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Italy
17 June 2013 Country Update-Italy
Antonio Guglielmi
Equity Analyst
+44 (0)203 0369 570
antonio.guglielmi@mediobanca.com
Riccardo Rovere
Equity Analyst
+39 02 8829 604
riccardo.rovere@mediobanca.com
Italy seizing up – caution required
A lot has changed, nothing has changed - déjà vu of 1992
Italy’s investment case seems a revival of 1992, when a political and macro crisis forced it to devalue
the Lira and exit the EMS with €140bn austerity and disposal. Debt service was 12% of GDP then
versus 6% now but current macro situation is worse and devaluation is no longer an option. Hence
it cannot be ruled out Italy having to apply for an EU bailout. The 250 bps spread tightening since
the Nov 2011 peak merely shows the market’s reward for monetary news from Frankfurt (LTRO,
OMT), NY and Tokyo (QE) rather than for political news from Rome. Argentina’s default risk, a
possible bailout of Slovenia, more macro pain, unplugging of QE, German court issues on OMT, a
lack of delivery from Letta could all lead to spread widening again, in our view.
The recession is spreading to large corporates – take the ILVA case
April data show Italy’s macro entered its acute phase with €2.3bn new NPLs in the month, VAT
collection at -7% YoY, consumers -4.4% YoY (vs -3.3% last year), and further credit tightening (-
1.1% YoY vs -0.7% in March). Unemployment subsidies are now up 7x since 2007 and we foresee
more welfare burden on the public accounts. The pain has now spread to large corporates, 160 of
which are under special crisis care. Banks’ exposure to ILVA for instance is capped to just 12bps
CT1 risk, but 40k jobs are at risk (12k directly) equivalent to 10% of the total jobs Italy lost in 2012.
Italian banks: Real estate and funding the threat, SME ABS the missed chance
Residential RE deals are down 26% YoY to 430k, the lowest since 1985. With 0.044
constructions per inhabitant in 2000-10, Italy is nowhere near Spain, which is 2.5x higher.
However, at the current coverage (10 p.p. below 2007), a further 10% RE price drop would wipe
out 170bps of 2012 Basel II.5 CT1: MPS, BP, BPER and BPM would sit below 8%, while ISP and
UCG would stay anchored at 9%. Deposits up 6% YoY confirm their stickiness, and €20bn AM
inflows in Q1 reversed the €270bn outflows since 2006 thanks to low yields on govies. But heavy
reliance on €260bn LTRO could erode c14% of our 2015e EPS when refunded to ECB. Draghi’s
recent cooling on the ECB potentially buying SMEs loans does not help. ECB-eligible SME loans
in our coverage range between €45bn (AA rated) and €145bn (A rated), i.e. between 6-15% of
Italian corporate loans. No delivery here will be a big missed chance for Italy to sustain growth.
No room for a large wealth tax but €75bn seems feasible
The debate on a large wealth tax aimed at cutting debt/GDP to 100% has three constraints: 1)
65% of the €9.5trn Italian wealth is RE already taxed above the EU average (direct real estate
taxes at 1.6% of Gross Disposable Income vs 1%); 2) only €2trn, i.e. 20% of wealth, is liquid
assets – 80% of which is retail savings at risk of outflows; and 3) it would hardly change the long
term dynamics of debt now due to >1x fiscal multiplier depressing consumption. We found room
for €75bn extra resources from: convergence between RE and financial assets tax rate (€3bn);
large fortunes tax a la French ISF (€5bn); a progressive wealth tax on the wealthiest 10% of the
population (€43bn); the Switzerland deal on repatriated funds (€20bn); and €4bn lower cost of
debt from the above. The resulting Debt/GDP down 4p.p. and 1p.p. GDP of recurrent growth
measures could create a virtuous circle but only if Italy can at the same time improve its
extremely poor track record on structural reforms and fight on tax evasion.
