Maturity Current… Deposits Reedem. at Notice Repos BondsSource: Bank of Italy, Mediobanca Securities analysisFunding mix unchangedItalian banks’ funding mix has not changed much over the last 12 months, with time depositsamounting to 14% of total funding, current accounts to 30%, deposits refundable with notice to 13%,repos to 6% and bonds to 37%. It is worth noting the higher share of fixed maturity deposits at theexpense of current accounts over the last two years, driven by customers seeking higher yields ondeposits.Italian Banks funding mix, Mar 2011- Mar 2013Deposits FixedMaturityCurrentAccountsDeposits Redeem.at NoticeRepos BondsMar-13 13.9% 29.7% 13.5% 5.7% 37.1%Mar-12 12.4% 29.6% 13.5% 4.6% 39.8%Mar-11 10.1% 32.8% 14.2% 6.2% 36.6%Source: Bank of Italy, Mediobanca Securities analysisSome slowdown in deposits’ collection emerged recently . . .The average annual growth rate of total funding over the last decade is equal to +9%. However, such agrowth pattern has stalled over recent months (i.e. +3% in Feb 2013 and Mar 2013). In March, banks’deposits amounted to €1.44trn, after reaching a maximum in Dec 2012 (€1.52trn).Italy – Deposits YoY Growth, Jun 1999 to Mar 2013 Italy – Deposits MoM Growth, Jan 2011 to Mar 2013-5%0%5%10%15%20%25%30%Jun-99Nov-99Apr-00Sep-00Feb-01Jul-01Dec-01May-02Oct-02Mar-03Aug-03Jan-04Jun-04Nov-04Apr-05Sep-05Feb-06Jul-06Dec-06May-07Oct-07Mar-08Aug-08Jan-09Jun-09Nov-09Apr-10Sep-10Feb-11Jul-11Dec-11May-12Oct-12Mar-13depositsYoY bondsYoY-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%deposits MoM bondsMoMSource: Bank of Italy, ABI, Mediobanca Securities analysis
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 40. . . but watch seasonalityItalian banks’ deposits follow a cyclical trend, as their growth seems to stop and become negativeduring the first two months of each year (i.e. in 13 years out of 16 years under scrutiny, with 2011,2005 and 200o being the exceptions). Hence, we could argue that the drop experienced in February2013 versus December 2012 could be related to seasonal factors, such as tax payments and theChristmas season.Italy – Deposits Growth in the First two Months of the Year vs Year-end, 1998-2013€bn 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Dec 443 485 511 550 597 663 671 708 807 867 1,053 1,138 1,227 1,466 1,418 1,520Avg Jan/Feb 439 483 511 531 587 632 658 738 796 843 1,049 1,129 1,221 1,440 1,424 1,471Change -0.9% -0.5% +0.1% -3.5% -1.8% -4.7% -1.9% +4.1% -1.3% -2.7% -0.4% -0.8% -0.5% -1.8% +0.4% -3.2%Source: Bank of Italy, ABI, Mediobanca Securities analysisReassuring message from Italian banks’ Q1 results on funding . . .The data disclosed by Italian banks at their Q1 2013 results lead to similar reassuring conclusions: We calculate approximately stable stock of customer deposits in March 2013 versusDecember 2012. We note no major difference in the growth pattern shown by the differentbanks (most of which hovering over -1%/+1% range, with the exclusion of Banco Popolare (-4%) and Creval (+7%). We calculate current accounts – i.e. potentially the easiest source of funding to move –remained stable in March 2013 versus December 2012, with MPS alone showing a markeddrop (c.6%). In any case, such a drop was balanced by the growth in other sources of fundingaccounted as deposits, which brought the total deposits up c.2% in March 2013 versusDecember 2012 in MPS too, despite a turbulent period and extremely negative presscampaign. We calculate the stock of bonds issued by Italian banks (including those classified at fairvalue) is down c.2% in March 2013 versus December 2012. We believe this is mostly due tothe LTRO liquidity drained by Italian banks in late 2011 and early 2012, which allowed Italianbanks not to tap the institutional funding markets.Italian Banks – Growth in Customer Deposits and Current Accounts€bnDeposits –Dec 12Deposits –Mar 13q-o-qDepositsCurr. Acc. –Dec 12Curr. Acc. –Mar 13q-o-qCurr. Acc.UCG 410 408 -0% 240 239 -0%ISP 218 220 +1% 195 203 +4%MPS 81 83 +2% 56 53 -6%UBI 54 55 +2% 45 45 +0%BP 50 48 -4% 37 36 -2%BPER 32 33 +2% 24 25 +3%BPM 26 26 -1% 22 22 +2%CREDEM 14 14 -1% 13 13 -2%CREVAL 16 17 +7% 12 12 -1%Aggregate 901 903 +0% 644 648 +1%Source: Company Data, Mediobanca Securities estimates
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 41The table below shows that Q1 2013 outflows affected almost all the banks on the bonds issuance side,with a quarterly drop in the mid-single digit region.Italian Banks – Growth in Securities Issued by Banks€bn Securities Issued - Dec12 Securities Issued - Mar13 q-o-qUCG 171 162 -5%ISP 186 184 -1%MPS 54 52 -4%UBI 45 44 -3%BP 45 45 +1%BPER 15 14 -4%BPM 12 12 +2%CREDEM 5 5 -5%CREVAL 6 6 -4%Aggregate 540 526 -2%Source: Company Data, Mediobanca Securities estimates. . . but Italian banks are still over-relying on ECB facilitiesThe fact that deposits are not showing any significant outflow does not necessarily mean that thefunding of Italian banks is immune from risks. This is particularly evident when considering the over-reliance of Italian banks on ECB funding. The lhs chart below shows that the amount deposited to theECB by Italian banks (net of the minimum reserve) stands at approximately €12bn in March 2013. Wealso show the liabilities that Italian banks have with the ECB, amounting to c.€260bn in March 2013,basically the same amount of liquidity drained at the time of the two LTRO auctions in late 2011 andbeginning of 2012. If Italian banks have taken c.€260bn from the ECB and have deposited just €12bnwith the Central Bank, it follows that the vast majority of the LTRO liquidity is still sitting on Italianbanks’ liabilities providing a crucial although temporary buffer to their funding needs.Italian Banks – Deposits at the ECB versus Fundingfrom the ECB (€bn)ECB Funding by country-275-250-225-200-175-150-125-100-75-50-25025Dec-04Apr-05Aug-05Dec-05Apr-06Aug-06Dec-06Apr-07Aug-07Dec-07Apr-08Aug-08Dec-08Apr-09Aug-09Dec-09Apr-10Aug-10Dec-10Apr-11Aug-11Dec-11Apr-12Aug-12Dec-12Apr-13Deposits at the ECB Liabilities from the ECB0.30.50.70.91.11.31.50%10%20%30%40%50%60%70%80%€ trnGR IRE IT ES PRT Total ECB Facility (RHS)Source: Datastream, Company Data, Mediobanca Securities analysisThe ECB funding ballooned since the end of 2011 and at the start of 2012, coinciding with soaringexposure in domestic sovereign (up €75bn in March 2013 versus December 2011, +47%, looking just atnine banks under MB coverage). The dependence upon ECB funding has not reduced recently, despitethe drop in Italy’s and Italian banks’ CDS, meaning that the regained access to the institutionalmarkets still remains too expensive for the Italian banking system.In the absence of a renewal of the LTRO auctions (something that may still be possible, although likelyfor a smaller amount than the €1trn injected with LTRO1 and LTRO2), the refunding of the massive
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 42liquidity drained by Italian banks is scheduled for late 2014/early 2015. Should Italian banks’ cost offunding remain at high – although bearable – levels, the system may be forced to cut back itssovereign exposure or replace the LTRO funding with more expensive liquidity at detriment ofprofitability in both cases. A back of the envelope calculation suggests that at current fundingconditions LTRO money could erode on average 14% of our 2015e EPS when refunded to ECB.5 Years Senior CDS (bps) Italian banks - Domestic Sovereign Exposure (€bn)0100200300400500600700800900100011001-Aug-081-Nov-081-Feb-091-May-091-Aug-091-Nov-091-Feb-101-May-101-Aug-101-Nov-101-Feb-111-May-111-Aug-111-Nov-111-Feb-121-May-121-Aug-121-Nov-121-Feb-131-May-13ITALY ISP UCG MPS BP0255075100125150175200225250UCG ISP MPS UBI BP BPER BPM CREDEM CREVAL TOTAL1Q13 FY12 FY11Source: Datastream, Coampny Data, Mediobanca Securities analysisAsset management back “en vogue” due to low interest ratesEur20bn AM inflows in Q1 20132013 looks to be marking a strong turning point for the asset management industry as a whole. Asshown in the chart below, the Italian asset management sector reported more than €270bn ofcumulated outflows in the 2006-2012 period, or some €40bn outflows per year. Such a gloomy picturestrongly reverted in 1Q13 as the industry turned in positive territory, posting €20bn net inflows andsuch trend is confirmed by the latest figures reported by Assogestioni, which shows additional €7bninflows in April.Italian Asset Management Sector – Net Inflows by Quarter, (€m, 2006-Mar-13)-1,466-9,721-5,676-6,766-12,431-10,170-12,451-20,676-36,794-29,100-25,602-40,054-12,934-6806,2174,1251,665-4,586-2,221-7,034 -6,514 -6,990 -7,658-17,871-2,507-3,8862,382-4,94520,222-50,000-40,000-30,000-20,000-10,000010,00020,00030,000Source: Assogestioni
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 43In the table below, we show inflows and assets under management of the ten major asset managementcompanies. As a general comment, we see improving momentum, with the sector turning positive in3Q and 4Q 2012, after the negative start reported in the first two quarters of the year. While assetgatherers are confirming their already positive performance, it is interesting to note the strongrecovery of banks.Italy – Top 10 Italian Asset Management Firms Inflows and AuM into Open Funds, 2012-131Q13A 4Q12A 3Q12A 2Q12A 1Q12A(€ m) Inflows AuM Inflows AuM Inflows AuM Inflows AuM Inflows AuMINTESA SAN PAOLO GROUP 2,132 112,405 546 109,047 -902 106,711 -2,309 104,057 -2,218 107,803UNICREDIT GROUP 1,300 56,223 217 53,864 -82 52,698 -1,159 51,033 -1,254 52,724GENERALI GROUP 264 41,923 -3,005 41,266 -70 18,432 -172 17,819 50 18,411AM HOLDING 206 28,905 424 28,412 345 27,056 -249 25,843 -238 26,526MEDIOLANUM 883 25,929 943 23,972 418 23,038 466 21,696 238 21,638AZIMUT 758 17,337 588 16,387 457 15,810 178 15,244 385 14,679ARCA 33 15,998 25 15,470 -79 14,579 -293 14,085 1,521 14,474BNP PARIBAS ITALY -117 14,354 -317 14,072 -317 14,516 7 14,417 -445 14,564AMUNDI -9 11,944 -69 11,812 -493 11,785 371 11,907 3 11,745TOTAL ITALIAN AM SECTOR 13,905 507,150 1,544 481,551 2,515 445,957 -1,551 428,065 -1,452 434,811Source: AssogestioniNNM/AuM annualised1Q13 4Q12 3Q12 2Q12 1Q12INTESASANPAOLO GROUP 7.6% 2.0% -3.4% -2.2% -2%UNICREDIT GROUP 9.2% 1.6% -0.6% -2.3% -2%GENERALI GROUP 2.5% -29.1% -1.5% -1.0% 0%AM HOLDING 2.8% 6.0% 5.1% -1.0% -1%MEDIOLANUM 13.6% 15.7% 7.3% 2.1% 1%AZIMUT 17.5% 14.4% 11.6% 1.2% 3%ARCA 0.8% 0.6% -2.2% -2.1% 11%BNP PARIBAS ITALY -3.3% -9.0% -8.7% 0.0% -3%AMUNDI -0.3% -2.3% -16.7% 3.1% 0%TOTAL ITALY AM SECTOR 11.0% 1.3% 2.3% -0.4% -0.3%Source: Mediobanca SecuritiesAuM vs short term rates on goviesWe believe there is an evident inverse correlation between short term interest rates on ItalianGovernment bonds and inflows into asset management products (but such correlation is valid for thenew business of traditional life insurance too). As we show in the chart below, inflows into assetmanagement always recovered in a context of falling yields, while proved to be negative during periodswith increasing or high yields on short terms Government bonds.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 44Italy – Inverse Correlation Between AUM inflows and Yield on 2-Years BTP1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%5.00%-50,000-40,000-30,000-20,000-10,000010,00020,00030,000IT asset management sector - flows Yield 2YR IT BTPSource: Datastream, AssogestioniA commonly asked question relates to where these inflows are coming from, given that the saving rateof Italian households is constantly decreasing (from c13-14% in 2002-2008 to the current 8%) andItalians’ financial wealth is stable at €3.6trn.Where are inflows coming from?Analysing the composition of Italian households’ financial wealth, we conclude that the re-composition is benefiting AUM products to the detriment of custodian assets. In our view, governmentbonds’ low yields and high volatility on equities are triggering an increasing demand for advice andpotentially higher returns offered by managed products. The stock of wealth in cash is increasing slightly year-on-year (latest available figures fromItalian Banking Association ABI relates to 3Q12), though the low 3% increase is equivalent toa €37bn increase in absolute terms. The amount of mutual funds and technical reserves increased over the period. Mindful of thefact that such trend could be affected by the market performance, we note that the startingpoint discounts the severe outflows reported by the industry in 3Q11 and 4Q11. Thus, webelieve the YoY increase in mutual funds and life technical reserves reported in 3Q12 is evenmore relevant and expect the growth pattern to have strengthened in 4Q12 and in 1Q13.Italy – Composition of Financial Assets of Italian Households (€bn)3Q11 3Q12 Y/Y Delta absCash 1,111 1,149 3% 37Fixed income 701 691 -1% -10Equities 714 637 -11% -78Mutual funds 250 274 10% 24Life technical reserves 679 691 2% 12Credits 171 178 4% 6Total 3,627 3,619 0% -8Source: ABI, April 2013 BulletinThe table above includes the fair value of Italian households, and therefore our conclusions might beaffected by market performance. As for fixed income, the Bank of Italy provides a detailed picture ofthe fixed income held by Italians at nominal value. We note a vast reduction in the direct ownership offixed income, falling to the current €658bn from €734bn at end of 2011.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 45Italy – Fixed Income Investments Held by Households vs Total (Nominal Value, €bn)Italian Households Total %2011 734.0 1,562.0 47%Mar-12 738.0 1,557.4 47%Apr-12 731.3 1,541.4 47%May-12 730.5 1,551.8 47%Jun-12 728.5 1,545.4 47%Jul-12 726.0 1,546.2 47%Aug-12 725.1 1,541.6 47%Sep-12 717.1 1,538.7 47%Oct-12 714.4 1,524.0 47%Nov-12 709.1 1,522.1 47%Dec-12 689.6 1,503.4 46%Jan-13 683.1 1,487.9 46%Feb-13 672.8 1,487.0 45%Mar-13 667.3 1,479.1 45%Apr-13 658.3 1,468.2 45%Source: Bank of Italy; Mediobanca Securities analysisAlso, we focus on the quarterly variation in the stock of fixed income investments held by Italianresidents and by foreign investors (external debt). We note how the quarterly variation among the twoinvestor types was somewhat similar in the first two quarters of 2012, while the trend diverged in 3Qand 4Q with Italian households being net sellers of bonds and foreign investors being net buyers.Fixed Income Investments– IT households vs foreign owners, quarterly trend – € bn4.0-5.5-11.4-27.43.9-3.024.721.3-40.0-30.0-20.0-10.00.010.020.030.01Q12 2Q12 3Q12 4Q12Italian households External debtSource: Bank of ItalyIn conclusion, we explain the current inflows of Italian households as follows: The financial wealth of Italian households is no longer growing, due to the drop in the savingsrate of Italian families. Within the existing €3.6tn of financial wealth, we note a decreasing direct exposure toequities and fixed income, while Italians are asking for more advice and returns increasingtheir exposure towards managed products such as mutual funds and life insurance policies.This is also confirmed by our analysis, which shows an inverse correlation between inflowsinto asset management products and yields on short term government bonds. In such a context, we do not see deposit outflows, but rather an increase in cash (small inrelative terms, but significant in absolute). Analysing the current quarterly trend of fixed income assets, we see that in the last fewquarters a decrease in the direct investments held by households, while we contextuallyobserve an increase in the assets held by foreign investors.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 46Tax burden on wealth: Italy vs EuropeFrom 1995 to 2010 Italy has pursued a fiscal policy divorced from the rest of Europe,lowering the tax burden on capital/wealth (and consumption) at the expenses of taxeson income. Based on 2010 figures, we calculate that taxes on the stock of capital andwealth accounted for 2.5% of Italian GDP (aligned to the EU average) from c.4% in 1995.Such a trend has been reversed in the past 12 months as the IMU (real estate) and theadditional 0.15% taxation of custodian assets brought the burden of capital taxation tothe level of 1995, making Italy the nation with the third highest taxation of capital in theEU-27 after France and UK. IMU brought the recurrent taxation of capital and wealth atalmost €60bn p.a., equal to c.4% of Gross Disposable Income. Hence, with theintroduction of the IMU tax, the direct real estate taxation moved in Italy from 0.6% ofGross Disposable Income to 1.6% versus 1% EU weighted average. Also taxation offinancial assets at 0.5% of GDP in Italy stands above the Eu average of 0.25% in France,Germany, Spain and UK. Despite being taxed more than in the other large EU countries,taxation of financial assets is lower than that of property in Italy and the introduction ofIMU widened the gap further given that real estate taxes account for 0.63% of wealth(real estate, land, excluding plants/machineries and valuables) in Italy versus 0.36% onfinancial assets. In conclusion, after benchmarking the Italian tax profile of wealth,both capital and real estate, with its EU peers we find no room to close the gap as Italyalready sits above the average. This fact leads us in the following chapter to explorealternative ways for the country to try and find resources should this be required tosupport public accounts but without harming consumers too much.Italy: 15 years of divergence from Europe . . .Eurostat’s data on tax revenues distinguish between income taxes, taxes on capital (including stock ofcapital/wealth), taxes on consumption and social contribution. It should be noted that Eurostatregards as taxes on the stock of capital/wealth stamp duties and registration fees (stamp taxes), taxeson financial transactions and financial capital and those on land, buildings and their use. Such adefinition in Italy comprises mostly financial wealth taxes (stamp duty on securities portfolios,imposta di bollo su conti correnti, conto titoli) on both financial transactions and on real estate assets(Imposta Comunale Immobili, ICI in 2010).EU – Tax Receipts Breakdown (excluding SocialContribution), 2010EU – Tax Receipts Breakdown (excluding SocialContributions and Consumption), 201054%46%37%44%9% 10%BE BG CZ DK DE EE IE EL ES FR IT CY LV LT LU HUMT NL AT PL PT RO SI SK FI SE UK NO EU27INCOMETAXESTAXES ONCONSUMPTIONTAXES ONSTOCK OF CAPITALBE BG CZ DK DE EE IE EL ES FR IT CY LV LT LU HUMT NL AT PL PT RO SI SK FI SE UK NO EU27PERSONALINCOME TAXCORPORATEINCOME TAXTAXES ONSTOCK OF CAPITALSource: Eurostat, Mediobanca Securities analysis
