Valerio Baselli: 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 resigned. 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.
Of course, political instability is not ideal, but with 63 governments in the last 70 years, unfortunately this is not new for Italy, and we will indeed see the 64th in the next few months, probably after having locked down the Budget Act and reaching an agreement on the electoral law.
In such a context, it does not seem impossible the surge of a n anti-euro political party. The possible exit of Italy from the Euro, an event that has been discussed in recent weeks, but that seems very unlikely to us, would have disastrous consequences for the European Union as whole, as well as the Italian banking system, which holds Italian debt.
That’s why, now that we have the results, Morningstar Analysts encourage Italian banks, namely Monte dei Paschi di Siena and UniCredit, to aggressively move forward with planned capital raises and start down the path of banking system reform.
The outcome of the referendum is likely to increase the volatility on the Italian stock market in the short term, but that does not change our opinion on Italian Banks. Mediobanca remains our most compelling idea in the Italian banking system. We think it’s undervalued by about 30% and It has strong asset quality because of its conservative underwriting and lower relative operating costs. At the same time, the bank has rationalized its balance sheet by reducing its reliance on more a debt financing and replacing it with cheaper retail deposits.