Mediobanca Italian Corporates Survey: credit access the main problem
More than 50 companies in our coverage responded to our first survey questionnaire aimed at
gauging sentiment: 55% of the industrials pointed to credit access as their major issue, which is why
85% of them are focused on cost-cutting and only 20% planning to increase their investments. As a
result, 50% foresee no top line growth in 2013. Low revenues and poor macro make less austerity
the clear consensus request: 44% seek growth measures, 26% ask for lower taxes and 21% for PA
restructuring vs 6% only for cutting public debt and 3% for complying with the Fiscal Compact.
Downgrading BP, BPER, Beni Stabili, Saras, Trevi and Yoox
After a 5% cut post Q1, we keep our EPS estimates broadly unchanged but reflect our cautiousness
in a string of downgrades – analysed separately in the accompanying reports published today: Beni
Stabili, BPER and Yoox to N from O, BP and Trevi to U from N, and Saras to U from O.
Italian Equity Team
Simonetta Chiriotti +39 02 8829 933
Gian Luca Ferrari +39 02 8829 482
Andrea Filtri +44 203 0369 579
Emanuela Mazzoni +39 02 8829 295
Fabio Pavan +39 02 8829 633
Chiara Rotelli +39 02 8829 931
Andrea Scauri +39 02 8829 496
Niccolò Storer +39 02 8829 444
Alessandro Tortora +39 02 8829 673
Massimo Vecchio +39 02 8829 541
Change in Recommendation
Company Rating TP
BENI STABILI
Neutral
(from Outperform)
€0.60
BPER
Neutral
(from Outperform)
€5.80
BP
Underperform
(from Neutral)
€0.95
SARAS
Underperform
(from Outperform)
€0.95
TREVI
Underperform
(from Neutral)
€4.45
YOOX
Neutral
(from Outperform)
€18.1
Source: Mediobanca Securities
Conviction pair trades by sector
Sector Long Short
Banks UCG, UBI, PMI ISP, BP, BPER
Cement Cementir Buzzi
Capital goods PRY, Danieli TFI, FNC
Oil ENI SARAS
Branded /
consumers
Autogrill Geox
Insurance /
assets gath.
Unipol, AZM Cattolica
Telecom /
media
El Towers,
Cairo
Mediaset
Auto Fiat Ind Pirelli, PIA

Italy
17 June 2013 ◆ 2
Contents
Executive Summary 3
Recession heading for the worst 14
Real Estate – Italy is no Spain, but . . . 25
Deposits and Am inflows - the good news 38
Tax burden on wealth: Italy versus Europe 46
Limited room for a large wealth tax but €75bn seems feasible 52
Mediobanca Italian Corporates Survey 2013 63
Conviction ideas and ratings changes 68

Italy
17 June 2013 ◆ 3
Executive Summary
Walking on a thin line
A lot has changed, nothing has changed - Reiterating our negative stance on Italy
Four months after the inconclusive elections at the end of February, the investment case of Italy offers
a mixed picture, in our view:
 Not much seems to have changed in Italy on the political side if Italian commentators’
favourite game at the moment is guessing how short-lived the Letta large coalition
government will be.
 However, quite a lot has changed outside of Italy due to the OMT announcement that gained
momentum and the Japanese QE measures that provided a strong relief to the Italian spread.
We believe the lower spread coupled with the removal of the excessive deficit procedure could offer
room for up to €15bn spending boost to Letta, i.e.1 p.p. of GDP. However, we see this as unlikely and
surely not enough to make us feel more positive on the country. Indeed, with this note we reiterate our
negative stance on Italy in light of further macro deterioration that we see ahead. As we show below,
the spread contraction of the last 18 months is more related to QE and monetary newsflow from NY,
Tokyo and Frankfurt (LTRO, OMT) than the markets’ appreciation of what is happening in Rome.
Italian spread (vs German Bund, blue line lhs axis) and short term yield gap between
BTP and BOT (as a % of BOT yield, red line rhs axis)
-200%
-100%
0%
100%
200%
300%
400%
0
100
200
300
400
500
600
OMTLTRO 2 Japan QE
European sovereign crisis with
Greece
Monti fiscal
consolidation
package
inconclusive
Italian election
Italian market
labour reform
ESM becomes
operative
ECB starts buying Italian
govies under the
Security Market Program
Monti appointed
Italian Prime
Minister
Source: Bank of Italy, Mediobanca Securities analysis
The recession is heading for the worst . . .
