Italian Banks Need to Be Aggressive
This weekend's referendum and the resignation of Prime Minister Matteo Renzi are neither Brexit nor Trump moments for European investors.
Italy voted no by a 20-point margin in Sunday’s referendum on constitutional changes. Given the magnitude of the loss, Prime Minister Matteo Renzi said he would resign. We see this as neither a Brexit nor a Trump moment for European investors, as Italian politicians have been aware of this possible outcome since the summer, and they have been clear on the next steps needed. Given the reduced uncertainty and expectation that the Italian status quo will be maintained (Italy has had 63 governments in 70 years), even if we see it as less than ideal, we would encourage the banks and investors to move forward with planned capital raises and undertake much-needed banking system reforms. Mediobanca remains our most compelling and undervalued (by about 30%) idea in the system thanks to its its clean balance sheet. While we expect market volatility in the coming days, we plan to maintain our fair value estimates and economic moat ratings for the Italian banks.
We had expected the no vote to prevail, despite our view that the parliamentary reform would have benefited Italy’s economic and political system. This is the fifth time Italians have rejected similar reforms since the early 1980s. We believe Renzi’s mistake was indicating that he would resign if the reforms failed to pass, which personalized the vote instead of focusing it on the substance of the reforms. With a smaller margin of victory for the no vote, we think it would have been possible for Renzi to remain in place, but the scale of the defeat was too much; the 20-point defeat was significantly larger than prereferendum polling of a 5- to 7-point loss.
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