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 47Selected EU Countries – Breakdown of Taxes on Stock of Capital/Wealth, 2010ITALY FRANCE GERMANY SPAIN UKReal Estate 51% 67% 65% 77% 90%Financial Assets 20% 7% n.a. n.a. 4%Wealth Tax 0% 5% n.a. 0% 0%Inheritance Tax 1% 9% 17% 9% 4%Other 28% 11% 17% 13% 2%Total 100% 100% 100% 100% 100%Source: Eurostat, Mediobanca Securities analysisLower taxes on wealth, higher taxes on income . . .According to Eurostat data, in the period 1995-2010 Italy has pursued a fiscal policy divorced fromthat of the rest of Europe, lowering the tax burden on wealth at the expenses of taxes on income. Asshown below, in 1995 Italy was among the countries with the higher share of tax revenues comingfrom the taxation of capital (9.8%), not far from the UK (10.5%) and France (9.9%). Germany, theexception among the major economies of the EU, in 1995 came a little over 3% of total tax revenues. In2010, the share of revenues from taxes of capital in Italy had fallen by almost 4%, to 5.9% of taxrevenues, a level lower than the weighted EU average (6.6%), in turn strongly influenced by Germany’ssoft taxation. In respect of GDP, Italy reduced the fiscal burden on stock from c.4% of GDP in 1995 toc.2.5% in 2010. Such a number remained unchanged in 2012 – effectively realigning Italy to theEuropean average, which floated around this level between 1995 and 2010.Italy – Taxes on Stock of Capital/Wealth as Percentof Tax Revenues, 1995 - 2010Italy – Taxes on Stock of Capital/Wealth as Percentof Domestic GDP, 1995 - 20105.05.56.06.57.07.58.08.59.09.510.01995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010ITALY EU 27 AVG2.02.22.42.62.83.03.23.43.63.84.01995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010ITALY EU 27 AVGSource: Eurostat, Mediobanca Securities analysis. . . largely due to real estateThe reduction of the taxation of the stock of capital/wealth in Italy is ascribed mostly to theprogressive relative reduction of the taxation on real estate, culminating in the elimination of ICI onthe main property in 2010. In 2010, the amount of direct real estate taxes amounted to €9bn versusalmost €13bn in 2007, less than 0.6% of GDP in 2010 versus 0.85% in 1995.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 48Italy – Real Estate Taxation Breakdown as Percent of GDP, 1995-2010Taxes (€bn) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010ICI Immobili/Terreni 6.7 7.2 7.7 7.9 8.3 8.4 8.7 9.6 10.0 10.4 10.9 11.4 12.0 9.1 8.9 8.6ICI Aree Edificabili 0.7 0.8 0.9 0.9 0.9 0.9 1.0 1.0 1.1 1.1 0.8 0.6 0.8 0.6 0.6 0.6Direct RE Taxes 7.4 8.0 8.6 8.8 9.2 9.3 9.7 10.6 11.1 11.5 11.7 12.0 12.8 9.7 9.5 9.2Imposta Registro 3.3 3.2 3.5 3.8 4.3 3.7 3.8 4.6 4.6 5.3 5.0 6.1 6.4 5.9 5.3 5.7Imposta Ipotecaria 0.7 0.9 1.3 1.4 1.2 1.1 1.0 1.3 1.2 1.2 1.5 2.3 2.5 2.3 2.1 2.1Diritti Catastali 0.2 0.3 0.6 0.7 0.6 0.6 0.5 0.7 0.7 0.7 0.8 1.1 1.2 1.1 1.0 0.9Imposta Surr. Registro 1.4 1.5 1.5 1.8 1.5 1.5 1.2 1.3 1.4 1.4 1.4 1.5 1.5 1.5 1.8 1.7SOCOF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0INVIM 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total RE Taxes 13.1 14.0 15.6 16.6 16.9 16.3 16.3 18.5 19.0 20.1 20.4 23.0 24.4 20.5 19.7 19.6Total RE Tax % GDP 1.51% 1.40% 1.47% 1.52% 1.49% 1.36% 1.30% 1.42% 1.42% 1.44% 1.42% 1.54% 1.57% 1.30% 1.29% 1.26%Direct RE Tax % GDP 0.85% 0.80% 0.81% 0.80% 0.81% 0.78% 0.77% 0.81% 0.83% 0.82% 0.81% 0.80% 0.82% 0.62% 0.62% 0.59%Source: Eurostat, Mediobanca Securities analysisLooking at the tax revenues composition, Eurostat data show that in 2010 taxes on capital accountedfor c.6% of total tax revenues in Italy, not far from the EU average. Overall, we conclude that in 2010the taxation of capital in Italy was broadly aligned to the European average, despite having pursued adifferent strategy in taxation.EU – Taxes on Capital as % of Tax Receipts, 2010 EU – Taxes on Stock of Capital as % of GDP, 201001234567891011121314NOUKFRBEISESIEPTLUHUEU27WAvgDKITPLCYEU27AvgMTNLROELLVFISEBGDELTSIATSKCZEE0.00.51.01.52.02.53.03.54.04.55.05.56.0NOFRUKBEDKISLUESITHUEU27WAvgPTIECYNLPLEU27AvgMTFISEELRODELVATSIBGCZLTEESKSource: Company data, Mediobanca Securities analysis. . . reversed in 12 months (2012)IMU tax changed the pictureDespite the relatively low taxation of real estate assets, the taxation of wealth in Italy in 2010 wasaligned to the EU average, either in respect of GDP or in respect of the weight on total tax revenues. In2011, the Berlusconi government introduced a mini-tax on financial wealth and real estate assets(IMU), starting from 2014. At the end of 2011 and in 2012, the Monti Government corrected the tax onfinancial assets and anticipated the IMU to 2012. The Italian Treasury is estimated to have collected€24bn from the possession of real estate assets (IMU, first indications pointed to €19bn, then upped
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 49due to ballooning municipal brackets), while the 0.15% tax on financial wealth is expected to generatec.€5bn.The aggregate of the two new taxes on wealth should stand at c.€28/30bn, c.70% of the tax revenueson capital in 2010 (€39bn). As in 2010, direct taxes on land, building and other structures amountedto €9bn according to Eurostat, and we add €15.5bn revenues from real estate tax (IMU) and €5bnfrom the new tax on financial wealth. Adding €21bn to the €39bn total taxes on capital in 2010, wecalculate the taxation on capital would stand at 3.8% of 2010 GDP, the level of 1995. The trend of thepast 15 years was reversed in one year (2012).Italy – Taxes on Capital as Percent of GDP, 1995-2010€bn 1995 2010Extra Revenues(IMU + Fin. Assets)2010(incl. IMU + Fin. Assets)Total Real Estate Taxes (Direct/Indirect) 13.1 19.6 +16 35.1Financial Assets 5.4 7.9 +5 12.9Total Taxes on Capital 33.8 38.9 +21 59.4GDP 865 1,556 1,556 1,556Taxes on Capital as % of GDP 3.9% 2.5% +1.3% 3.8%Source: Company data, Mediobanca Securities analysis and estimatesProperty taxation in EuropeAccounting real estate assets for c66% of Italy’s net wealth, we start assessing if the current level oftaxation of property assets in Italy is below/above the EU AVG. Being real estate an asset class thatcannot be considered as cash or cash-equivalent, in our view it is correct to measure it against theDisposable Income of a nation, rather than against GDP.From 0.6% of GDI in 2010, below the EU average . . .Using Eurostat data (i.e. the items named 29A in Eurostat statistics), we calculate direct taxes on realestate (€9bn, excluding indirect taxes such as stamp duties, cadastral taxes et cetera…) assetsrepresented 0.57% of the Italian Gross Disposable Income in 2010, the Italian level of propertytaxation was below EU 27 (arithmetic) average of the same year, equal to 0.68% of Gross DisposableIncome. Using a weighted average for EU, we would calculate that taxes on real estate assets wouldaccount for c1.0% of Gross Disposable Income, pushed upward by the high level of taxation in Franceand UK, more than balancing the low taxation in Germany. In this case, the taxation of Italian realestate assets was much lower than the EU average.. . . to 1.6% in 2012 post the introduction of IMU, above the EU averageToday we could not make the same statement. Including the incremental revenues from theintroduction of IMU in 2012 (equal to €15.5bn) in respect of ICI in 2010, the total direct taxes on realestate would hit c€24bn, and the weight of direct real estate taxation would account for c1.6% of GrossDisposable Income in 2010, the second-highest in the Euro Area after France and well above the EUaverage.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 50EU – Direct Real Estate Taxation as Percent of Gross Disposable Income, 20102010 Real Estate Taxes (€bn, A) Gross Disp. Income (€bn, B) A / BBE 4.4 359 1.2%BG 0.1 36 0.3%CZ 0.3 138 0.2%DK 3.2 237 1.4%DE 11.3 2,511 0.5%EE 0.1 14 0.4%IE 1.4 129 1.1%EL 0.0 214 0.0%ES 9.5 1,026 0.9%FR 45.7 1,942 2.4%IT (ICI on Buildings and Land) 8.6 1,528 0.6%IT (incl. extra €16bn Taxes from IMU) 24.1 1,528 1.6%CY 0.1 17 0.6%LV 0.1 19 0.7%LT 0.1 28 0.3%LU 0.0 26 0.1%HU 0.3 91 0.3%NL 3.0 570 0.5%AT 0.7 283 0.2%PL 0.8 344 0.2%PT 1.0 168 0.6%RO 0.5 126 0.4%SI 0.2 35 0.5%SK 0.2 64 0.3%FI 0.0 179 0.0%SE 2.7 352 0.8%UK 26.2 1,705 1.5%NO 1.1 318 0.3%IS 0.2 8 2.7%EU Average 0.7%EU Weighted Avg 1.0%Source: Eurostat, OECD, Mediobanca Securities analysis and estimatesTaxation of financial wealth looks the highest in Italy, but below real estateOur analysis compares the taxation on financial assets across Europe. We neglect taxation of capitalgains and the withholding tax on deposits for households and corporations, and we limit our analysisto a sample including the five major European countries (Italy, France, Germany, Spain and the UK).Unlike real estate, the levies on financial wealth are heterogeneous and more difficult to compare.Eurostat does not provide data for Germany and Spain, for which taxation on financial wealth looks tobe very low: if we assume all taxes on the stock of capital/wealth other than real estate and inheritanceto be allocated to financial assets, we calculate the residual would account for 0.2% of GDP inGermany and 0.3% of GDP in Spain.In 2010, the total amount of taxes on financial assets accounted for 0.5% of GDP in Italy versus 0.3%in France and 0.15% in the UK. In other words, already in 2010 Italy showed the highest tax burden onfinancial assets. The situation changed in 2013 with the introduction of the 0.15% taxation of financialwealth. If we add the estimated €5bn tax receipts, the taxation of financial assets would reachapproximately €13bn, more than doubling the amount charged in France (excluding the ISF).Although being the highest among the five largest countries, the taxation of financial assets accountedfor 0.2% of the Italian households’ wealth in 2010, below the 0.33% calculated as taxation of realestate assets as a percentage of the Italian households’ wealth in real estate. Adding the estimatedadditional tax receipts from IMU (€16bn) and financial assets (€5bn), the gap will widen further toc.25bps, by our estimates.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 51Selected EU Countries – Breakdown of Taxes on Stock of Capital/Wealth, 2010€bn ITALY ITALY (IMU/Fin. Ass) FRANCE GERMANY SPAIN UKReal Estate 20 35 56 17 20 66Financial Assets 8 13 6 n.a. n.a. 3Wealth Tax 0 0 5 n.a. 0 0Inheritance Tax 0.5 0.5 8 4 2 3Other 11 11 9 4 3 1Total 39 59 83 25 26 74Source: Eurostat, Mediobanca Securities analysisItaly – Tax Receipts on Real Estate Assets and Financial Assets as Percent of Wealth, 2010€bn Wealth Tax ReceiptsTaxes as %of WealthTax Receipts(incl. IMU, Fin. Assets)Taxes as %of WealthReal Assets (RE, ex Valuables, Plants) 5,541 20 0.35% 35 0.63%Financial Assets 3,546 8 0.22% 13 0.36%Source: Eurostat, Bank of Italy, Mediobanca Securities analysis and estimatesCapital taxation at 2.5% of Gross Disposable IncomeAnother way to look at the weight of taxation of capital is to measure it against Gross DisposableIncome, i.e. the amount of money that a nation has available for spending and saving after incometaxes have been accounted for (disposable income is often monitored as one of the many key economicindicators used to gauge the overall state of the economy).In 2010, we calculate taxation of capital in Italy accounted for c.2.5% of Gross Disposable Income(GDI), aligned to the EU average. Adding €21bn, we calculate the ratio would soar to 3.9%, makingItaly the country with the fourth highest taxation of stock in Europe after Norway and the third highestin the Euro Area after the UK and France and excluding a marginal nation such as Luxembourg.Hence, we conclude that the taxation of capital in Italy is already among the highest in Europe andproves to be high in respect of the income generated by the country annually.EU – Taxes on Capital as Percent of Gross DisposableIncome, 2010Italy – Taxes on Capital as Percent of GrossDisposable Income, 1995 - 20100.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%NOUKFRLUIT (Imu + Others)BEISDKHUIEESEU 27 WavgITPTCYPLNLFISEELRODEATLVSIBGCZEESKLT0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%19951996199719981999200020012002200320042005200620072008200920102010+IMUSource: Company data, Mediobanca Securities analysis and estimatesIn summary, there seems to be very limited room for Italy to increase its taxes on wealth, both on realestate and on financial assets. The comparison with its EU peers does not in fact show any significantgap to be closed, given the already above-average tax rate of wealth in Italy. Harmed with such finding,in the following chapter, we investigate the room that the country has to realistically tap a potentialemergency situation eventually forcing it to quickly try and raise extra taxes should it be needed.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 52Limited room for a large wealth taxThe need for a large wealth tax is a recurring debate in Italy. We estimate that a €400bnwealth tax would be needed in order to bring the debt / GDP ratio below 100% withoutdisposals. We believe such an approach is hardly feasible when considering that: 1)some 65% of the €9.5trn Italian wealth is real estate, offering no room for further taxrises relative to Europe; 2) only 20% of the Italian wealth comprises liquid assets, i.e.c.€2trn, 80% of which is retail savings (bank deposits 30% of total liquid assets, postalsavings 15%, banks bonds 18% and Italian govies 9%). Raising €400bn from this potmeans 35% of Net Liquid Wealth (net of €900bn debt), far too high not to run the risk ofdeposit outflows and over penalisation of small retail savers; 3) a large one-off wealthtax spread over the whole population would hardly change the long-term dynamics ofItaly’s debt when assuming current > 1x fiscal multiplier to depress consumers.Harmed by such constraints, we investigate the room for up to €75bn alternativesources for the government, taking tax progression into account: 1) €3bn (up to €7bn ifincluding SMEs equity) from converging the fiscal treatment of financial assets to thatof real estate; 2) €5bn from a large fortunes tax replicating the French ISF; 3) €43bnwealth tax on 10% of the wealthiest population; 4) €20bn from an agreement withSwitzerland on the repatriated funds; 5) €4bn from lower interest service on debtstemming from the above measures. We also looked into the feasibility of anotherbuilding amnesty and concluded that the potential €2bn extra funds are not worth thepolitical cost, hence we have not include it in our exercise. Our conclusion would be amix of 4 p.p. of debt/GDP reduction, not necessarily over-penalising consumers as itwould come from the wealthiest population, and room for recurring growth measuresamounting to at least 1 p.p. of GDP. A proper attack on tax evasion and the blackeconomy would clearly bring us to a much larger number, but the poor track record ofItaly in this regard leads us to prefer not to include such options.Some €9.5trn wealth in Italy but only €2trn is liquid assetsReal estate is 65% of Italian wealthAs the fiscal pressure on personal and corporate income has reached untenable levels, it is generallydebated in Italy the fact that any further large fiscal intervention should involve Italy’s wealth. In 2011,Italy’s wealth amounted to €9.5trn (gross of €900bn debt), with c.65% of such wealth comprising realestate and physical assets. The residual third comprises financial wealth, scattered in a constellation ofasset classes, of which only bank deposits and life technical reserves show a relatively high weight (7%of total wealth in both cases).Only 20% of Italian wealth is easily sellable . . .In our view, the most important feature of Italy’s wealth is that c.80% of it cannot be regarded asliquid or easily sellable (cash-equivalent). A further tax levied on real estate assets for instance wouldhave a cash impact on households, but real estate property cannot be converted in cash in a shortperiod of time. In our view, the asset classes that could be considered cash/cash-equivalent are: Bank deposits and postal savings (€980bn), accounting for 10% of Italy’s gross wealth. Italian corporate bonds (€375bn), which should all be relatively easy to transform in cash. Weassume banks’ bonds to be listed and sellable, although bid and ask may be distant. Italian T-bonds and T-bills (€185bn), as we assume levying a tax on a debt the Governmentowes to Italian people does not constitute a credit event. We assume foreign securities (€150bn) held by Italians to be sellable, as we assume those tobe mostly constituted of Government bonds and liquid foreign corporate bonds.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 53 Equity in Italian and foreign listed corporations (c€75bn). Mutual funds units (c€250bn).We regard life technical reserves as not entirely liquid (i.e. easily sellable), as: Investors may incur severe penalties when selling the assets underlying reserves ahead of thescheduled timing Contracts may have capital and yield protection, potentially affecting the capital of insurers inabsence of an appropriate legislation.Italy – Breakdown of Gross Wealth, 2011Amount - €bn As % of TotalResidential Property 5,027 53% Not LiquidValuables 125 1% Not LiquidNon-Residential Buildings 342 4% Not LiquidPlants, Machineries et cetera... 237 2% Not LiquidLand 247 3% Not LiquidTotal Real Estate and Physical Assets 5,978 63%Equity in Non-Listed Limited Corporations 421 4% Not LiquidEquity in Non-Limited Firms 205 2% Not LiquidLife Technical Reserves 680 7% Not LiquidOthers (Commercial Loans, Shareholders Loans to Cooperatives, Others) 119 1% Not LiquidBanknotes, Coins 114 1% LiquidBank Deposits 651 7% LiquidPostal Savings 327 3% LiquidItalian Gov. Bonds and T-Bills 184 2% LiquidItalian Corporate Bonds 3 0% LiquidItalian Banks Bonds 373 4% LiquidForeign Securities 146 2% LiquidEquity in Listed Limited Corporations 73 1% LiquidMutual Funds Units 248 3% LiquidTotal Financial Assets 3,542 37%Total Gross Wealth 9,519 100%Source: Bank of Italy, Mediobanca Securities analysis. . . and 80% of such ‘liquid wealth’ is retail savingsExcluding life technical reserves, we calculate that the Gross Liquid Wealth (GLW) would amount toc.€2.1trn, reaching €2.8trn including life technical reserves. Taking into consideration the debt ofItalian households (€900bn), the Net Liquid Wealth (NLW) would reduce to €1.2trn (excluding lifereserves) and to €1.9trn including life technical reserves. Overall, we could argue that approximately€2trn is the amount of liquid wealth that could be considered for extra wealth taxation. The vastmajority of such gross liquid wealth (c.70/75%) typically comprises retail savings, i.e. bank deposits(30% of total), postal savings (15% of total), banks bonds (18% of total), Italian Governments and T-Bills (9% of total).