Italian unemployment subsidy applications increased to more than 1bn hours today from 185m hours
in 2007, highlighting the magnitude of the current crisis. Five years into the recession mean that Italy
is heading for the worst, in our view. As recently highlighted by the BoI, over the 2007-12 period,
Italian GDP contracted by 7 p.p., disposable income by 9 p.p. and industrial production by 25pp. It
could still take more than 10 years to return to pre-crisis output levels. Not only are macro data poor
per se, but the most recent (April 2013) figures showed a negative second derivatives with macro
deterioration accelerating: €2.3bn new NPLs generation in April, VAT collection down 7% YoY,
LTRO 1

Italy
17 June 2013 ◆ 4
consumer expenditure down 4.4% YoY (versus -3.3% YoY last year), and further credit tightening (-
1.1% YoY lending in April versus -0.7% in March).
. . . and is now hurting the large corporates – the ILVA case
If SMEs and households were first to be hit by the crisis, it now looks like the time has arrived for large
corporates to also pay their toll. Some 160 large Italian corporates are now under special crisis
administration. We highlight in this note the recent example of the ILVA environmental case, maybe
the most problematic large corporate situation in Italy today. The good news is that banks’ exposure to
ILVA seems to cap the capital erosion risk to 12bps of CT1. The bad news is that it looks very difficult
to square the circle between job security (12k employees of ILVA at risk, 40k when considering
indirect workers) and respect for EU environmental directives (high mortality rate in the area of
ILVA’s operations proved to be due to the plant’s emissions of a carcinogenic polluting agent).
We have been here before - A déjà vu of 1992
We see many similarities between the situation in the country today and that of 20 years ago, when
political instability and macro meltdown forced Italy to exit the European Monetary System in spite of
the Lira devaluation, of some Lit 100bn (€50bn) austerity measures undertaken by the Amato
government and of a large privatization plan which followed. We think the situation is worse today as
macro is hurting the economy more heavily and Italy can no longer leverage on currency devaluation.
What could go wrong? Argentina and more
This is why we think time is a very scarce resource for Italy: the next six months will be crucial to
assess if the country can leverage on the ‘low spread QE-driven momentum’ and on the new
government to reverse the poor macro trends of the last decade, or if it will inevitably end up in a EU
bailout request, as we currently suspect.
The potential default of Argentina, the likely bailout of Slovenia, the recurring risk for the Letta
government to fall short of support from the Parliament or the unplugging of the FED QE measures
are just few examples of what could become triggers of renewed market concern on the sustainability
of the Italian debt. Argentina in particular worries us, as a new default seems likely.
Argentina Sovereign curve yield (Lhs) and debt maturity
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
3 mnths 1 yrs 2 yrs 3yrs 4yrs 5yrs
10/06/2013 01/01/2013
2.6 2.5 2.2
4.2
1.7
1.1
1.7
15.3
14.4
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 2014 2015
$bns
Source: Mediobanca Securities, Bloomberg
Not only could Argentina’s problems reignite concern on debt sustainability in peripheral Europe, but
it could also have a direct impact on the Italian economy given the exposure to Argentina of many
Italian corporates. TI and Tenaris, for instance, have double-digit turnover exposure to the country.

Italy
17 June 2013 ◆ 5
Italian companies’ exposure to Argentina
Rating TP Turnover exposure EBITDA exposure EPS exposure
Tenaris Underperform 13.6 30.0% 23% 20%
Telecom Italia Not Rated - 13.0% 10% 2%
Campari Neutral 5.45 2.9% 2.5% 2.5%
Fiat Neutral 4.5 2.0% n.m. n.m.
Pirelli Underperform 7.0 4.0% n.m. n.m.
Trevi Underperform 4.45 3.2% 5.9% 7.9%
Generali Neutral 15.0 0.8% n.m. n.m.
Source: Company data, Mediobanca Securities
No deposit outflows and AM back to inflows – the good news
Banks deposits’ stickiness . . .
