Since the days of the Greek financial crisis, investors have frequently wondered which Eurozone shoe would be the next to drop. Italy has often been mentioned as that shoe and that sentiment is currently back in vogue. That could prove to be problematic for the iShares MSCI Italy Capped ETF (NYSEArca: EWI), which is already one of this year’s worst-performing developed markets single-country exchange traded funds.
Last year, reforms to Italy’s banking sector were seen as a potential driver of improved equity market performance. Specifically, the reforms would turn these types of banks into possible takeover targets almost instantly. For instance, the new rules could be a catalyst for a potential merger between UBI Banca and Banca Monte dei Paschi di Siena.
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However, reforms have been slow moving and investors are increasingly concerned about the fragility of banks in Italy, the Eurozone’s third-largest economy.
“EWI has become one of the year’s worst-performing, losing about a quarter of its value in 2016. Unfortunately, Boris Schlossberg, managing director of FX strategy for BK Asset Management, doesn’t see an Italian renaissance anywhere in the cards, and says Italy’s financial sector is to blame,” according to CNBC.
[related_stories]In Italy, regulators are currently working to configure a bad debt company of sorts to help Italian banks deal with a rising non-performing loan problem. Earlier this year, Economy Minister Pier Carlo Padoan called a meeting in Rome with executives from Italy’s top financial institutions on Monday to hash out a plan for a state-backed fund to acquire bad loans and cover capital shortfalls, reports Silvia Aloisi for Reuters.
“About 24 percent of EWI is made up of financials. The problem is that Italy’s banks are burdened by about $400 million worth of loans, sending investors fleeing from these financial institutions. Many of the country’s banks have seen their share prices plunge by more than half this year alone, with flagship names like the Monte dei Paschi di Siena falling by almost 80 percent,” reports CNBC.
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Italian banks’ bad loan problem has “beome more pressing during years of economic stagnation. A highly fragmented and inefficient industry doesn’t help — Italy has more than 600 banks, supporting 52 bank branches for every 100,000 adults. Germany has 14 bank branches per 100,000 adults, and the United States 38,” according to CNN Money.
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