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 54Italy – Breakdown of Gross Wealth, 2011 Italy – Breakdown of Gross Liquid Wealth, 201171%7%26%Not Liquid Life Technical Reserves Liquid46%18%12%9%7%5%3%Deposits IT Corporate Bonds Mutual Funds IT Gov BondsForeign Securities Banknotes, Coins Listed EquitySource: Bank of Italy, Mediobanca Securities analysisWhy a large wealth tax aimed at reducing debt is hardly feasible€400bn wealth tax would bring debt / GDP below 100% but . . .We simulate the magnitude of a wealth tax aimed at increasing the tax pressure and reducing theDebt/GDP ratio from the 127% reported in 2012 to 100%. In this simple exercise shown in the tablebelow, we start from €1.99trn Public Debt and €1.57trn GDP at the end of 2012 – as reported by theItalian Treasury.Italy – Estimated Impact on Debt/GDP Ratio from a Wealth Tax, 2012Wealth Tax - €trn 0.00 0.05 0.11 0.16 0.21 0.26 0.32 0.37 0.42Gross Wealth - €trn 9.52 9.47 9.41 9.36 9.31 9.26 9.20 9.15 9.10Net Wealth - €trn 8.62 8.57 8.51 8.46 8.41 8.36 8.30 8.25 8.20Gross Liquid Wealth - €trn 2.12 2.06 2.01 1.96 1.91 1.85 1.80 1.75 1.70Net Liquid Wealth - €trn 1.22 1.16 1.11 1.06 1.01 0.95 0.90 0.85 0.80Debt - €trn 1.99 1.94 1.88 1.83 1.78 1.73 1.67 1.62 1.57GDP - €trn 1.57 1.57 1.57 1.57 1.57 1.57 1.57 1.57 1.57Debt / GDP Ratio 127% 124% 120% 117% 114% 110% 107% 104% 100%Tax on Gross Wealth 0% 1% 1% 2% 2% 3% 3% 4% 4%Tax on Gross Liquid Wealth 0% 2% 5% 7% 10% 12% 15% 17% 20%Tax on Net Liquid Wealth 0% 4% 9% 13% 17% 22% 26% 30% 35%Source: Mediobanca Securities estimates. . . it would amount to 35% of net liquid wealth – too muchAs shown above, we calculate that a wealth tax exceeding €400bn would reduce the Debt/GDP ratio to100%. At first sight, €400bn would account for less than 5% of Italy’s gross wealth (€9.5trn in 2011),but such a finding is clearly misleading for the following reasons: A wealth tax of such magnitude should be imposed suddenly and rapidly, allowing no time totransfer the wealth outside the country. This would impose a sudden cash outflow withbanks/insurers implementing a withholding tax, leaving no time to sell the less liquid assets(i.e. real estate). Hence, the impact would fall only onto the Gross Liquid Wealth (€2.1trn)and 100% Debt/GDP ratio would impose a withholding tax equal to 20% of GLW.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 55 As it is reasonable to assume that Italian households will not stop to be obligors (i.e. they willhave to continue to amortise their debts, mortgages, etc), €400bn wealth tax would translateinto a withholding tax equal to 35% of the Net Liquid Wealth (NLW). The soaring fiscal pressure would hit retail savings the most, as bank deposits, postal savings,bank bonds and Government bonds represent c.70/75% of GLW, resulting in a politicallyunacceptable intervention.The above calculations not only show that reducing the Debt/GDP ratio to 100% through a wealth taxis not feasible, but are also overly simplified, as they do not take into consideration the collateraldamage of an intervention of such magnitude on the domestic financial institutions’ liquidity profile: Representing bank and postal savings the majority of GLW (€650bn bank deposits, €330bnpostal savings), we calculate approximately €200bn sudden outflows from Italian MFIs,representing c.15% of Italian MFI’s deposits, i.e. unthinkable. An intervention on corporate bonds would hit banks the most (representing almost 100% ofthe Italian corporate bonds held by Italians), potentially denting the trust of Italian savers inbanks.The impact of a wealth tax on GDP – the fiscal multiplierNot only is the introduction of a large wealth tax constrained by the largely non-liquid Italian wealth,but even more importantly it needs to be taken with care when considering the effect of the fiscalmultiplier. If on the one hand it is fair to expect that a wealth tax aimed at reducing the Debt/GDPratio would improve the creditworthiness of the Republic of Italy, on the other it would also negativelyaffect the already-low growth prospects of the country, and adversely affect the GDP in the mediumterm, i.e. potentially affecting the Debt/GDP Ratio too. Recent austerity measures in Europe provideplenty of evidence on the GDP contraction stemming from consumers shrinkage post tax raises. In itsrecent report for instance, the IMF not only states that the late bailout intervention in Greece was amistake, but it also admits that the 0.5x estimated fiscal multiplier was overly optimistic as in reality itended up depressing GDP more than expected, a common issue for the whole peripheral Europe wewould assume.Recurring versus one-off taxes and the fiscal multiplierWe know that GDP is equal to the aggregate real income of a country, i.e. to the sum of consumption(C), savings (S) and taxes (T):GDP = Consumption + Saving + Taxes, where C + S = Disposable Income = GDP - T It is necessary to distinguish between ordinary wealth tax and “una tantum” one (one off). Anintervention aimed at reducing the country’s debt would qualify as “una tantum”intervention. Hence, in year one, we could argue that GDP would not change, as resourceswould only be transferred from savings to taxation, with an immediate and suddenimprovement in the Debt/GDP ratio. From year two though, we argue that an increase in tax pressure would change the disposableincome (DI), i.e. a change in both the consumption and savings in accordance to a TaxMultiplier (TM), i.e. the change in the aggregate production caused by a change of one unit ingovernment taxes. The simplest versions of the tax multiplier include only inducedconsumptions, while more complex versions also include other components (governmentpurchases, exports). A Tax Multiplier (TM) is given by the ratio between the negativemarginal propensity to consume (mpc) and marginal propensity to save (mps). The savingsrate would be hit by the one-off intervention, while the marginal propensity to consumewould likely fall, fearing additional actions.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 56A large one-off wealth tax alone would hardly improve debt / GDP in the long termIn other words, the introduction of a massive wealth tax would probably result in the freezing ofgrowth and in the increase of the Debt/GDP ratio, after its temporary reduction. Indeed, a large “unatantum” wealth tax does not necessarily have any influence on the Debt/GDP ratio, as such a taxwould lower the debt level in the immediate term but it would not change its long-term dynamic, andafter few years Italy could be back to the same level. We should learn from history: this is a roadalready travelled in 1992 at the time of the Amato government. In that period, privatisations andwealth tax (including an intervention on current accounts) reduced the Public Debt/GDP ratio of overten percentage points but, due to the absence of political reforms aimed at sustaining growth, thebenefit obtained was lost over the next decade. Hence, we argue the ingredients necessary to reducethe Debt/GDP ratio are growth, a surplus in public accounts and low interest rates.Alternative ways to free up €75bn extra resourcesThe previous sections set the boundaries of the limited manoeuvring room in terms of a wealth tax.We know that: including IMU the taxation of real estate is already above the EU average in Italy; the taxation of financial assets is also in line or above EU standards; a large wealth tax in Italy is constrained by the fact that 80% of wealth is not liquid; any one-off large wealth tax would not fix the problem in the long run when considering thenegative impact on growth (and hence on tax collection) due to >1x fiscal multiplier.Our receipt for €75bn extra resourcesWe have written extensively in the past about Italy’s urgent need to reduce its public debt (see ourCassa Depositi e Prestiti – Italy’s gate to debt cut, of 28 February 2012 and Elections approaching,uncertainty rising, of 18 February 2013). We have highlighted the ample room for the government todispose of its assets when considering €110bn worth of gold, €90bn of equity stakes, €30bn worth ofstate concessions, and most importantly €450bn of real estate assets. Here we look at alternative waysto free up resources without harming Italian consumers and before considering any potential disposal.We will therefore focus on the progressivity of the tax rate.The analysis that follows identifies room for up to €75bn resources coming from a combination ofrecurring and one offs as follows: €3bn (up to €7bn) from re aligning the tax treatment of financial assets to that of real estateassets; €5bn from a recurring tax on large fortunes in line with French ISF; €43bn one-off tax on the wealthiest 10% of the population; €20bn from extra taxation on repatriated funds from Switzerland; €4bn from lower cost of debt.Aligning the taxation of financial assets to real estate: €3bnClosing the gap between 0.56% wealth tax on real estate and 0.46% on financial assets...In this analysis we account only for real estate assets, excluding plants/machineries and valuablesfrom physical wealth. In the definition of financial assets, we exclude commercial loans and otherassets.Including the equity owned by the Italian population in small to medium enterprises and familybusinesses, we calculate that the taxation of financial assets accounted for 0.22% of the Italianhouseholds’ financial wealth in 2010, below the 0.35% calculated as taxation of real estate assets as apercentage of the households’ wealth in real estate. In other words, the tax burden on real estate assetswas 50% higher than that on financial assets. As we show in the table below, adding the estimated tax
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 57receipts from IMU (c.€16bn in 2012) and financial assets (€5bn) introduced by the Monti Governmentin 2012, the gap widens further to 27 bps (0.63% versus 0.36%).Italy – Tax Receipts on Real Estate and Financial Assets as a Percentage of Wealth€bn Real Estate Financial Wealth(including SME equity)Financial Wealth(excluding SME equity)Wealth - 2010 5,541 3,546 2,807Taxes - 2010 19.5 7.8 7.8Taxes as % of Wealth - 2010 0.35% 0.22% 0.28%Additional Taxes from IMU – 2013E 15.5 0.0 0.0Additional Taxes on Fin. Assets – 2013E 0.0 5.0 5.0Estimated Real Estate Tax Receipts - 2013E 35.0 12.8 12.8Taxes as % of Wealth – 2013E 0.63% 0.36% 0.46%Suspension of IMU on Main Property – 2013E -4.0 0.0 0.0Estimated Real Estate Tax Receipts - 2013E 31.0 12.8 12.8Taxes as % of Wealth – 2013E 0.56% 0.36% 0.46%Extra Tax Receipts from Tax Realignment 7.0 2.9As % of GDP 0.45% 0.18%Source: Eurostat, Mediobanca Securities analysis and estimates. . . but excluding the equity tied up in SMEs and family businesses . . .We think there is sufficient argument to aim for a convergence between the two fiscal treatments, as ingeneral terms it is a hard to accept the principle that the taxation of financial wealth has to be lowerthan that of real estate. Our calculation above is aimed at closing such gap with a conservativeapproach based on the following considerations: The majority of the financial wealth (especially the liquid part) is composed of currentaccounts, postal savings, Government bonds, bank bonds, life technical reserves, i.e. typicallyretail investments. In other words, the straight realignment of the taxation would largelypenalise retail savers. Taxing the equity of SMEs in a country whose economy is largely based on small and mediumenterprises and family businesses could be particularly damaging, discouraging the birth ofnew enterprises/initiatives. If we exclude the equity in SMEs and account only for the equity in Italian and foreign-listedcorporations, the tax burden gap would shrink to 7bps in 2010 (0.35% on real estate versus0.28% on financial assets ex SME equity), i.e. the taxation of real estate assets would be just25% higher than that on real estate. In the attempt to eliminate the taxation of the main property (the one in which Italianhouseholds live), the current Government has suspended the taxation on the main property.Hence, we may lower the overall impact of IMU introduction to €12bn in 2013E, deductingthe estimated €4bn tax receipts from IMU on main property collected in 2012. This wouldreduce the gap between the taxation of real estate wealth and financial wealth to 10bps.. . . would generate €3bn additional tax receiptsBased on our assumptions of excluding the equity tied in SME and family-businesses from a wide andindiscriminate taxation and deducting the estimated €4bn tax receipts from IMU on main propertycollected in 2012, we calculate €3bn additional tax receipts from aligning the taxation of financialwealth to that of real estate assets. If we maintain a more aggressive approach by realigning taxationalso on SME equity it would generate up to €7bn tax receipts.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 58Wealth tax on large fortunes: €5bnA wealth tax in Italy should only apply to very large wealth . . .There is a recurring debate in Italy on the need for a wealth tax. Our analysis so far has showed thelimited room for such intervention on a large scale when considering that the current taxation of realestate assets in Italy is already above the EU average. Additionally, starting from January 2013, a0.15% tax on the financial wealth is already in place in Italy, levied on mutual funds, unit-linked, indexlinked, equities, bonds, with the exclusion of current accounts (subject to a flat tax of €34) and somelife insurance policies (e.g. pension funds and traditional policies).. . . like France’s ISF which generates €4bnHence, we believe a wealth tax should be focused only on the large wealth. France’s Governmentcharges the ISF (Impot de Solidarite’ sur la Fortune). In 2013 the ISF will tax net wealth above €800kin a progressive way, reaching a maximum of 1.50% for wealth above €10m. The French ISF taxes themain following items: residential property (the value of the property in which the household lives isreduced by 30%), land, all equity holdings (although holdings in SME are subject just to acontribution), bonds, bank deposits, mutual funds, valuables. Such tax treatment generatesapproximately €4bn p.a. for France as shown below.France – ISF 2013 (Impot de Solidarite’ sur la Fortune)Taxable Wealth Tax 2013 2005 2006 2007 2008 2009 2010<€800K 0%€800K to €1.3m 0.50%€1.3m to €2.57m 0.70%€2.57m to €5.00m 1.00%€5.0m to €10.0m 1.25%>€10m 1.50%Revenues - €m 3,023 3,658 4,390 4,155 3,580 4,461Source: Eurostat, Mediobanca Securities analysis€5bn from 0.16% large wealth tax in ItalyAccording to the Bank of Italy, c.40% of the net wealth in Italy is owned by c.10% of the households,meaning that 2.5m households own €3.0trn of net wealth, i.e. €1.2m net wealth per household. Basedon such breakdown of the Italian wealth, we estimate in the table below that introducing a tax similarto France’s ISF could generate €5bn of recurring revenues per annum, implying 16bps recurring taxrate on large wealth. This could possibly free up resources to reduce the burden on labour taxes for thewhole population, supporting the consumption of 90% of the Italian households.Italy – Estimated Tax Revenues from Replicating France’s ISF Wealth TaxItalyNet Wealth€bnWealth of 10% ofHouseholds(40% of Total) €bn10% of ITHouseholds(millions)Net Wealth perHousehold€mTaxPer Household€TaxRevenues€bnProperty 5,615Equities 698Bonds 705 7Deposits/Post Savings 978Valuables 125Mutual Funds 248Debt -900Net Wealth 7,469 (A) 2,988 (B=40%*A) 2.52 (C) 1.19 (B/C)/1000 1,934 (D) 4.9 (E=D*C)Source: Bank of Italy, Istat, Mediobanca Securities analysis and estimates
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 59One-off wealth tax: €43bn should not endanger consumersOnly progressivity can make a wealth tax workThe €8bn of further tax receipts we have calculated so far stem from a higher taxation of financialassets and from the imposition of a solidarity contribution levied on the 10% wealthiest populationowning c.40% of the national wealth. These measures have a recurrent nature and would bring thetotal taxation on the stock of capital/wealth at 4% of 2010 GDP, above the level reached in 1995 andwell above the EU average (almost matching France and UK).However, such interventions would not address the debt of the country. In our view, the only way tostart reducing Italy’s debt would be a una tantum levy charged on a larger part of the net wealth of therichest population to try and minime the negative impact on consumers. In this analysis, and unlike inFrance’s ISF, we include €680bn assets held in insurance life technical reserves, bringing the total nettaxable wealth at €8.3trn (€3.3trn owned by 10% of the population). We exclude plants machineries,and commercial loans, as we believe those are related to the production/manufacturing of domesticSMEs, which are already under financial pressure due tightening banks’ credit conditions.A 1.3% tax on 10% wealthiest people generates €43bn, i.e. 5% of liquid net wealth . . .As the vast majority of the Italians’ wealth is concentrated in real estate, we believe the una tantumwealth tax could not exceed a certain threshold, in order not to stress the households’ liquidity (albeitwealthy). We set such a maximum threshold at 1.3% of the Net Wealth, generating €43bn of taxrevenues to be drawn from the 10% wealthiest households. Such an amount would account for c.5% ofthe liquid net wealth of the wealthiest Italians, a level we regard as bearable, and unlikely to endangerthe households’ liquidity profile.. . . and reduces debt / GDP ratio by 3 p.p.Such an initiative would reduce Italy’s Debt/GDP ratio by c.3 percentage points to 124% – withoutreshaping it. Provided the Government takes actions on the spending side to keep the trajectory of theCentral Government Debt under control, it may generate a positive spill-over on the deficit front, as itwould reduce the cost of servicing the Italian debt by some €2bn p.a., again resources that may bedevoted to lower the burden on labour tax and support consumption.The una tantum wealth tax on the wealthiest 10% of the population would be on top of the €5bnidentified as recurrent. In our view, the payment of the una tantum wealth tax could be done ininstalments.Italy – Estimated Tax Revenues from Una Tantum Wealth Tax on 10% Wealthiest HouseholdsItalyNet Wealth€bnWealth of 10% ofHouseholds(40% of Total) €bn10% of ITHouseholds(millions)Net Wealth perHousehold€mTax PerHousehold€Tax PerHousehold as% ofLiquid AssetsTaxRevenues€bnProperty 5,615Equities 698Bonds 705Deposits/Saving 978Valuables 125Mutual Funds 248Insurance 680Cash 114Gross Wealth 9,163Debt -900Net Wealth 8,263 3,305 2.52 1.31 17,067 5% 43-o/w Liquid 2,117 847 0.34Source: Bank of Italy, Istat, Mediobanca Securities analysis and estimates