Most recent data show that Italian banks are not suffering deposit outflows as the amount of deposits
showed a 6% annual growth as at March 2013, and the stock is broadly stable at c.€1.45trn. Deposits
soared by roughly €20bn in March 2013 versus February 2013, almost equally split between time
deposits and current accounts. This trend offset the €20bn monthly drop in bonds. As a result, the
Eur20bn net funding increase at Italian banks in March versus February is almost entirely explained
by repos.
. . . and strong AM inflows
As well as deposits confirming their stickiness, appetite for risk has emerged when looking at recent
strong AM inflows: after Eur270bn of cumulated outflows since 2006, 1Q 2013 brought Eur20bn
inflows, benefiting both assets gatherers and banks. Our correlation analysis points to the drop in
government bond yields post the OMT announcement as a key driver of the recent AM inflows (Rhs
chart below).
Italian Banks – Funding Mix, € bn Inverse correlation: AUM inflows vs 2Y BTP yield
-
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2,500
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Deposits Fixed Maturity Current… Deposits Reedem. at Notice Repos Bonds
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
-50,000
-40,000
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
IT asset management sector - flows Yield 2YR IT BTP
Source: Bank of Italy, ABI, Mediobanca Securities analysis

Italy
17 June 2013 ◆ 6
Heavy reliance on ECB funding the bad news
Whilst current accounts’ outflow does not seem to be an issue for now, the ECB data confirm Italian
banks’ funding is still over reliant on the central bank. Italian banks have taken c.€260bn from the
ECB and have deposited just €12bn with it, meaning the vast majority of the LTRO liquidity is still
sitting on Italian banks’ liabilities – thus providing a crucial albeit temporary buffer to their funding
needs. The refunding of such ECB liquidity is scheduled for late 2014/early 2015. Should Italian banks’
cost of funding remain at high levels, the Italian banking system may be forced to cut back its
sovereign exposure or replace the LTRO funding with more expensive liquidity, at the detriment of
some 14% of their 2015 profitability, based on our calculations.
Italian Banks – ECB Deposits and funding (€bn) ECB Funding by country
-275
-250
-225
-200
-175
-150
-125
-100
-75
-50
-25
0
25
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Deposits at the ECB Liabilities from the ECB
0.3
0.5
0.7
0.9
1.1
1.3
1.5
0%
10%
20%
30%
40%
50%
60%
70%
80%
€ trn
GR IRE IT ES PRT Total ECB Facility (RHS)
Source: Datastream, Company Data, Mediobanca Securities analysis
Real estate: Italy is no Spain, but asset quality will get worst
Italy is no Spain
Recent data show an ongoing marked slowdown of the Italian real estate market with residential
transactions down 26% YoY to 430k, the lowest level since 1985. Real estate prices in Italy contracted
by 12% since their 2008 peak versus a 25% correction in Spain. There are very good reasons for Italy
not to fear a ‘Spanish-like’ real estate contraction: 1) some 40% of the national value added in Spain
came from real estate in 2007, 10 p.p. higher than Italy; 2) housing completions over the last decade
were 2.5x larger in Spain than Italy despite a 30% larger population in Italy: 0.11 houses per
inhabitant in Spain versus 0.044 in Italy; 3) Italian households’ indebtedness is the lowest in EU; and
4) average loan-to-value stands at 65% in Italy versus 72% in Spain.
Italy - Number of RE residential transactions (000) Nomisma Retail real estate prices
464
558
687
769
835
866 877
816
689
614617
603
448
400
450
500
550
600
650
700
750
800
850
900
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
70
80
90
100
110
120
130
140
150
160
170
180
190
200
1H
92
1H
93
1H
94
1H
95
1H
96
1H
97
1H
98
1H
99
1H
00
1H
01
1H
02
1H
03
1H
04
1H
05
1H
06
1H
07
1H
08
1H
09
1H
10
1H
11
1H
12
Residential Office Retail
Source: Agenzia del Territorio, Nomisma, Mediobanca Securities
Simulation 1: up to 45% RE price correction would still leave coverage above 100%
Whilst Italy is no Spain, we think it fair to assume that a likely further real estate price correction
could affect Italian banks’ balance sheets currently sitting on a cash coverage of 41%, some 10 p.p.

