Around 500 years ago during the Renaissance era a number of charitable money lenders were created across what is now Tuscany in Italy to combat the damaging effects of loan sharks. Back then merchant bankers still limited their business to the noble or political and religious elite until Franciscan Friars persuaded the Vatican to found a bank that would set interest rates at cost and take collateral. These banchi di pegn (or pawnbrokers) and similar banks then begun to spread with one rich trading city-state, that of Siena, creating their very own such bank with taxpayers’ money. This innovative project grew a core portfolio of agricultural loans along with other banking business to a previously neglected populous. After a significant loss financing the exploration of Christopher Columbus in 1492 its rotating structure of leadership instilled a risk-averse culture and lending practice.
In 1624, after around two centuries of such profitable activity, this bank changed its name to Monte dei Paschi di Siena (BMPS). It’s relatively stable business model continued to make profits and acquire farmland and develop other businesses for another couple of centuries. By the 1900s it had begun to expand across the nascent unified Italy. A few decades later, in the economic crisis of the 1930s, BMPS remained resilient and throughout the late 80s it was considered Italy’s most profitable bank.
However expanding rapidly in the 90s drained the bank’s reserves and profits leading to its public offering in 1999. Some failed and successful acquisitions and mergers further shifted BMPS sources of profit and risk. Then in 2012 during the European sovereign-debt crisis, as a major holder of Italian government debt, the bank suffered losses in excess of $2 billion. Following this came the 2013 scandal of hidden losses and derivatives with further recapitalisation and bailouts. And now (just like half a millennium ago) the bank may receive taxpayers’ money but this time as a lifeline in the form of €15bn of EU state aid.
Investing in such temporary propping is not part of our investment philosophy and until there is a fundamental basis for investing in the region we see other creditor regions offering much more favourable risk adjusted returns. Had we had the opportunity over the past five hundred years perhaps we would have invested in a number of Italian credits such as Monte dei Paschi di Siena; companies with strong asset bases and proven business models afford the breathing space to cope with shocks and monitor any trends of deteriorating business or financial health. But in recent decades Italy’s financial health has mostly followed a similar story to that of BMPS and in the face of such indebtedness, necessity of rescue packages and the political headwinds (as Matteo Renzi looks set to resign later today) Italy along with much of indebted Europe does not seem to offer long term fundamental value.