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 60The 2009 tax amnesty: €20bn potential revenuesOnly €6bn tax collection from tax amnesty in ItalyUnder the last Berlusconi government, Italians holding funds outside the country were permitted tolegalise their money through a 5% taxation. The amnesty was largely a success as c.€100bn wasindicated to be declared (c.60% kept in Switzerland under the so-called “rimpatrio giuridico” whilethe remaining 40% was physically repatriated) which generated some €6bn taxes for the Italiangovernment as shown below.Italy – Revenues from Tax shield (Imposta straordinaria sui capitali rientrati dallestero - Scudo fiscale)€m 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Tax 0 0 0 0 0 0 0 1,480 617 0 0 0 0 0 5,013 656Source: Eurostat, Mediobanca Securities analysisDeals between Switzerland/UK/Germany envisage 20-30% burden on repatriated fundsThe agreement reached with Switzerland by Germany and the UK pointed to a taxation in the 20-30%region, largely above the 5% applied by Italy in 2009. The Tax Agreement between the UK and Switzerland was first signed in October 2011 by theExchequer Secretary David Gauke and the Swiss Finance Minister Eveline Widmer-Schlumpfand came into force on 1 January 2013. The agreement foresees for clients of banks inSwitzerland who are taxable in the UK a path to tax compliance while maintaining theirfinancial privacy. The maximum tax rate for regularising the past is 34%, but the effective taxrate for most clients should be 20-25% of total assets. The bilateral tax treaty agreement between Germany and Switzerland, initially rejected by theGerman Parliament provides for a 25% withholding tax (plus solidarity surcharge) on capitalgains received by German taxpayers with accounts held in Switzerland, ensuring that capitalgains realised in Switzerland were in future treated in the same way as in Germany. Theagreement also provides for a 50% tax to be imposed on inheritances in Switzerland, unlessGerman residents opted to declare their inheritance to the German tax authorities. The taxdeal also provided for the taxation of until now undeclared and untaxed assets held byGerman taxpayers in the Confederation’s banks, at withholding tax rates varying from 21-41%.Deal between Italy and Switzerland could be worth €20bnIn the previous paragraph, we identified actions to drain wealth out of the country to free up resourcesto support internal consumption. The current taxation of the stock of wealth and capital already hitsthe whole population, and the measures we have identified would increase the tax burden evenfurther. Increasing the fiscal pressure without tackling the funds repatriated from the tax amnestycould be politically unacceptable. During the last electoral campaign, several politicians have referredto the opportunity to re-open the file of the Italians that benefited from the tax amnesty in 2009. Weestimate that using the average taxation imposed by similar deals struck by the UK and Germanycould generate €20bn additional taxes for Italy.Feasibility is the key questionHowever, the feasibility of such initiative may be debatable for the following reasons: The intervention may be considered as retroactive, possibly generating legal issues. The intervention may be considered as not compliant with the principle of the so-calledcapacita’ contributiva (taxes should be related to the current capacity to contribute, not to thepast or future capacity to pay taxes). Such a principle is part of the Italian Constitution. The amount of money repatriated with the tax amnesty may have already been used, investedor injected in corporations.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 61Building and fiscal amnesty: upside not worth the political costSix large amnesties over the last 40 yearsThe history of the building amnesties introduced by Italian governments is quite long and complex.According to Italian Tax Authorities (Agenzia delle Entrate), all amnesties (mainly fiscal and buildingamnesties) introduced from 1973 to 2005 generated a total amount of €26bn tax receipts. The first large fiscal amnesty dates back to 1973 and generated total proceeds equal toc€1.5bn at current prices. In 1982 the Minister of Economics and Finance R. Formica introduced the so-called“condono tombale”(€5.8bn). In 1985 Prime Minister Bettino Craxi introduced a building amnesty that was promised as aone-off action for people who had violated zoning laws and built without the permission ofthe local authorities. In 1994 Berlusconi’s first term as prime minister allowed a building amnesty and a fiscal one(so-called Concordato Fiscale). The latter mainly targeted autonomous workers/holder ofbusiness income. The taxpayer subscribing to the Concordato Fiscale accepted a highertaxable income for direct taxes purposes (Irpef, Irpeg, Ilor) and VAT in exchange of anyfuture claim from the tax authorities. The combination of building and fiscal amnestygenerated €2.6bn tax receipts. In 2003-04 Berlusconi’s Government introduced a building amnesty (generating c.€4bn taxrevenues) and a fiscal one (generating €23bn tax revenues). The tax amnesty again involveddirect taxes and VAT. Finally, in 2009 Berlusconi’s Government introduced the “tax shield”, generating c.€5bn taxrevenues.In our view, another amnesty could only be applied to real estate. A tax amnesty in fact cannot involveVAT anymore, as VAT is now a European tax and tax amnesties are not permitted on European levies.With particular reference to a building amnesty, the third and last one was launched in 2003-04 and itonly applied to “breaches” occurred by and not later than the 31 March 2003. As showed in the tablebelow, the cumulative income related to that amnesty amounted to c.€4.6bn. In our view, a newbuilding amnesty will generate lower tax revenues than the €4bn collected in 2003-04. Provisionallyand given the table below we could assume €2bn, which we do not consider worth the political riskand hence do not include in our simulation.Italy – Building Amnesty€m 2003 2004 2005 2006 2007 2008 2009 2010 TotalBuilding Amnesty 0 2,312 1,785 171 142 92 70 59 4,631Source: Eurostat, Mediobanca SecuritiesConclusion: €75bn to reduce debt without harming consumptionIn light of the limited scope to introduce a large wealth tax aimed at reducing and reshaping theDebt/GDP ratio of the country, we focused in this chapter on potential fiscal measures aimed atfreeing-up resources to lower personal and corporate taxation over time and support consumption.Needless to say all measures should be accompanied by the rationalisation of Government spending,by the disposal of public assets, and fighting tax evasion. In the absence of such a commitment, anymeasure would be useless, as the trajectory of the Central Government debt would remain unchanged.Our suggested measures can be classified in two groups: Recurring interventions. A re-alignment of the tax burden for property and financialassets levied on the whole population could generate c.€3bn revenues. A recurring wealth taxlevied on the wealthiest households (replicating France’s ISF) could generate c.€5bn
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 62revenues. The mentioned interventions would bring the taxation on the stock ofcapital/wealth at 4% of GDP as shown below, above the EU average and almost matching theUK and France.Italy – Realigning Tax Treatment of Real Estate and Financial Assets€bnRealEstateFinancialWealthWealthTaxInherit.TaxOthers TotalTax Receipts on Capital 2010 19.5 7.8 0.0 0.5 10.8 38.7Tax Receipts from IMU 2012 15.5 0.0 0.0 0.0 0.0 15.5Suspension of IMU Prima Casa 2013 -4.0 0.0 0.0 0.0 0.0 -4.0Additional Taxes Fin. Assets 2013 0.0 5.0 0.0 0.0 0.0 5.0Alignment Taxes Fin. Assets 2013 0.0 2.9 0.0 0.0 0.0 2.9Wealth Tax on Wealthy Population 0.0 0.0 4.9 0.0 0.0 4.9Total 31.0 15.7 4.9 0.5 10.8 63.0As % of GDP 2.0% 1.0% 0.3% 0.0% 0.7% 4.0%‘– France 4.3%‘- Germany 2.8%‘- Spain 2.5%‘- UK 4.3%Source: Eurostat, Mediobanca Securities estimates One-off interventions. A wealth tax levied on the wealthiest population could generate€43bn in of one-off revenues. A more penalising taxation of the wealth repatriated with thetax shield in 2009 could generate a maximum of €20bn, although the feasibility remainsdebatable. A combination of the two could reduce the Debt/GDP Ratio to 123% from 127%.The table below summarises our findings where we estimate the above initiatives could also bringsome €4bn lower cost of interest on the Italian public debt.Italy – Summary of Interventions€bn Total GoalRecurring Interventions 8Alignment Taxes Fin. Assets 2013 3 Reduce Income TaxesWealth Tax on Wealthy Population 5 Reduce Income TaxesUna Tantum Interventions 67Wealth Tax 43 Debt ReductionTaxation of Repatriated Funds 20 Debt ReductionLower Cost of Debt 4 Reduce Income TaxesTotal 75Source: Eurostat, Mediobanca Securities estimates
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 63Mediobanca Italian Corporates Survey 2013More than 50 Italian companies in our coverage universe responded to our first surveyaimed at gauging expectations on the back of the recent political deadlock. Althoughroughly one out of three companies considered the latter as a very negative on theircompany’s economic situations, it is not politics per se that is the main source ofconcern. Some 55% of the industrials responding pointed to credit access as their majorproblem, whilst banks mentioned the high and volatile cost of funding. If 85% of thebanks seem confident to report a decent top line growth this year, some 50% ofindustrials expect no top line growth, which is why 85% of them are considering furthercosts’ rationalisation, and only 20% of them are planning to raise their investmentssignificantly versus last year. The recent decree to speed up payments to corporates bythe Italian PA does not seem to represent a game changer, with only 24% of respondentssaying this could have a significant impact on their economics. This is probably due tothe fact that large to medium corporates (which is what our panel represents in thecontext of the average size of the Italian enterprises) have more bargaining power innegotiating payment terms. Some 80% of the panel expect that the weak scenario couldlead to some sector consolidation, but only 8% believe the M&A opportunity wouldcome from distressed PA assets. The final result is that some 44% of the answers pointto growth measures as a priority number one for the government followed by softeningof the fiscal pressure (26%) and restructuring of the public administration (21%). Only3% call for the respect of the fiscal compact, and 6% are worried about the public debt.The overall picture is of a country in a ‘wait and see’ mood, with companies reluctant toinvest, more focused on cost-cutting plans and in strong need of increasing their creditconditions. Low revenues prospects and poor macro expectations make the softening ofthe austerity stance to be the clear consensus request emerging from our survey.A gloomy picture ahead from Italian corporatesWe outline in this chapter the key findings of our first Mediobanca Italian Corporates SentimentSurvey aimed at capturing expectations into 2013 and 2014. Although these kinds of exercises shouldclearly be taken with extreme care and should not be seen as fully representative of the entire country,we stress that the fairly large sample of the companies surveyed under our coverage (more than 50between corporate and financials) and their size makes the responses to our questionnaire aninteresting reference point on where to set expectations, in our view. Our answers were collected oneweek before the appointment of the Letta government, and as such one might argue that expectationscould feasibly have improved post the government appointment compared with our findings.Financials more than corporates worried for the political deadlockItalian political instability has had a mixed impact in our sample. According to the questionnaire, 72%of the Financials interviewed believe that the Italian political deadlock has impacted their economicssomehow versus 55% of industrials. Only one third of our sample though says that such issue had avery high impact on its activity.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 64Italian political instability impact on companies’ economics6% 7%17%14%17%19%14%21%19%29%17%28%43%24%11% 14%0%10%20%30%40%50%60%70%80%90%100%MB Sample Financials IndustrialsExtremely A lot Moderatly Neither much nor little Slightly NoSource: Mediobanca SecuritiesEasing credit access a prerequisite for growth from 55% of the corporatesWe asked our sample to pick, among four options, what makes them more worried about the future.The results mirror the differences of financial versus industrial businesses. The latter, which needfrequent access to credit in order to increase investments and growth prospective, are in 55% of thecases more worried about the difficulties in obtaining loans from the banks. Financials, on the otherhand are mainly concerned about the interest rate on Italian government bonds and high ratesvolatility in the market.Factors to be worried about in the future Revenue growth expectations for 201329%57%23%16%43%10%11%13%45%55%0%10%20%30%40%50%60%70%80%90%100%MB Sample Financials IndustrialsCreditaccess Capital markets access Interestrates volatility Interestrates30%37%14%14%13%11%13%27%33%16%71%3%3%14%0%10%20%30%40%50%60%70%80%90%100%MB Sample Financials IndustrialsExtremely A lot Moderatly Neither much nor little Slightly NoSource: Mediobanca SecuritiesTwo out of three Italian corporates expect zero or negative growth . . .The picture offered in the right hand side chart above shows two different views when it comes togrowth expectations. On the one hand, 85% of Financials in our sample foresee an improvement of the generaleconomic and political conditions. Therefore they expect an increase of their revenue streamin Italy in 2H 2013. For Industrials however, 96% expect either no or moderate future revenues’ growth in Italy in2013. Indeed, 50% of them expect zero or little revenue growth in 2013 from Italy, and only3% of the sample expects good revenue increase.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 65. . . which is why only 20% of them are investingAs a result of such expectations, Industrials have not only reduced their plan to invest in Italy but theyare also implementing further cost rationalisation plans. As shown in the two pie charts below, onlytwo companies out of 10 are planning to increase significantly their investments, while the majoritywill wait for the economic situation to improve. In addition, 85% of the Industrials are putting in placecost rationalisation plans, which will most probably translate in a number of job losses.Few Industrials plan to increase investments (lhs) and many to further optimise costs (rhs), 2013No17%Slightly30%Neithermuch norlittle20%Moderatly13%A lot17%Extremely3%Slightly10%Neither muchnor little14%Moderatly31%A lot28%Extremely17%Source: Mediobanca SecuritiesPayment of commercial debt is not considered a game changer . . .In a second set of questions, we asked the Industrial companies what they think is necessary to boostthe Italian economy. One of the measures that has been announced by the Italian government in thepast weeks is to start repaying around Eur40bn of commercial debt to Italian companies. Although wewelcomed such move, according to the Industrial companies in our pool it won’t help solving thegrowth problem of the country. As shown in the right hand side chart below, two thirds of the samplebelieve this move will have limited/moderate impact on the Italian GDP. In addition, 62% of theIndustrial companies do not expect any major benefit for themselves from such a payment.PA payment of commercial debt benefits on Industrial companies (lhs) and on Italian GDP (rhs)No24%Slightly31%Neither much norlittle7%Moderatly14%A lot17%Extremely7%How much will the speed up of the paymentof commercial debts by the publicadministration impactyour company?...3%17%20%33%17%11%14%29%50%24%29%34%9% 10%0%10%20%30%40%50%60%70%80%90%100%MB Sample Financials IndustrialsExtremely A lot Moderatly Neithermuchnorlittle Slightly NoSource: Mediobanca Securities. . . as 70% of the sample aims for growth measures and softening of austerity stanceThe companies interviewed are all well aligned in terms of their priorities for the new Lettagovernment. As shown in the chart below, out of the five options proposed, 44% of the pool indicatedgrowth strategies as a necessity to revitalise the stagnant economy. The rest of the companiesprioritise the reduction of fiscal pressure (26%) and the restructuring of the Public Administration