Italy
17 June 2013 ◆ 7
below the 2007 levels within our coverage universe. In the first approach of our simulation, we find
that Italian banks could bear up to 45% downward revision of their real estate collaterals and still
maintain coverage above 100%.
Simulation 2: 10% RE price drop would erode 17% of CT1 if coverage stays unchanged
Alternatively, we are interested in quantifying the capital erosion stemming from 10% real estate
prices drop subject to keeping unchanged total coverage ratios at current levels. The result is that
some 10% lower collateral value at constant coverage ratio would wash out some 17% of the aggregate
CT1 capital of our banks with CT1 ratio dropping by 170bps to 8.7% (Rhs chart below).
Estimated Max Revision of RE Collaterals Values to
Hit 100% Coverage Ratio, 2012
Estimated CT1 Impact from 10% Drop in Market Price
of RE Collaterals, 2012 (coverage unchanged)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Aggregate
UBI
BP
CREDEM
CREVAL
BPER
MPS
ISP
BPM
UCG
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Aggregate
ISP
UCG
MPS
BP
UBI
BPER
BPM
CREDEM
CREVAL
CT1 Impact CT1 after RE Collaterals Mark-down
Source: Company Data, Mediobanca Securities analysis
Five banks would sit below 2012 Basel II.5 8% CT1: MPS, BP, BPER, BPM and CVAL, but the last three
show room to restore capital ratios through IRB models. ISP and UCG would remain anchored above
9% CT1 ratio. In summary, although we recognise Italy is no Spain, we foresee further balance sheet
clean-up ahead for Italian banks, possibly triggered by the asset quality stress test that the ECB is set
to carry out next year.
Tax burden on wealth – Italy versus Europe
Some 15 years of divergence from Europe . . .
From 1995 to 2010, Italy has pursued a fiscal policy divorcing from the rest of Europe, i.e. lowering the
tax burden on capital and wealth (and consumption) at the expenses of taxes on income. Based on
2010 figures, we calculate that taxes on the stock of capital and wealth accounted for 2.5% of Italian
GDP in 2010 (aligned to the EU average) from c.4% in 1995. The reduction of the taxation of the stock
of capital/wealth in Italy has to be ascribed mostly to the progressive relative reduction of the taxation
on real estate, culminating in the elimination of ICI on the main property in 2010. In 2010, the
amount of direct real estate taxes amounted to €9bn versus almost €13bn in 2007, less than 0.6% of
GDP in 2010 versus 0.85% in 1995.
Italy – Taxes on Wealth as % of GDP, 1995-2010 Tax receipts breakdown, 2010
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ITALY EU 27 AVG
BE BG CZ DK DE EE IE EL ES FR IT CY LV LT LU HUMT NL AT PL PT RO SI SK FI SE UK NO EU
27
PERSONAL
INCOME TAX
CORPORATE
INCOME TAX
TAXES ON
STOCK OF CAPITAL
Source: Eurostat, Mediobanca Securities analysis

Italy
17 June 2013 ◆ 8
. . . reversed in 12 months (2012) due to higher real estate taxes
The trend has been reversed in 12 months as the IMU (real estate) and the additional 0.15% taxation of
custodian assets brought the burden of capital taxation to the level of 1995, making Italy the nation
with the third highest taxation of capital in EU-27 after France and the UK. IMU brought the recurrent
taxation of capital and wealth at almost €60bn p.a., equal to c.4% of Gross Disposable Income, the
level of 1995. The trend of the past 15 years was thus reversed in one year (2012).
