Feeling under pressure? Monte dei Paschi shares plummet ahead of European banking stress tests

Hayley Kirton
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Shares in Monte dei Paschi are down more than 80 per cent compared with this time last year (Source: Getty)

Investors may well be feeling the strain ahead of the European bank stress test results, as shares in troubled Monte dei Paschi have plunged more than eight per cent today.

Shares in the Italian bank are down 8.2 per cent at €0.29 at time of writing and have lost over 80 per cent of their value in the last year.

The results of the European bank stress tests, which are due on Friday, are expected to be less than glowing for Italy. Not only are low interest rates creating issues industry wide, the country's lenders are saddled with around €360bn (£301.3bn) in non-performing loans.

Italian banks' shares were also not immune from the UK's vote for Brexit last month, as many were sent tumbling in the fallout.

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It has been widely speculated that Prime Minister Matteo Renzi has locked horns with the European Commission over the last few weeks, as the former seeks approval for plans to inject around €40bn into Italy's banking system.

However, such a deal would involve going around EU laws which were put in place after the 2008 financial crisis.

"Several Italian banks are likely to drop below the minimum requirements in the European Central Bank's 'adverse financial scenario testing' and thus require recapitalisation," said Steve Hussey, head of financial institutions credit research at AllianceBernstein. "The real question is how the tightrope of recapitalization can be achieved within the new Bad & Doubtful Debt Reserve framework."

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According to a note from Goldman Sachs, which was released last week, Monte dei Paschi would not meet the stress test threshold for capital ratios, should the reference point be the same as that which was used in the 2014 stress tests.

In comparison, the British banks, including Lloyds, Barclays and HSBC, would safely beat this target.

However, Italy is not the only European country with banking sector woes. Shares in Deutsche Bank have lost over half of their value over the course of the last year.

The German banking giant, along with Santander, also failed the US Federal Reserve's stress tests last month.

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