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 66(21%). Surprisingly, in our view, only 6% of the pool believe the reduction of the high public debt is apriority, and only 3% care about respecting the Fiscal Compact.Priorities for the next government3% 3%6% 7%21%22%21%26%22%26%44%56%43%0%10%20%30%40%50%60%70%80%90%100%MB Sample Financials IndustrialsGrowth strategy Reducing fiscal pressureRestructuringPublic Administration Reducing public debtComply with fiscal compactSource: Mediobanca SecuritiesSome 60% of the corporates have credit access issues . . .We also asked the Industrial companies in our pool to give us more detail on their accessibility tocredit. Some 60% of the interviewed sample confirmed they are currently experiencing difficulties inopening credit lines.Italian Industrial relationship with credit marketNo13%Slightly20%Neither much norlittle7%Moderatly33%A lot17%Extremely10%Do you experience difficultiesin opening/increasing creditlinesin Italy?Source: Mediobanca Securities. . . and more than 50% of them plan to increase their cash position at Italian banksSome 56% of Industrials in our panel have increased their cash reserves or accessed the capital marketmore than needed. Despite the several hurdles they need to overcome to obtain loans by banks,Industrials seem to look at their relationship with banks in a less negative stance. Although none of thecompanies interviewed believe their attitude towards Italian banks will sharply increase in the nearfuture, 92% of them at least does not expect it to worsen.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 67Italian Industrials attitude vs Italian banks in the past 3 months (lhs) and in the future (rhs)Extremelydecreased4%Slightlydecreased8%Stable24%Moderatlyincreased56%Increased a lot8%How has your attitude to holdingcash/cash equivalents atItalian bankschanged inthe lastthree months?...Slightlydecreased8%Stable38%Moderatlyincreased54%…And how will it evolve in the near future?Source: Mediobanca SecuritiesThe overall picture is for a country in a ‘wait and see’ mood with companies reluctant to invest, morefocused on cost-cutting plans and in strong need of improving their credit conditions. Low revenueprospects and poor macro expectations make the softening of the austerity stance the clear consensusrequest emerging from our survey.The QuestionnaireThe Questionnaire - Q&AQuestions No SlightlyNeithermuchnor littleModeratelyAlotExtremelyHow much is the absence of the government impacting your company? 6% 17% 19% 19% 28% 11%Do you expect revenue growth in Italy in 2013? 30% 14% 11% 27% 16% 3%Are you considering further costs rationalisations in 2013? 0% 10% 14% 31% 28% 17%Have you changed your cost structure as a consequence of the crisis? 3% 17% 7% 28% 34% 10%Do you plan to increase investments in Italy in 2013? 17% 30% 20% 13% 17% 3%Do you see opportunities for consolidation in your sector? 7% 11% 21% 21% 32% 7%Have you increased cash reserves or accessed capital markets more frequently? 20% 20% 10% 20% 20% 10%Do you have difficulties in opening/increasing new credit lines in Italy? 13% 20% 7% 33% 17% 10%Which portion of your cash/cash equivalents is held at Italian banks? 4% 7% 11% 29% 32% 18%Has your attitude to hold cash at Italian banks increased in the last 3 months? 4% 8% 24% 56% 8% 0%Will your attitude to hold cash at Italian banks improve in the near future? 0% 8% 38% 54% 0% 0%Will your company benefit from the payment of commercial debts by PA? 24% 31% 7% 14% 17% 7%Will GDP expectation benefit from the payment of commercial debts by PA? 3% 20% 11% 29% 29% 9%Do you see opportunities to acquire assets from PA given its financing needs? 16% 32% 16% 28% 8% 0%Source: Mediobanca SecuritiesOther questions asked were: Which of the following factors are you more worried about?Answers: Interest rate: 29%, Interest rate volatility 16%, Capital market access 11%, Creditaccess 45%. How is your liquidity invested?Answers: Cash/Cash equivalent 85%, EU treasuries 4%, US treasuries 1%, Corporate bonds3%, Other 7%. What should be the priorities of the next government?Answers: Introduction of growth strategies 44%, Restructuring of Public Administration 21%,Reducing fiscal pressure 26%, Reducing public debt 6%, Respect fiscal compact rules 3%.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 68Conviction ideas and ratings changesFollowing a weak set of Q1 results, we ended up downgrading our 2013 and 2014estimates by 5% on average for our Italian coverage. We remain cautious on the growthprospects for 2013 and 2014 and expect further downgrades in 2H 2013, driven by themacro outlook further deteriorating. As a result, we maintain a cautious stance on Italy,which leads us to favour defensive stocks and names with high earnings diversificationoutside of the country or stocks with corporate action/ restructuring potential. Our keyhigh conviction longs are: Autogrill, Azimut, Cementir, Cairo, Danieli, EI Towers, ENI,Fiat Industrial, PMI, Prysmian, UBI, Unicredit and Unipol. Following our more cautiousstance on Italy we downgrade Beni Stabili, BPER and Yoox from Outperform to Neutral,BP and Trevi from Neutral to Underperform and Saras from Outperform toUnderperform.Cautious view on ItalyWe reiterate our cautious stance on Italy. This leads us to favour defensive stocks with diversificationof their earnings outside of Italy or potential stock specific catalysts. This means: Long: Autogrill, Azimut, Cementir, Cairo, Danieli, EI Towers, ENI, Fiat Industrial, PMI, Prysmian,UBI, Unicredit, Unipol; Short: BPER, Banco Popolare, Buzzi Unicem, Finmeccanica, Geox, IntesaSanpaolo, Mediaset,Piaggio, Pirelli, Saras, Trevi.In this chapter we summarise our by-sector overviews suggesting our high conviction pair trades. Wealso address the key rational behind our downgrades which are analysed separately in theaccompanying reports published today.Banks: macro and asset quality put our EPS at risk of downgradeThe uneasy macroeconomic outlook in the foreseeable future leads us to stay cautious: Vanishing inflationary pressure across the Euro Area and abundant liquidity may prompt furtherrate cuts in the ECB policy rates. Euro Area HICP inflation is projected by the ECB to decline froman average rate of 2.5% in 2012 to 1.4% in 2013 and 1.3% in 2014. Our current estimates are builton the assumption of a progressive realignment of Euribor 3-Months (currently at 0.2%) to thecurrent base rate (0.5%). In other words, our estimates incorporate c25bps increase in short-termrates in 2014E, which may be a debatable assumption given the low inflationary pressure. Shouldthis not happen, we see further deposit margin pressure, affecting NII negatively. Long lasting recession in Italy may dent loan growth in the medium-term. First quarter resultsshowed a reduction in the loan book of many Italian banks (UCG, ISP, MPS, UBI, BP, CE, CVAL).In general terms, we expect Italian banks loan book to stabilise in 2013E and start growing again in2014E (+3% nominal in Italy). Such assumption is coherent with the GDP outlook depicted by theECB. The Central Bank expects real GDP to increase during 2013 supported by the favourableimpact on export of a gradually rising external demand. Domestic demand should also pick up overtime, initially benefiting from a fall in commodity price inflation and from accommodativemonetary policy stance. In 2014, internal demand should also be supported by progress made infiscal consolidation. On the other hand, the ECB itself sees remarkable downside risks and thisholds particularly true for Italy (GDP forecasts have been revised downward several times over thepast few months and economic recovery postponed quarter after quarter). Needless to say that alonger than expected recession in Italy may dent the forecast resume in lending growth. Asset quality remains a key concern to us. First quarter results provided a mixed picture fromItalian banks, with management conveying moderately reassuring messages in some cases. On theother hand, Bank of Italy data show that NPL (sofferenze) kept growing in Apr-13 versus Mar-13
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 69(+€2.3bn). In our view, it is premature to call a stabilisation in deteriorated loans inflow. Longerthan expected recession may prevent any asset quality improvement, while we currently estimate ageneral decrease of loan loss provisions in 2014E; Aside the impact on the forecast returns, asset quality may become an issue also for regulatorycapital. Italian banks’ capital may come under the spotlight again in light of the steady increase inthe stock of deteriorated loans since the start of the crisis in late 2007 and the possible start of anECB-led review of lenders’ asset quality. An exercise stressing banks’ capital adequacy on assetquality deterioration could be a matter of concern for Italian banks, as the combination of soaringGross Problem Loans since 2007 and relaxation of coverage ratios resulted in Net DeterioratedLoans accounting for c120% of CT1 in Mar-13. Needless to say, stress-scenario assumptions onsomething exceeding 100% of CT1 would have a remarkable impact on regulatory capital.Italian Banks – Net Problem Loans as Percent of CT1 Capital, 1Q13-2007 (ex. State Capital)2007 1H 08 2008 1H 09 2009 1H 10 2010 1H 11 2011 3M 12 1H 12 9M 12 2012 1Q 13Aggregate 45% 52% 61% 78% 98% 97% 102% 94% 97% 96% 101% 107% 108% 117%CREDEM 13% 14% 20% 24% 33% 35% 36% 37% 41% 43% 45% 47% 45% 46%ISP 35% 42% 48% 65% 80% 77% 81% 65% 69% 73% 77% 80% 85% 91%BPM 22% 23% 35% 71% 80% 81% 99% 101% 71% 76% 75% 81% 89% 93%UCG 53% 54% 66% 75% 91% 91% 97% 95% 103% 89% 93% 97% 94% 96%UBI 25% 26% 36% 50% 71% 75% 80% 74% 80% 85% 89% 98% 103% 109%BPER 45% 50% 57% 90% 108% 111% 110% 119% 118% 135% 141% 149% 140% 151%CREVAL 28% 35% 52% 63% 101% 128% 108% 116% 124% 149% 132% 154% 148% 174%BP 70% 75% 98% 109% 235% 220% 235% 163% 162% 167% 188% 200% 215% 228%MPS 63% 116% 120% 154% 156% 167% 173% 188% 148% 168% 184% 203% 205% 328%Source: Company Data, Mediobanca Securities analysisLong UCG versus ISP and long UBI versus BP are our two high conviction pair trades Long UCG (Outperform, TP €5.1) – Adjusting 2012 reported RoTEs shows underlyingprofitability would move to 4.3% already in 2012. Furthermore, the reallocation of UCG’s Germanexcess capital to CEE (16% RoTE) and the realignment of CIB to EU peer average profitabilityimply €1.1bn net profit boost. UCG is a restructuring play with: 1) large cost cutting (we estimate€780m pending cost cuts at UCG); 2) CIB makeover potential; 2) EPS potential from capitalredeployment into CEE from CIB and GER; 3) faster inversion of LLP trends than ISP from a fastercredit cycle. Finally, in a scenario of possible further macro deterioration in Italy, the weight ofGerman, Austrian, Polish, Turkish and Russian operations should work as a mitigating factor. Short ISP (Neutral, TP €1.1) – Adjusting 2012 reported RoTEs shows underlying profitabilityat 2.5%. ISP shows positive aspects (capital adequacy, liquidity strength, low leverage andregulatory risk) and a major weakness: the large incidence of TE to bad loans. We see ISP as afocused and efficiently run bank. However, its asset quality worsened much faster than UCG (3x vs2x using since 2006), reflecting Italy’s issues. ISP’s higher carry trade and deposit hedging supportis positive short-term P&L management to us, but it is but unsustainable in the medium-term. Long UBI (Outperform, TP €4.0) – Our positive stance on UBI is mostly related to theminorities’ angle: Basel III makes further rationalisation of minorities necessary, adding up to70bps of CET1. Minorities’ rationalisation could be seen also as a way of weathering potentialfurther macro deterioration in Italy and surviving a potential EU-wide exercise on asset quality inthe future. We also see some short-term catalyst: we regard the guided 50bps improvement in theCT1 ratio from the roll-out of retail IRBA models as prudent and the validation expected by Jun-13may work as a catalyst.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 70 Short Banco Popolare (Underperform, TP €0.95) – With a fully-phased Basel III CET1below 8% in 2013E, we see BP as undercapitalised. We view this as light in both absolute terms,given the magnitude of the deteriorated loan book, and relative to peers. Re-aligning BP to thepeers’ average (10%) would require a €1.3bn capital infusion, making BP trading at 0.5X TE, agenerous multiple in light of 4% return in 2014E. The combination of low CET1 ratio, lack ofoptions to replenish it, potential risks underlying the large deteriorated loan portfolio andgenerous multiples after theoretical recapitalisation lead us to downgrade BP today. Long BP Milano (Outperform, TP €0.60). The transformation of BPM into a limitedcompany looks like a remote option. Hence, the premium the market might attach to a speculativeangle related to a change in the governance is unlikely to resurface soon. Nevertheless, we believethe market has over-reacted to the shattered dream of a radical governance change: based on ournumbers, BPM trades at 0.35X TE 2014E, below UBI and BPER and aligned to BP a multiple hardto justify in light of the expected c6% return in 2014E. Unlike peers like BP, such low multiplescannot be justified neither by the asset quality situation (total deteriorated loan coverage ratio at34% is above peers’ one, net deteriorated loans accounting for 90% of CT1 is below the peers’average of c120%) nor by the capital outlook (pro-forma Basel II CT1 at 10% in FY12, without IRBmodels validation and with marginal impact from Basel III). Short BP Emilia Romagna (Neutral, TP €5.80). After reducing 2014E earnings by 33%, weexpect BPER to deliver c.5% RoTE in 2014E. This makes the current 2013E 0.5X T/E fair. Firstquarter results show that the current profitability hovers over 3% RoTE, unlikely to expand soondue to the asset quality burden. Moreover, our estimates are based on short-term rates matchingthe 0.5% policy rate and on lowering cost of risk, leaving little margin of safety in our forecasts.Finally, apart from the roll-out of IRB models, we see few options to improve the bank’s capitalratios, a weakness in a deteriorating macro environment and in light of the ECB-led review oflenders’ asset quality.Cement: Cementir is our high conviction longFirst quarter results have highlighted a very soft start for the Italian cement market. Cement and readymix selling volumes fell by a double-digit amount y-o-y due to a very negative performance by theresidential and public works segments. The picture gradually improved in April and May due to betterweather conditions, but growth drivers for the sector remain limited. According to our estimates, domestic cement consumption is expected to be some 20.5m tonsin 2013E (down by some 20% Y/Y), reflecting a utilisation rate close to 52%. Despite this gloomy picture, market leader Italcementi has right-sized its production capacitysignificantly (from 15m tons to 9m tons) over the last two years, and now plants are currentlyrunning with a utilisation rate of around 60%. The other players, including Buzzi Unicem and Cementir have also optimised theirproduction footprint. This ongoing rationalisation of the Italian cement production footprintshould result in better price discipline than in the past, in our view. Next steps for theindustry are to right-size the ready mix industry plus further plant closures. The key question for producers remains the visibility on a potential recovery in volumes. Inour opinion, a normalised level of capacity utilisation close to 70% (to be reached in threeyears) would be a satisfactory result. Long Cementir (Outperform TP €2.35) – We reiterate our positive stance on Cementirbased on the wealthy geographical mix combined with the projected cost savings related toheadcount rationalisation; Short Buzzi Unicem (Underperform TP €11.2) – We reiterate our negative stance onthe stock. The geographical mix is solid due to the group’s exposure to the US, Mexico andRussia, but we believe that its growth potential has been overvalued by the market. The stock
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 71is trading at 6.3x, above its mid-cycle multiple of 5.7x. The timing and shape of the cyclerecovery factored in by the market seems too bullish, in our view.Capital goods: Prysmian and DanieliFirst quarter results did not produce a significant trend due to seasonal reasons for our capital goods’coverage. Delays in payments from Public Administration (PA) have further stressed the companies’working capital management. The recent news relating to the gradual unlocking of payments from PA(some €21bn to be released in a first tranche) could inject some liquidity into the sector andpotentially restart some infrastructural projects. The high-conviction buys in our capital goodsuniverse remain Prysmian and Danieli. Long Prysmian (Outperform TP €17.50) – The stock reacted quite well after thewarning given by the CEO on the cyclical businesses during the first quarter results. Given theworsening of the cycle, the company has immediately increased its efforts on productionoptimisation and upgraded the cost synergies target from €150m to €175m (at full speed in2015). This upgrade is mainly related to a second round of production footprint optimisationto be implemented in Europe; Long Danieli (Outperform ordinary shares TP €24.90, Outperform €16.20saving shares) – We see good momentum on backlog. The €3.05bn current backlog doesnot include two “jumbo” orders that the company has already won, given its very cautiousaccounting policy. It would mean a book-to-build for the plant making of above 1.2x.Additionally, we expect a positive impact on earnings from the recent acquisition of a steelplant in Croatia, integrating the ABS mill in Italy; Short Trevi (Underperform; €4.45 TP) – We downgrade the stock today given themodest cash flow generation, demanding multiples and our overall bearish stance on Italy.We cut the TP by 24% to €4.45 (from €5.85). Our valuation is the average of a DCF analysis(€4.30 fair value) and peer multiples comparison on 2013 and 2014 figures (€4.5); Finmeccanica (Underperform TP €3.40) – In our view, the stock has been supportedby the speculation surrounding potential disposals. We believe the current government (asclearly expressed by many of its members several times) would not support asset sales toforeign companies. Meanwhile, the company’s reputation is badly damaged and this isevident from the poor order intake. This is expected to translate later into poor cash flowsand P&L numbers.Oil: ENI remains our core longIn our latest sector report (“1H ’13 outlook: cautiousness with a pinch of M&A”, 15 January 2013), wesuggested an overall cautiousness in the oil and oil service sector, holding onto oil-integrated stocksrather than oil services/oil-related names in the first half of the year. We confirm this view also for thesecond half of 2013: With the oil service industry currently experiencing further delays in tendering activity andthe award of new contracts, we see opportunities for oil integrated stocks to keep onoutperforming given 1) sustained earnings momentum in the E&P activity; 2) sustainedexploration activity; and 3) stabilisation in the negative trend of the downstream activities. We assume a scenario of declining oil price. The charts below highlight the historical over-performance of Oil Integrated stocks vs. Oil Services in this scenario, confirmed also in 1H13.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 72Oil Integrated vs Oil Services performance (rebased to 100) in the long term (left) and YtD (right)70758085909510010511011512031/12/2010 31/03/2011 30/06/2011 30/09/2011 31/12/2011 31/03/2012 30/06/2012 30/09/2012 31/12/2012 31/03/2013Oil services Integrated909510010511001/01/2013 22/01/2013 12/02/2013 05/03/2013 26/03/2013 16/04/2013 07/05/2013 28/05/2013Oil services IntegratedSource: Thomson Reuters Datastream, Mediobanca Securities Long ENI (Outperform TP €22.20) – ENI remains our high conviction outperform inthe Oil space. We expect earnings momentum to improve in the coming quarters after a slowstart of the year, with a slight improvement in production in 2Q and a robust acceleration in2H. We feel confident the company will meet its 3% target of production growth, includingthe start-up of Kashagan as scheduled. As far as the gas marketing division is concerned,positive news might come from the take-or-pay contracts renegotiations, driving to a lowerloss than what the market is estimating thanks to the positive contribution of theretrospective effects that we quantify in some €300m. A 6.5% dividend yield coupled with thecontribution of the share buyback lead us to confirm our preference for ENI among Italianindustrial names. The icing on the cake would be the solving of the SPM issue that couldrepresent a strong catalyst for both stocks. Short Saras (Underperform TP €0.95) – Today we downgrade the stock toUnderperform (from Outperform). The reason is twofold: on the one hand M&A appealshould wane, following last Friday’s termination of Rosneft partial tender offer on 7.29% ofthe capital. On the other hand market fundamentals are showing signs of deterioration. Ournew TP points to €0.95, following a revision in estimated profitability from the refiningbusiness.Branded & Consumers: Autogrill vs GeoxLimited exposure to the Italian riskOn average some 23% of the luxury sector’s turnover is generated in Italy (17% for consumerscompanies). This falls below 10% for Luxottica and Ferragamo, while it reaches 40% for Tod’s. Basedon our estimates, the contribution to the turnover generated in Italy by local customers isapproximately 17%, since luxury demand in Italy is mostly driven by travellers’ flows from Asia andChina, and appetite for buying luxury products in Italy is mainly supported by the existing gap in retailprice between Asia and Italy (at 35-40% in China). Tod’s and GEOX are the most exposed to domesticpurchases (28% and 35%, respectively), and Ferragamo and Prada the least exposed (2% and 5%).