Italy – Taxes on Capital as Percent of GDP, 1995-2010
€bn 1995 2010
Extra Revenues
(IMU + Fin. Assets)
2010
(incl. IMU + Fin. Assets)
Real Estate Taxes 13.0 19.6 +16 35.1
Financial Assets 5.4 7.9 +5 12.9
Total Taxes on Capital 33.8 38.9 +21 59.4
GDP 865 1,556 1,556 1,556
Taxes on Capital as % of GDP 3.9% 2.5% +1.3% 3.8%
Source: Company data, Mediobanca Securities analysis and estimates
Such jump has to be ascribed to a much more severe taxation of real estate assets. Using Eurostat data
(i.e. the items named 29A in Eurostat statistics), we calculate that taxes on real estate assets (€8.6bn)
represented 0.57% of the Italian Gross Disposable Income in 2010. The Italian level of property
taxation was below EU 27 (arithmetic) average of the same year, equal to 0.68% of Gross Disposable
Income. Using a weighted average for the EU, we calculate that taxes on real estate assets would
account for c.1.0% of Gross Disposable Income, pushed upwards by the high level of taxation in France
and UK, more than balancing the low taxation in Germany. In this case, the taxation of Italian real
estate assets was much lower than the EU average.
Today we could not make the same statement. Including the incremental revenues from the
introduction of IMU in 2012 (equal to €15.5bn) in respect of ICI in 2010, the total taxes on real estate
would hit c.€24bn, and the weight of real estate taxation would account for c.1.6% of Gross Disposable
Income in 2010, among the highest in the Euro Area and well above the EU average. Hence, with the
introduction of the IMU tax, the direct real estate taxation moved in Italy from 0.6% of gross
disposable income to 1.6% versus 1% EU weighted average.
EU – Real Estate Taxation as Percent of Gross Disposable Income, 2010
2010 Real Estate Taxes (€bn, A) Gross Disp. Income (€bn, B) A / B
BE 4.4 359 1.2%
CZ 0.3 138 0.2%
DK 3.2 237 1.4%
DE 11.3 2,511 0.5%
IE 1.4 129 1.1%
ES 9.5 1,026 0.9%
FR 45.7 1,942 2.4%
IT 8.6 1,528 0.6%
IT (including IMU) 24.1 1,528 1.6%
HU 0.3 91 0.3%
NL 3.0 570 0.5%
AT 0.7 283 0.2%
PL 0.8 344 0.2%
PT 1.0 168 0.6%
RO 0.5 126 0.4%
SK 0.2 64 0.3%
FI 0.0 179 0.0%
SE 2.7 352 0.8%
UK 26.2 1,705 1.5%
EU Weighted Avg 1.0%
Source: Eurostat, OECD, Mediobanca Securities analysis and estimates

Italy
17 June 2013 ◆ 9
Taxation of financial wealth already looks high as well . . .
In 2010, also taxation of financial assets at 0.5% of GDP in Italy stands above the Eu average, as the
total amount of taxes on financial assets accounted for 0.5% of GDP in Italy versus 0.25% average for
France, Germany, Spain and UK. In other words, already in 2010 Italy showed the highest tax burden
on financial assets. The situation will change in 2013 with the introduction of the 0.15% taxation of
financial wealth. If we added the estimated €5bn tax receipts, the taxation of financial assets would
reach approximately €13bn, more than double the amount charged in France (excluding the ISF).
Selected EU Countries – Breakdown of Taxes on Stock of Capital/Wealth, 2010
€bn ITALY ITALY (IMU/Fin. Ass) FRANCE GERMANY SPAIN UK
Real Estate 20 35 56 17 20 66
Financial Assets 8 13 6 n.a. n.a. 3
Wealth Tax 0 0 5 n.a. 0 0
Inheritance Tax 0.5 0.5 8 4 2 3
Other 11 11 9 4 3 1
Total 39 59 83 25 26 74
Source: Eurostat, Mediobanca Securities analysis
Although being the highest among the five largest countries, the taxation of financial assets accounted
for just 0.22% of the Italian households’ wealth in 2010, below the 0.35% calculated as taxation of real
estate assets as percent the Italian households’ wealth in real estate. Adding the estimated additional
tax receipts from IMU (€16bn) and financial assets (€5bn), the gap will widen further to c.25bps.
Italy – Tax Receipts on Real Estate and Financial Assets as Percent of Wealth, 2010
€bn Wealth Tax Receipts
Taxes as %
of Wealth
Tax Receipts
(incl. IMU, Fin. Assets)
Taxes as %
of Wealth
Real Assets 5,541 20 0.35% 35 0.63%
Financial Assets 3,546 8 0.22% 13 0.36%
Source: Eurostta, Bank of Italy, Mediobanca Securities analysis and estimates
. . . and will move from 2.5% of Gross Disposable Income in 2010 to 3.9%
Another way to look at the weight of taxation of capital is to measure it against Gross Disposable
Income. In 2010, we calculate taxation of capital in Italy accounted for c.2.5% of Gross Disposable
Income (GDI), aligned to the EU average. Adding €21bn from the newly-introduced taxes the ratio
would soar to 3.9%, making Italy the third highest taxation of stock in the Euro Area after UK, France
and Norway. Hence, we conclude that the taxation of capital in Italy is already among the highest in
Europe and is also high in respect of the income generated by the country annually.
EU – Taxes on Capital as Percent of Gross Disposable
Income, 2010
Italy – Taxes on Capital as Percent of Gross
Disposable Income, 1995 - 2010
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
NO
UK
FR
LU
IT (Imu + Others)
BE
IS
DK
HU
IE
ES
EU 27 Wavg
IT
PT
CY
PL
NL
FI
SE
EL
RO
DE
AT
LV
SI
BG
CZ
EE
SK
LT
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2010+IMU
Source: Company data, Mediobanca Securities analysis and estimates

Italy
17 June 2013 ◆ 10
After benchmarking the Italian tax profile of wealth – both capital and real estate – with its EU peers,
we find no room to further close the gap through higher taxation as Italy already sits above the
average. This leads us to investigate alternative ways for the country to quickly raise taxes should this
be needed in the case of further pressure on public accoutns.
Wealth tax - In search of €75bn alternative sources
Three reasons to avoid a large wealth tax
The need for a large wealth tax is a recurring debate in Italy. We estimate a €400bn wealth tax would
be needed to bring the debt / GDP ratio below 100% without disposals. We think such an approach is
not feasible when considering that:
 Some 65% of the €9.5trn Italian wealth is already accounted for by real estate, offering no
room for further tax rises relative to Europe.
 Only 20% of the Italian wealth is constituted of liquid assets, i.e. c.€2trn, 80% of which is
retail savings: (bank deposits 30% of total liquid assets, postal savings 15%, banks bonds 18%
and Italian govies 9%). Raising €400bn from this pot means 35% of Net Liquid Wealth, far
too high not to run the risk of deposits outflows and over penalisation of small retail savers.
 A large one-off wealth tax spread over the whole population would hardly change the long-
term dynamics of Italy’s debt, when assuming current >1x fiscal multiplier expected to
depress consumers as already confirmed by the lower than expected VAT tax collection
following recent austerity measures.
Italy – Breakdown of Gross Wealth, 2011
Amount - €bn As % of Total
Residential Property 5,027 53% Not Liquid
Valuables 125 1% Not Liquid
Non-Residential Buildings 342 4% Not Liquid
Plants, Machineries et cetera... 237 2% Not Liquid
Land 247 3% Not Liquid
Total Real Estate and Physical Assets 5,978 63%
Equity in Non-Listed Limited Corporations 421 4% Not Liquid
Equity in Non-Limited Firms 205 2% Not Liquid
Life Technical Reserves 680 7% Not Liquid
Others (Commercial Loans, Shareholders Loans to Cooperatives, Others) 119 1% Not Liquid
Banknotes, Coins 114 1% Liquid
Bank Deposits 651 7% Liquid
Postal Savings 327 3% Liquid
Italian Gov. Bonds and T-Bills 184 2% Liquid
Italian Corporate Bonds 3 0% Liquid
Italian Banks' Bonds 373 4% Liquid
Foreign Securities 146 2% Liquid
Equity in Listed Limited Corporations 73 1% Liquid
Mutual Funds Units 248 3% Liquid
Total Financial Assets 3,542 37%
Total Gross Wealth 9,519 100%
Our doable €75bn wealth tax proposal . . .
Adversely affected by such constraints, we investigate the room for up to €75bn alternative sources for
the government, taking tax progression into account aimed at minimizing the negative impact on
consumers.
 €3bn (up to €7bn if including SMEs) from converging the fiscal treatment of financial assets
to that of real estate.