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 73Branded & Consumers Goods: exposure to domestic consumptionsREVENUES IN ITALY o/w domesticBRANDED 23% 17%AEFFE 39% 25%BRUNELLO CUCINELLI 25% 16%FERRAGAMO 8% 2%GEOX 35% 35%LUXOTTICA 5% 5%PRADA 16% 5%SAFILO 20% 20%TODS 40% 28%YOOX 16% 16%CONSUMERS 17% 17%AUTOGRILL 20% 20%CAMPARI 23% 23%DE LONGHI 11% 11%INDESIT 12% 12%Source: Mediobanca Securities on company dataThe luxury is in good shapeThe branded goods sector has experienced a solid start to the year, reporting average mid-single digittop line growth in 1Q13, despite a challenging basis of comparison (sales grew double digits YoY in1Q12 on average). The major macro event affecting the sector in the quarter was the depreciation ofthe Yen against the Euro (17% on average), which hit all companies with a high exposure to such amarket, but on the other hand it pushed domestic purchases by Japanese consumers. This was partlyfaced by some brands raising retail prices in Japan (more notably Louis Vuitton raised prices by 10-15% in mid-February, Richemont by 9%, and Gucci is set to do it in 2Q).Geographically speaking, the driver of the sector has been North America, where the demand washelped by healthy consumer confidence pushing up domestic consumption.In Europe the picture is mixed, with Southern Europe (Italy and Spain) being very weak, and Franceand the UK outperforming. Overall, performance was softer in March than in January and February,as the sell-out of Spring/Summer 2013 collections was delayed by poor weather conditions. In theregion, the sector reported mid-single digit growth in 1Q13, mostly driven by travellers’ flows. The mixis changing as travellers are increasingly from Russia, while tourist flows from Japan and China arereducing their purchases in Europe due to the narrowing of the price gap, as some luxury companiesincreased prices in Europe. On the other hand, local demand for luxury goods has not yet picked up.Most luxury companies in Europe are now focused on cleaning up their independent wholesalechannels to reduce their credit risk profiles, and implementing a much more cautious retail plan.The Asia Pacific is again the area where all companies are focused in terms of better brand penetrationand expansion of distribution networks. This seems likely to happen in China, while South Korea isseen as likely to be in trouble. Although most companies do not expect to replicate in China theoutstanding performance recorded in 2012, the environment there is still buoyant and luxurycompanies’ efforts are still focused on expanding the direct retail network in tier II and III cities tocapture new customers and their appetite for luxury goods. The new anti-corruption actions by thenew government might have an impact on the giving of gifts, hitting luxury sales, especially watches,while some boost might come from increasing consumption in women’s apparel for personal use.In terms of outlook for the remainder of the year, the common attitude among listed luxury companiesis a more cautious approach to providing indications, but almost all companies reported a solid start to2Q, with April seen as a continuation of 1Q.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 74On the back of buoyant macro conditions in the major luxury markets, the sector experienced a strongshare price performance (+30% YTD on average), and given that consensus estimates were notmaterially revised up, there was a rerating of the sector that in most cases is at its all times peak(i.e.29x 2013 PE on average).Consumers: a tough start of the yearAll consumer companies experienced a weak start to the year, due to depressed demand in Europe andparticularly tough conditions in Italy, partly compensated by good growth in North America andemerging markets.Weakness in Italy affected 1Q13 results in particular in terms of one-off destocking activities forCampari, weak motorways business for Autogrill, and poor volumes for Indesit. Emerging marketscontinued to drive the growth, with the exception of Russia for the large domestic appliances industry.It is worth underlining that the manufacturers of domestic appliances are now increasingly focused onimproving price-mix to protect profitability: Indesit has planned to increase prices in 2Q and 3Q13;De’Longhi was able to improve its profitability in 1Q13 due to better price-mix and the managementexpects further improvements over the year.After a tough start of the year, consumer companies started to experience improvements in tradingconditions. Autogrill sales grew slightly in the first 18 weeks of the year (+0.5% ex forex) with F&Bsupported by less negative trends in Italian motorways and further growth in North America.De’Longhi and Indesit experienced better growth trends in April and May. Long Autogrill (Outperform, TP €11.80) – Autogrill is our high conviction long amongBranded and Consumer companies since the forthcoming demerger of the Travel Retail &Duty Free division is expected to reveal additional value which is currently not priced in andto be a first step for a consolidation with other operators in the sector. Short Geox (Underperform, TP €1.30) – Geox is our short idea since quarterly resultsand current trading conditions are not showing any reverse in the very negative businesstrend, with Italy and Europe still down double digit and a very cautious guidance provided bythe company on the remainder of the year, which put current consensus estimates at risk.Insurance: Unipol vs CattolicaFirst quarter results in the P&C business showed the consequences of the current poor macroeconomicsituation of Italy in two ways: Top line remains under pressure in Motor, as the fall in new car registrations coupled withlimited tariff increases. In addition, non-mandatory Motor products still reported a mid-single digit drop as a consequence of lower disposable income. The flipside of the coin is that frequency remained at historical lows and this translates intolow loss ratios and low combined ratios.We therefore see some top line pressure in the Italian property and casualty business, but profitabilityremains sound. On the financial income side, Italian insurers remain net buyers of Italian BTPs andare therefore subject to the volatility of this asset class.Going forward, we believe the mix between the drop in the top line and high margins will be key inassessing the overall profitability of this business. Against this background, we believe the continuedpressure in the macroeconomic situation of the country will put top line pressure with combined ratiosremaining at the current low levels. We do not expect Motor tariffs to be a game changer, as we seelimited room for increasing prices going forward, particularly after a year of low single-digit increases.In terms of the Life insurance business, the fall in short term rates increased the appeal of traditionalLife insurance products. Volumes are therefore in an expansion-mode, though the reinvestment yieldremains a concern going forward. In the above-mentioned environment, we favour stories with aspecific catalyst more than a bias on the sector overall.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 75 Long Unipol (Outperform, TP €3.40) – We remain buyers into the Unipol/Fondiariarestructuring story, as we still see the two stories trading at a significant discount to peers.We are aware of the risks that are still surrounding this investment case, but we see aninteresting risk/reward profile in any case. July will be a decisive month, in our view, with thedeadline of the green light from IVASS being the main catalyst. The release of second quarterresults will be the second main catalyst in our view, with the potential marginal good newscoming from the Life business. Short Cattolica (Underperform – TP €14.5) – lack of upside on fundamentals (our TPis 4% below current prices) is the main reason of our negative stance on Cattolica, coupledwith limited liquidity and suboptimal governance (per capita vote).Asset gathering: AzimutThe current year is proving to be a golden year for Italian asset gatherers, as inflows are close tohistorical highs and in some cases to record highs. The weighted average performance year-to-date isgood too, and both items are supporting AUM growth. Margins are generally flattish, with averagemanagement fees confirming to be resilient and sustainable, while performance fees were a bit lessgenerous compared to the first part of 2012, but still above the historical average.The asset gathering business is confirming to be a low capital intensive business with a strong freecash flow generation. In this context, sound top line growth couples with high visibility of dividendswhich are sustainable, in our view. Recruitment is a positive surprise to us, as the three listed Italianasset gatherers are finding a good source of recruitment from private bankers working for the majorretail banks. Azimut (Outperform TP €18.0) – Even though we remain convinced that all the threelisted asset gatherers are high quality names, our preference at the moment is Azimut. Webelieve Azimut is cheaper compared to other two names, particularly on P/Es calculated onrecurring earnings. We also see market consensus too low on both inflows and 2013E-2015EEPS.Real Estate sector: downgrading Beni StabiliThe disclosure of first quarter results by Italian real estate stocks confirmed the trends highlighted inthe last year and in particular: Negative impact of IMU on net rental income – while in 1Q 12 companies charged the IMUtax on the basis of provisional rates then amended in full year results, the application in 1Q 13of the definitive and higher IMU rates had a negative impact on net rents. Subdued rental market in retail – falling consumption rates by Italian households wasreflected in an increasing weakness of some shopping malls that saw growing vacancy anddecreasing rents. Negligible income of trading – not surprisingly considering the low market liquidity and lackof debt financing, portfolio rotation in the first quarter was very low.Partially in contrast with the uninspiring picture emerging from first quarter results, the comments onthe prospects for the sector in the rest of the year were generally more positive, highlighting a slightimprovement in the investment market liquidity due to increasing interest by opportunistic investorsfor peripheral markets such as Italy after the strong rally of core European markets. Conversely, theongoing weakness of the Italian economy coupled with a large vacancy in most markets, pointstowards a continuing weakness in the rental market in the coming months. Beni Stabili (Neutral TP €0.60) – We downgrade Beni Stabili to Neutral since despitethe group’s traditional strength - high quality portfolio, sustainable leverage and good
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 76management, the stock performance is expected to suffer from worsening macro conditionsand financial volatility. Prelios (Neutral TP €0.90) – Prelios remains the riskier name in the sector. Pending thefinalisation of the groups’ recapitalisation and debt restructuring, we see Prelios’ plan ofgradually becoming a pure asset manager as ambitious in the current market environmentwhile the gradual divestment of its large portfolio of co-invested assets is particularly difficultin the current market environment. IGD (Neutral, TP €0.96) – In the first quarter the group’s cashflows were resilient despiteworsening sector’s fundamentals reflected in a decrease of the financial occupancy in Italianshopping malls from 96.3% in December 2012 to 95% in March on the back of the ongoingweakness of retail sales (around -5% in the quarter) We are confirming our Neutralrecommendation on IGD with a target price of €0.96 considering on one side its attractive9.3% yield and on the other the difficult moment of retail sales in Italy.Telecom and Media: Long EI Towers and CairoThe release of the first quarter results has confirmed our fears over a prolonged negative trend for thedomestic advertising collection, notwithstanding a less challenging comparison: first feedback on thesecond quarter seems to suggest the second derivative is still far from showing any improvement,while the optimistic stance on the recovery expected for the last months of 2013 is losing momentum.In the first months of 2013, the domestic telecom market has come under pressure mainly as a resultof increased competition, the weak macroeconomic environment and adverse regulation such as themost recent reduction in MTR: we believe this trend will persist in the rest of the year, with thelikelihood of a partial recovery from 2014 onwards.We think the most important topics for the rest of the year in the TMT space are: the continuedweakness of the domestic advertising market, the auction for the new frequencies, the tough situationof the state-owned RAI TV, the possible spin-off of the Network Business from Telecom Italia, and apossible market consolidation in the domestic mobile industry.Italian advertising market down 19% in 4M 13, risks of further audience fragmentationOur estimates call for 12% YoY decline for the domestic advertising market in 2013 (after the -14% YoYdrop recorded in 2012). This would reduce the Italian advertising market below the €7bn threshold in2013, the lowest level of the last ten years. We note at the beginning of the year some industryoperators suggested a more optimistic stance, expecting some recovery in the second half, but recentcomments seem to suggest a more cautious approach is needed: unemployment remains at recordlevels, and consumptions remain extremely week. Waiting for more visibility to come (for the timebeing we are at 10-15 days in the TV space), we note April figures on Italian advertising marketreleased by Nielsen confirmed a 18% drop. Auditel figures recently confirmed the long tail offragmentation, with thematic channels getting close to the 20% threshold, and the core channels ofRAI and Mediaset under severe pressure: Mr Flavio Zanonato – Minister of Economic Development –recently confirmed the Government will complete the auction to assign three national frequencies (inorder to avoid the EU fine pending on Italy because of the lack of TV pluralism); as a consequence,new international players could decide to join an already-crowded arena (SKY still extremelyaggressive, Discovery doubled its presence a couple of months ago, Cairo new owner of La7). Online isthe only segment with positive results (+1% YoY growth in 4M 13, now representing 8% of the totaladvertising pie), we believe tablet PCs and video content will further sustain this growth, but we notefor the time being there is not a clear winner in the space, net of the over-the-top international giants(Google, Apple, Amazon, Facebook, Netflix). We also note the circulations figures for newspapers &magazines are suggesting visible high single-digit drops.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 77Network spin-off, possible market consolidation, new attitude from EU regulatorsThe mixed impact of adverse regulation, a weak macroeconomic environment and a fierce competitiontranslated in an extremely negative outcome for the telecom industry: in the first quarter, mobileservice revenues posted a double-digit decline, with operators confirming the tough environment forthe next months as well as a straight focus on costs reduction. Waiting for some visibility to come fromthe EU regulator (Ms Neelie Kroes, vice-president of EU telecommunications commission andresponsible of the Digital Agenda is expected to unveil measures in order to harmonise the industry,aimed at helping telecoms companies to speed up the rollout of faster 4G & NGA services), the focus inItaly will be on the possible spin-off of the TI network. At the end of May, Telecom Italia’s Board ofDirectors approved the network spin-off plan: i) the new structure will result in the so-calledEquivalence of Input model of equality of treatment, which could allow for more favourable rules onthe incumbent for what concerns its retail offers, ii) the BoD also confirmed the powers granted tomanagement in order that contacts continue with CDP about its potential acquisition of a stake in theaccess network company’s share capital, and iii) TI has informed the Communications RegulatoryAuthority about the plan which now has to assess its impact on the current regulatory framework. Atthe same time, local press argued about a potential market consolidation in the mobile industry, withHutch’s 3 Italia – that recently became the most aggressive player in the market – rumoured to beinterested in an integration with TIM or Wind.Long Cairo & EI Towers– short Mediaset Long EI Towers (Outperform TP €36.1) – In our view, EI Towers has clear options foremerging as a winner in the space, as the new owner of frequencies will need a towercompany to broadcast the signal and the option of a national tower company could representa game changer in the industry. EI Towers seems well-positioned to benefit from thepotential TV Auction and potential M&A activity, in our view; Long Cairo Communications (Outperform TP €3.58) – We identify Cairo as anextremely appealing name, because of the turnaround story of La7. La 7 is achieving brilliantaudience results (close to the 5% threshold in 24/7, +50% increase in prime time to 6%) anda solid cash position. At current prices, Mediaset is implying a 12% year-on-year advertisinggrowth for the next year, while for La7 estimates are suggesting a flattish trend: the crossbetween these data and the audience ones leaves space for interesting upside on Cairo, in ourview; Mediaset (Neutral, TP €1.70) – The demanding multiples (18x 2014E EV/EBIT, morethan twice the sector average) and new international players that could join an alreadycrowded arena, identify Mediaset as the short side of our media trade.Automotive sector – FIAT Industrial the core longThe recent trends in the sector are mixed and vary by geographical area: Central/Northern Europe isweakening (German car registrations down double digits in May) while Southern Europe seems to bebottoming out (Italian car sales still negative in May with a positive new orders figure) although withsome discontinuities (2Ws sales still strongly negative although, again, improving versus the YtDtrend).
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 78German car sales (YoY trend) Italian car sales and order intake (YoY trend)2.9%-5.0% -4.7%-10.9%0.5%-3.5%-16.4%-8.6%-10.5%-17.1%3.8%-9.9%-20.0%-15.0%-10.0%-5.0%0.0%5.0%Jun12Jul12Aug12Sep12Oct12Nov12Dec12Jan13Feb13Mar13Apr13May13-24.0%-20.9%-19.9%-25.5%-12.0%-19.7%-21.8%-17.2%-17.0%-4.5%-10.8%-8.0%-35.0%-30.0%-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%Jun12Jul12Aug12Sep12Oct12Nov12Dec12Jan13Feb13Mar13Apr13May13Car sales Order intakeSource: Thomson Reuters Datastream, Mediobanca SecuritiesAsia has been deteriorating recently, mostly on the construction side, but also 3Ws and 2Ws seemvolatile. Elsewhere, the reference markets are booming and accelerating or in some cases, as in the US,are not showing the signs of weakness that some were expecting: the market is growing high single-digit with solid pricing and supported by cheap financing. Latam is growing at double-digit pace, withastonishing numbers on tractors/combines (+27% and +65% YtD in Brazil, respectively).We remain cautious going forward due to the fact that many company indications and consensusfigures factor in a strong 2H13, accelerating versus 1H13. Therefore, the only stock we are positive onis Fiat Industrial, while we remain negative on Pirelli and Piaggio. Long Fiat Industrial (Outperform, TP €10.4). Our positive stance on the stock derivesfrom the fact that the share price valuation does not reflect the benefits of the merger withCNH, which will be evident from September when the deal will be closed and the companywill meet investors on road shows. Although we remain negative on the macro cycle, thetractor market is unrelated to GDP, and this is exactly why Fiat Industrial has been a laggardin the recent industrials’ rebound: a positive going forward if our top-down view is correct.For the remaining two businesses, Iveco and CE, the former will benefit from some pre-buythat should help to weather difficult reference markets. The stock trades at a discount bothversus peers (15%) and on its SoP (20%). Short Pirelli (Underperform, TP €7.0). The stock has been supported by a speculativeappeal that faded away recently when Mr Tronchetti and Mr Malacalza finalised anagreement on Camfin stabilising the shareholder base. We are now back to fundamentals thatare solid elsewhere but weak in Europe, where we see price pressure and do not share the+5/6% price/mix embedded in company’s guidance. Industry overcapacity would push pricecuts, and the negative registration figures seen in Germany are making the situation evenworse. The stock trades at premium versus peers and is not as cheap on an absolute basis (11x2013E earnings versus peers at 9.3x). Short Piaggio (Underperform, TP €1.6). Our negative stance on the stock is related tothe high exposure of the company to Europe (60% of its annual turnover) and to Italy inparticular (17% of sales), which are still showing a downward trend although the pace of thedecline is somehow improving. Exposure to emerging countries (25% to India and 15% to SEAsia) is not proving as supportive as expected: macro conditions in India remain difficult andhigh borrowing costs and inflation hit demand of vehicles, while the SE Asian sales have beenaffected by an economic slowdown in Vietnam (which accounts for c.70% of the sales in thearea) and by some company-specific issues in penetrating the Indonesian market. EPS
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 79estimates on the stock have continuously been cut in the past months, but this trend has notbeen followed by the stock price, which remains resilient. On our estimates, the stock tradesat a 15% premium versus peers on 1YR fwd earnings.Rating ChangesBanco Popolare (Underperform from Neutral, TP € 0.95 ) Stretched Basel III Capital levels – With a fully-phased Basel III CET1 below 8% in 2013E, wesee BP as undercapitalised. We view this as light in both absolute terms, given the magnitudeof the deteriorated loan book, and relative to peers. Risk of converting €1bn convertible bondcannot be neglected in case of further macro deterioration; Multiples after theoretical recapitalisation do not look compelling – Re-aligning BP to thepeers’ average CET1 ratio (10%) would require €1.3bn capital infusion, making BP trading at0.5X TE 2013E TE, a generous multiple in light of 4% return in 2014E; The most exposed to risks related to an ECB-led review of lenders’ asset quality – In Mar-13BP’s net deteriorated loans accounted for more than 200% of CT1 and coverage stood at a low26%. Adding €1.3bn of shortfall in the stock of provisions for expected loss, the coveragewould rise to 34%, but net deteriorated loans would still account for 200% of CT1 (ex.collaterals). Needless to say, stress-scenario on something exceeding 100% of CT1 would havea large impact on capital; Limited options to replenish capital in case something goes wrong – BP benefits from theroll-out of IRBA models and cannot count on a sudden reduction of RWA. Aside from organiccapital generation, BP could only count on challenging assets disposal to strengthenregulatory capital. The sale of the 39% stake in consumer finance arm would free-up 50bps ofCET1, but we do not see CASA as interested. We see no other asset whose sale couldcontribute to capital strengthening.BP Emilia Romagna (Neutral from Outperform, TP € 5.80) Fairly valued after earnings cut – After reducing 2014E earnings by 33%, we expect BPER todeliver c.5% RoTE in 2014E. This makes the current 2013E 0.5X T/E fair; Little margin of safety in our forecasts – Our estimates are based on short-term ratesmatching the 0.5% policy rate and on lowering cost of risk, debatable assumptions in absenceof a macroeconomic recovery; Faint memories of halcyon days – First quarter results show that the current profitabilityhovers over 3% RoTE, unlikely to expand soon due to the asset quality burden; Little room to improve capital ratios – Apart from the roll-out of IRB models, we see fewoptions to improve the bank’s capital ratios. This is a weakness in a deteriorating macroenvironment and in light of the ECB-led review of lenders’ asset quality.Beni Stabili (Neutral from Outperform, TP € 0.60) On the back of our cautious stance on the Italian macroeconomic and financial picture, we donot see room for improvement for the Italian real estate sector for which we expect furtherlow liquidity and price weakness and we prefer to reduce the exposure to the real estatesector, downgrading Beni Stabili from Outperform to Neutral (TP from €0.65 to €0.60). Wehave updated our 2013-2014 estimates on Beni Stabili, the main change being the inclusionof some asset write-downs this year, the logical consequence of the macro and sector pictureoutlined above. Relatively speaking, we still regard Beni Stabili as the best name in the Italian real estatesector, in the light of its high quality and resilient portfolio, lower financial leverage and
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 80strong management. We think that Beni Stabili is well positioned in the current difficultenvironment as the group’s management has reacted to the prolonged crisis of the Italian realestate sector by focusing on fundamentals: Sustain rental income and asset value through active asset management – carefully selectedcapex and refurbishments and continuous contact with tenants in order to anticipate theirneeds, are the basis of Beni Stabili asset management. This activity allowed the group to keepthe vacancy rate at minimal levels (less than 2% in core portfolio) while in 1Q 13 Beni Stabilihas already renewed 95% of the contracts expiring in FY 13 and achieved an overall 1.2%increase in gross rents. On the other hand, asset rotation in the current market conditions is marginal and after agood first quarter, when the group was able to close sales for €64.2m, Beni Stabili has seen aslow down in the market as even potential Italian buyers are in a wait and see mood in thecurrent uncertain situation. Deleverage, early renegotiation of expiring debt and diversification of funding – Beni Stabiliaims to decrease its LTV from the current 49% to 45%, a process that will take time in thecurrent illiquid environment. On the other hand, after the huge work done in 2012 and in 1Q13, the group’s financial structure is now secure having covered 2013-2014 maturities. Inparticular, in 1Q 13 the group successfully issued €225m of convertible bonds at 3.375%increasing the diversification of its L/T financial sources.Saras (Underperform from Outperform, TP € 0.95) Last Friday, the offer by Rosneft on 7.29% of Saras’ capital terminated. We believe that overthe last two months Saras’ share price has benefitted from the ongoing tender offer, alsogiven the uncertainty related to the final number of shares delivered by investors (foreigninvestors in fact needed special authorization to adhere to the offer, as it was promoted onlyin Italy). Going forward, the lack of M&A support should bring the focus back to fundamentals, whichin 2Q13 were quite weak: so far, EMC benchmark averaged ca. USD-0.9/bll and the factorswhich allow Saras to overperform the market have somehow eased (heavy-light spreadalmost zeroed and conversion spread fallen to below USD300/ton). In light of these poorfigures and of the adverse macro trends we are cutting our 2013E and 2014E comparableEBITDA for the refining business to €-29m and €69m (from the previous €18m and €76mrespectively). Following the revision in estimates our new SoP valuation points to a €0.95 fair value for thestock. The bulk of the revision stands in the refining business valuation which passes from€279m EV to €104m. Marketing valuation was increased by some €25m EV as we included2014E figures in the valuation while Power Gen and Wind businesses were left broadlyunchanged. Although the Rosneft deal gave the market a clear indication on how much therefining business of Saras might be worth and although we consider it a realistic possibilityfor Rosneft to further increase its stake in Saras in the future, we downgrade the stock toUnderperform as we believe that, for the time being, the focus of the market will go back tofundamentals.Trevi Fin. (Underperform from Neutral; TP €4.45) After the stock’s recent rally, driven by US investors’ appreciation of the technological level ofthe drilling equipment and management efforts to penetrate new markets and clients, thestock is currently trading at too demanding multiples in our view. The overall excitement on drilling business growth prospects is grounded, but the key point isthat the core business, which accounts for 60% of sales and 50% of consolidated EBITDA, is
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comItaly17 June 2013 ◆ 81still sluggish, with material risks of further contraction on European markets (particularlywith reference to Soilmec). The US market and the historically rich niche of dam repair are still missing, with fewcontracts expected to be awarded. The backlog is broadly stable, but consists of small-scalecontracts that do not generate material synergies with the equipment unit. Cash flow generation remains the big issue. Although cash flow should peak in 2Q and 3Q,following the delivery and payments of rigs manufactured in 2012 (for a total amount ofaround €80m), net debt is expected to remain stable at €417m by year-end, or 3.5xdebt/EBITDA. In addition, the current macro picture might lead to a further deterioration in receivables,increasing the level of write-downs and shaving some percentage points off profitability.Yoox (Neutral from Outperform, TP € 18.10) Since our upgrade in November 2012, YOOX has been a strong outperformer, with the shareprice jumping by 46% vs. 6% for the Italian market. Since the IPO in November 2009, it haseven trebled its market cap to the current €1bn thanks to its positive track record of growthand latest business developments, which have supported investor confidence in its uniquegrowth profile and hidden potential. Our TGT price of €18.1 per share leaves only 9% upside on current price, and we currently seeno reason for a further re-rating in the short term. Accordingly we are adjusting our rating to NEUTRAL. We continue to like YOOX businessmodel but suggest time has arrived for some profit taking profit. We see no catalyst in the short term, but on a long term perspective we see some industry-specific growth opportunities YOOX might leverage on and namely m-commerce, and crosschannelling.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comDisclaimer17 June 2013 ◆ 82GENERAL DISCLOSURESThis research report is prepared by Mediobanca - Banca di credito finanziario S.p.A. ("Mediobanca S.p.A."), authorized and supervised byBank of Italy and Consob to provide financial services, and is compliant with the relevant European Directive provisions on investment andancillary services (MiFID Directive) and with the implementing law.Unless specified to the contrary, within EU Member States, the report is made available by Mediobanca S.p.A. The distribution of thisdocument by Mediobanca S.p.A. in other jurisdictions may be restricted by law and persons into whose possession this document comesshould inform themselves about, and observe, any such restrictions. 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INVESTORS: This research report has not been approved or licensed by the UAE Central Bank, the UAESecurities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) or any other relevant licensing authorities in theUAE, and does not constitute a public offer of securities in the UAE in accordance with the commercial companies law, Federal Law No. 8 of1984 (as amended), SCA Resolution No.(37) of 2012 or otherwise. This research report is strictly private and confidential and is being issuedto sophisticated investors.REGULATORY DISCLOSURESMediobanca S.p.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware thatthe firm may have a conflict of interest that could affect the objectivity of this report. Mediobanca S.p.A. or its affiliates or its employeesmay effect transactions in the securities described herein for their own account or for the account of others, may have long or shortpositions with the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other servicesfor such issuer or its affiliates. The organisational and administrative arrangements established by Mediobanca S.p.A. for the managementof conflicts of interest with respect to investment research are consistent with rules, regulations or codes applicable to the securitiesindustry. The compensation of the analyst who prepared this report is determined exclusively by research management and senior
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comDisclaimer17 June 2013 ◆ 83management (not including investment banking). Analyst compensation is not based on investment banking revenues, however,compensation may relate to the revenues of Mediobanca S.p.A. as a whole, of which investment banking, sales and trading are a part.For a detailed explanation of the policies and principles implemented by Mediobanca S.p.A. to guarantee the integrity and independence ofresearches prepared by Mediobancas analysts, please refer to the research policy which can be found at the following link:http://www.mediobanca.it/static/upload/b5d/b5d01c423f1f84fffea37bd41ccf7d74.pdfUnless otherwise stated in the text of the research report, target prices are based on either a discounted cash flow valuation and/orcomparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of thisfundamental valuation is adjusted to reflect the analysts views on the likely course of investor sentiment. Whichever valuation method isused there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseenchanges in competitive pressures or in the level of demand for the companys products. Such demand variations may result from changes intechnology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected bychanges in taxation, in exchange rates and, in certain industries, in regulations. All prices are market close prices unless differentlyspecified.Rating system - methodology 6 months horizon relative to local & European indicesOutperform: >+10% performance vs benchmark;Neutral: -10% to +10% performance vs benchmark;Underperform: <-10% performance vs benchmark;Under review: fair value (and rating) under scrutiny for a possible change;Not rated: impossible to determine a fair value (and rating) due to either because there is no sufficient visibility on the companys key itemsor because it has not been finalized yet a complete analysis of the company. Alternatively, it is applicable pursuant to Mediobanca S.p.A.policy in circumstances when Mediobanca S.p.A. is acting in any advisory capacity in a strategic transaction involving this company.Our rating relies upon the expected relative performance of the stock considered versus its benchmark. Such an expected relativeperformance relies upon forecasts for the companys financials that we now consider accurate but that could change in the future as aconsequence of unexpected events. Our recommendation relies upon the expected relative performance of the stock considered versus itsbenchmark. Such an expected relative performance relies upon a valuation process that is based on the analysis of the companys businessmodel / competitive positioning / financial forecasts. The companys valuation could change in the future as a consequence of amodification of the mentioned items.Proportion of all recommendations relating to the first quarter 2013Outperform Neutral Underperform Under Review Not Rated37,41% 44,22% 17,69% 0% 0,68%Proportion of issuers to which Mediobanca S.p.A. has supplied material investment banking services relating to the first quarter 2013Outperform Neutral Underperform Under Review Not Rated14,55% 6,15% 0% 0% 0%To access previous research reports and establish trends in ratings issued, please see the restricted access part of the "MB Securities"section of the Mediobanca S.p.A. website at www.mediobanca.it.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comDisclaimer17 June 2013 ◆ 84COMPANY SPECIFIC REGULATORY DISCLOSURESRATINGThe present rating in regard to AEFFE has not been changed since 14/05/2013.In the past 12 months, the rating on YOOX has been changed. The previous rating, issued on 13/11/2012, was OUTPERFORM.The present rating in regard to ANSALDO STS has not been changed since 16/01/2013.In the past 12 months, the rating on UNIONE DI BANCHE ITALIANE has been changed. The previous rating, issued on 25/03/2013, wasNEUTRAL.The present rating in regard to ASTALDI has not been changed since 23/04/2013.In the past 12 months, the rating on TREVI FINANZIARIA has been changed. The previous rating, issued on 18/04/2012, was NEUTRAL.The present rating in regard to AUTOGRILL has not been changed since 06/02/2013.In the past 12 months, the rating on TENARIS has been changed. The previous rating, issued on 15/10/2012, was NEUTRAL.The present rating in regard to AZIMUT has not been changed since 14/03/2011.In the past 12 months, the rating on SARAS has been changed. The previous rating, issued on 18/09/2012, was OUTPERFORM.The present rating in regard to BANCA MONTE PASCHI SIENA has not been changed since 27/07/2011.In the past 12 months, the rating on SAIPEM has been changed. The previous rating, issued on 30/01/2013, was UNDERPERFORM.The present rating in regard to BANCA POP. MILANO has not been changed since 18/01/2012.In the past 12 months, the rating on SAFILO has been changed. The previous rating, issued on 24/11/2011, was OUTPERFORM.The present rating in regard to BANCO POPOLARE has not been changed since 17/06/2013.In the past 12 months, the rating on PRYSMIAN has been changed. The previous rating, issued on 26/11/2012, was NEUTRAL.The present rating in regard to BENI STABILI has not been changed since 17/06/2013.In the past 12 months, the rating on PRADA has been changed. The previous rating, issued on 26/09/2012, was OUTPERFORM.The present rating in regard to BP EMILIA ROMAGNA has not been changed since 17/06/2013.In the past 12 months, the rating on PIRELLI & C. has been changed. The previous rating, issued on 20/07/2012, was NEUTRAL.The present rating in regard to BRUNELLO CUCINELLI has not been changed since 12/06/2012.In the past 12 months, the rating on PIAGGIO has been changed. The previous rating, issued on 13/09/2012, was NEUTRAL.The present rating in regard to BUZZI UNICEM has not been changed since 27/03/2013.In the past 12 months, the rating on MEDIOLANUM has been changed. The previous rating, issued on 05/12/2006, was OUTPERFORM.The present rating in regard to CAIRO COMMUNICATION has not been changed since 26/10/2011.In the past 12 months, the rating on MEDIASET has been changed. The previous rating, issued on 01/08/2012, was UNDERPERFORM.The present rating in regard to CAMFIN has not been changed since 23/01/2013.In the past 12 months, the rating on FINMECCANICA has been changed. The previous rating, issued on 01/08/2012, was NEUTRAL.The present rating in regard to CAMPARI has not been changed since 29/10/2012.In the past 12 months, the rating on FIAT has been changed. The previous rating, issued on 04/05/2009, was OUTPERFORM.The present rating in regard to CATTOLICA ASSICURAZIONI has not been changed since 05/03/2007.In the past 12 months, the rating on FERRAGAMO has been changed. The previous rating, issued on 05/10/2011, was OUTPERFORM.The present rating in regard to CEMENTIR has not been changed since 21/05/2012.In the past 12 months, the rating on DANIELI has been changed. The previous rating, issued on 22/11/2012, was NEUTRAL.The present rating in regard to CREDEM has not been changed since 05/01/2009.In the past 12 months, the rating on CAMPARI has been changed. The previous rating, issued on 03/09/2012, was OUTPERFORM.The present rating in regard to CREDITO VALTELLINESE has not been changed since 06/06/2012.In the past 12 months, the rating on CAMFIN has been changed. The previous rating, issued on 27/03/2012, was OUTPERFORM.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comDisclaimer17 June 2013 ◆ 85The present rating in regard to DANIELI has not been changed since 06/05/2013.In the past 12 months, the rating on BUZZI UNICEM has been changed. The previous rating, issued on 06/02/2012, was NEUTRAL.The present rating in regard to DE LONGHI has not been changed since 13/02/2012.In the past 12 months, the rating on BP EMILIA ROMAGNA has been changed. The previous rating, issued on 06/06/2012, was OUTPERFORM.The present rating in regard to EI TOWERS has not been changed since 24/10/2006.In the past 12 months, the rating on BENI STABILI has been changed. The previous rating, issued on 22/02/2010, was OUTPERFORM.The present rating in regard to ENI has not been changed since 25/02/2004.In the past 12 months, the rating on BANCO POPOLARE has been changed. The previous rating, issued on 05/07/2011, was NEUTRAL.The present rating in regard to FERRAGAMO has not been changed since 18/10/2012.In the past 12 months, the rating on AUTOGRILL has been changed. The previous rating, issued on 02/08/2012, was NEUTRAL.The present rating in regard to FIAT has not been changed since 31/10/2012.In the past 12 months, the rating on ASTALDI has been changed. The previous rating, issued on 07/08/2009, was OUTPERFORM.The present rating in regard to FIAT INDUSTRIAL has not been changed since 19/03/2012.In the past 12 months, the rating on ANSALDO STS has been changed. The previous rating, issued on 25/07/2012, was OUTPERFORM.The present rating in regard to FINMECCANICA has not been changed since 09/11/2012.In the past 12 months, the rating on AEFFE has been changed. The previous rating, issued on 22/03/2011, was OUTPERFORM.The present rating in regard to GENERALI ASS. has not been changed since 30/07/2012.The present rating in regard to YOOX has not been changed since 17/06/2013.The present rating in regard to GEOX has not been changed since 11/05/2012.The present rating in regard to UNIPOL has not been changed since 14/03/2013.The present rating in regard to IMMOBILIARE GRANDE DISTRIBUZIONE has not been changed since 20/11/2007.The present rating in regard to UNIONE DI BANCHE ITALIANE has not been changed since 30/05/2013.The present rating in regard to IMPREGILO has not been changed since 22/10/2009.The present rating in regard to UNICREDIT has not been changed since 26/03/2012.The present rating in regard to INDESIT has not been changed since 04/05/2011.The present rating in regard to TREVI FINANZIARIA has not been changed since 17/06/2013.The present rating in regard to INTESA SANPAOLO has not been changed since 08/04/2011.The present rating in regard to TODS has not been changed since 05/10/2011.The present rating in regard to ITALCEMENTI has not been changed since 10/08/2010.The present rating in regard to TENARIS has not been changed since 15/01/2013.The present rating in regard to LUXOTTICA has not been changed since 24/11/2011.The present rating in regard to TELECOM ITALIA has not been changed since 25/01/2012.The present rating in regard to MEDIASET has not been changed since 26/11/2012.The present rating in regard to SARAS has not been changed since 17/06/2013.The present rating in regard to MEDIOLANUM has not been changed since 25/03/2013.The present rating in regard to SAIPEM has not been changed since 03/06/2013.The present rating in regard to PIAGGIO has not been changed since 12/10/2012.The present rating in regard to SAFILO has not been changed since 22/04/2013.The present rating in regard to PIRELLI & C. has not been changed since 17/10/2012.The present rating in regard to PRYSMIAN has not been changed since 01/03/2013.The present rating in regard to PRADA has not been changed since 09/04/2013.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comDisclaimer17 June 2013 ◆ 86The present rating in regard to PRELIOS has not been changed since 13/02/2009.INITIAL COVERAGEAEFFE initial coverage as of 17/09/2007.YOOX initial coverage as of 21/01/2010.ANSALDO STS initial coverage as of 04/07/2006.UNIPOL initial coverage as of 21/07/2003.ASTALDI initial coverage as of 22/06/2009.UNIONE DI BANCHE ITALIANE initial coverage as of 16/04/2007.AUTOGRILL initial coverage as of 21/02/2003.UNICREDIT initial coverage as of 30/06/2003.AZIMUT initial coverage as of 01/08/2005.TREVI FINANZIARIA initial coverage as of 06/03/2006.BANCA MONTE PASCHI SIENA initial coverage as of 12/02/2004.TODS initial coverage as of 28/01/2003.BANCA POP. MILANO initial coverage as of 05/03/2003.TENARIS initial coverage as of 15/04/2003.BANCO POPOLARE initial coverage as of 25/07/2007.TELECOM ITALIA initial coverage as of 12/02/2003.BENI STABILI initial coverage as of 18/06/2007.SARAS initial coverage as of 22/05/2012.BP EMILIA ROMAGNA initial coverage as of 06/06/2012.SAIPEM initial coverage as of 20/02/2003.BRUNELLO CUCINELLI initial coverage as of 12/06/2012.SAFILO initial coverage as of 19/12/2006.BUZZI UNICEM initial coverage as of 21/03/2003.PRYSMIAN initial coverage as of 26/06/2007.CAIRO COMMUNICATION initial coverage as of 12/02/2003.PRELIOS initial coverage as of 20/02/2003.CAMFIN initial coverage as of 27/03/2012.PRADA initial coverage as of 21/02/2012.CAMPARI initial coverage as of 21/03/2003.PIRELLI & C. initial coverage as of 12/05/2004.CATTOLICA ASSICURAZIONI initial coverage as of 11/04/2005.PIAGGIO initial coverage as of 14/09/2006.CEMENTIR initial coverage as of 23/01/2003.MEDIOLANUM initial coverage as of 19/03/2003.CREDEM initial coverage as of 21/03/2003.MEDIASET initial coverage as of 19/03/2003.CREDITO VALTELLINESE initial coverage as of 18/12/2007.LUXOTTICA initial coverage as of 27/06/2003.DANIELI initial coverage as of 23/05/2006.ITALCEMENTI initial coverage as of 31/01/2003.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comDisclaimer17 June 2013 ◆ 87DE LONGHI initial coverage as of 28/01/2003.INTESA SANPAOLO initial coverage as of 16/04/2007.EI TOWERS initial coverage as of 24/10/2006.INDESIT initial coverage as of 16/02/2006.ENI initial coverage as of 25/02/2004.IMPREGILO initial coverage as of 24/06/2005.FERRAGAMO initial coverage as of 05/09/2011.IMMOBILIARE GRANDE DISTRIBUZIONE initial coverage as of 18/06/2007.FIAT initial coverage as of 07/07/2003.GEOX initial coverage as of 01/03/2005.FIAT INDUSTRIAL initial coverage as of 04/01/2011.GENERALI ASS. initial coverage as of 23/01/2003.FINMECCANICA initial coverage as of 28/03/2003.SPECIALISTThis report was prepared by Mediobanca S.p.A. in its capacity as specialist of the following companies, in compliance with the obligationsset forth by the rules of the markets organized and managed by Borsa Italiana S.p.A.: AEFFE, ANSALDO STS, EI TOWERS, YOOX. MediobancaS.p.A. expects to prepare research reports on the following companies at least on a semi-annual basis: AEFFE, ANSALDO STS, EI TOWERS,YOOX.MARKET MAKERMediobanca S.p.A. is currently acting as market maker on equity instruments, or derivatives whose underlying financial instruments arematerially represented by equity instruments, issued by the following companies: ASTALDI, AUTOGRILL, AZIMUT, BANCA POP. MILANO,BANCO POPOLARE, BP EMILIA ROMAGNA, BUZZI UNICEM, CAMPARI, CATTOLICA ASSICURAZIONI, CREDEM, ENI, FIAT, FIAT INDUSTRIAL,FINMECCANICA, GENERALI ASS., GEOX, IMPREGILO, INTESA SANPAOLO, ITALCEMENTI, LUXOTTICA, MEDIASET, MEDIOLANUM, PIRELLI & C. ,PRYSMIAN, SAIPEM, SARAS, TELECOM ITALIA, TENARIS, UNICREDIT, UNIONE DI BANCHE ITALIANE, UNIPOL.MEDIOBANCA REPRESENTATION ON GOVERNING BODIESMediobanca S.p.A. or one or more of the companies belonging to its group have a representative on one of the governing bodies of thefollowing companies: ANSALDO STS, FINMECCANICA, GENERALI ASS., PIRELLI & C. , TELECOM ITALIA.MEDIOBANCA SIGNIFICANT FINANCIAL INTERESTSAs of the date of publication of this research report, Mediobanca Securities USA LLCs parent company, Mediobanca S.p.A. beneficially owns1% or more of any class of common equity securities of the securities of the following companies: ANSALDO STS, PRYSMIAN.Mediobanca S.p.A. or one or more of the companies belonging to its group hold material open positions in financial instruments, orderivatives whose underlying financial instruments are materially represented by financial instrument, issued by the following companies:GENERALI ASS..Mediobanca S.p.A. or one or more of the companies belonging to its group owns a "major holding" (as defined in the EU TransparencyDirective as implemented in each relevant jurisdiction) in the following companies: GENERALI ASS., PIRELLI & C. , PRELIOS. Please consultthe website of the relevant competent authority for details. As of the date of publication of this research report, Mediobanca SecuritiesUSA LLCs parent company, Mediobanca S.p.A. beneficially owns 1% or more of any class of common equity securities of the securities of thefollowing companies: GENERALI ASS., PIRELLI & C. , PRELIOS.ISSUER REPRESENTATION ON MEDIOBANCA GOVERNING BODIESCertain members of the governing bodies of the following companies are also members of the governing bodies of Mediobanca S.p.A. or oneor more of the companies belonging to its group: ANSALDO STS, BANCA MONTE PASCHI SIENA, CAIRO COMMUNICATION, CAMFIN, CREDITOVALTELLINESE, DANIELI, ENI, FINMECCANICA, INDESIT, INTESA SANPAOLO, ITALCEMENTI, LUXOTTICA, MEDIASET, MEDIOLANUM, PIRELLI & C. ,PRELIOS, SAFILO, SAIPEM, TREVI FINANZIARIA.The following companies have a representative on one of the governing bodies of Mediobanca S.p.A. or one or more of the companiesbelonging to its group: TELECOM ITALIA, UNICREDIT.ISSUER SIGNIFICANT FINANCIAL INTERESTS ON MEDIOBANCAThe following companies own a "major holding" (as defined in the EU Transparency Directive as implemented in each relevant jurisdiction)in Mediobanca S.p.A.: MEDIOLANUM, UNICREDIT, UNIPOL. Please consult the website of the relevant competent authority for details.LENDING RELATIONSHIPMediobanca S.p.A. or one or more of the companies belonging to its group have a significant lending relationship with the followingcompanies or one or more of the companies belonging to their group: AUTOGRILL, GENERALI ASS., TELECOM ITALIA, UNIPOL.
  • Unauthorizedredistributionofthisreportisprohibited.ThisreportisintendedforAntonio.Guglielmi@mediobanca.co.ukfromMB.Antonio.Guglielmi@mediobanca.comDisclaimerMEDIOBANCA – Banca di Credito Finanziario S.p.A.Piazzetta Enrico Cuccia, 1 - 20121 Milano - T. +39 02 8829.133 Grosvenor Place – London SW1X 7HY – T. +44 (0) 203 0369 530CORPORATE FINANCE SERVICE CONTRACTSIn the past 12 months, Mediobanca S.p.A. or one or more of the companies belonging to its group have entered into agreements to delivercorporate finance services to the following companies or one or more of the companies belonging to its group: BANCA MONTE PASCHISIENA, ENI, IMMOBILIARE GRANDE DISTRIBUZIONE, ITALCEMENTI.Mediobanca S.p.A. or one or more of the companies belonging to its group are currently providing corporate finance services to thefollowing companies or one or more of the companies belonging to its group: BANCO POPOLARE, CATTOLICA ASSICURAZIONI,FINMECCANICA, GENERALI ASS., IMPREGILO, TELECOM ITALIA.CONTRACTUAL AGREEMENTS RE: FINANCIAL INSTRUMENTSMediobanca S.p.A. or one or more of the companies belonging to its group are currently fulfilling agreements to issue financial instrumentslinked to financial instruments of the following companies: MEDIASET.UNDERWRITINGMediobanca S.p.A. is committed to purchase financial instruments remaining unsubscribed in the context of financial instruments offeringof the following companies: BANCA POP. MILANO.ANALYSTS PERSONAL FINANCIAL INTERESTSFERRARI GIANLUCA holds no.600 shares of AZIMUT.PAVAN FABIO holds no.100 shares of EI TOWERSCOPYRIGHT NOTICENo part of the content of any research material may be copied, forwarded or duplicated in any form or by any means without the priorconsent of Mediobanca S.p.A., and Mediobanca S.p.A. accepts no liability whatsoever for the actions of third parties in this respect.END NOTESThe disclosures contained in research reports produced by Mediobanca S.p.A. shall be governed by and construed in accordance withItalian law.Additional information is available upon request.Mediobanca is acting as financial co-advisor to Telecom Italia for the network spin-off.Mediobanca will act as co-underwriter of the capital increase.