 €5bn from a large fortunes tax replicating the French ISF.
 €43bn wealth tax on 10% of the wealthiest population.

Italy
17 June 2013 ◆ 11
 €20bn from an agreement with Switzerland on repatriated funds.
 €4bn from lower interest service on debt stemming from the above measures.
Italy – Summary of Interventions
€bn Total Goal
Recurring Interventions 8
Alignment Taxes Fin. Assets 2013 3 Reduce Income Taxes
Wealth Tax on Wealthy Population 5 Reduce Income Taxes
Una Tantum Interventions 67
Wealth Tax 43 Debt Reduction
Taxation of Repatriated Funds 20 Debt Reduction
Lower Cost of Debt 4 Reduce Income Taxes
Total 75
Source: Eurostat, Mediobanca Securities estimates
. . . resulting in 4 p.p. of debt/GDP reduction and growth measures for 1 p.p. GDP
The conclusion would be a mix of 4 p.p. of debt/GDP reduction, not necessarily over-penalising
consumers as it would come from the wealthiest population, and room for recurring growth measures
amounting to 1 p.p. of GDP. A proper attack on tax evasion and the black economy would clearly bring
us to a much larger number, but the poor track record of Italy in this regard leads us to prefer not to
include such options in our analysis.
Mediobanca Italian Corporates Survey
Credit access is the main problem for 55% of our sample; 50% expect no top line growth
More than 50 Italian companies in our coverage responded to our survey questionnaire aimed at
gauging expectations on the back of the recent political deadlock. Although roughly one out of three
companies considered the latter as a very negative on their economics, it is not politics per se the main
source of concern. Some 55% of industrials point to credit access as their major problem, whilst banks
mentioned the high and volatile cost of funding (lhs chart below). If 85% of the banks foresee a decent
top line growth this year, more than 50% of industrials expect no top line growth (rhs chart).
Worrying factors for the coming future Revenue growth expectations in 2013
29%
57%
23%
16%
43%
10%
11%
13%
45%
55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MB Sample Financials Industrials
Credit access Capital markets access Interest rates volatility Interest rates
30%
37%
14%
14%
13%
11%
13%
27%
33%
16%
71%
3%3%
14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Extremely A lot Moderatly Neither much nor little Slightly No
85% focus on cost-cutting and only 20% is increasing investments versus last year
This is why 85% of our sample are considering further costs rationalisation and only 20% are planning
to raise investments versus last year. The recent decree to speed up payments to corporate by the
Italian PA does not seem to represent a game changer, as only 24% say this could have a significant

Italy
17 June 2013 ◆ 12
impact. Some 80% of the panel expects that the weak scenario could lead to some sector consolidation,
but only 8% believe M&A opportunity would come from distressed PA assets.
Plan to increase investments Plan to further optimise costs, 2013
No
17%
Slightly
30%
Neither much nor
little
20%
Moderatly
13%
A lot
17%
Extremely
3%
Slightly
10%
Neither much
nor little
14%
Moderatly
31%
A lot
28%
Extremely
17%
Priorities: growth (44%), lower taxes (26%), public debt (6%), Fiscal Compact (3%)
The companies interviewed are all well aligned in terms of their priorities for the new Letta
government. As shown in the chart below, out of the five options proposed, 44% of the pool indicated
growth strategies as a necessity to revitalise the stagnant economy. The rest of the companies
prioritise the reduction of fiscal pressure (26%) and the restructuring of the Public Administration
(21%). Surprisingly, only 6% of the pool believe the reduction of the high public debt is a priority, and
only 3% care about respecting the Fiscal Compact. Austerity.
Priorities for the next government
3% 3%
6% 7%
21%
22%
21%
26%
22%
26%
44%
56%
43%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Growth strategy Reducing fiscal pressure
Restructuring Public Administration Reducing public debt
Comply with fiscal compact
Conclusion: softening austerity is the government conundrum
The overall picture of our survey is for a country in a ‘wait and see’ mood with companies reluctant to
invest, more focused on cost-cutting plans and in strong need of increasing their credit conditions.
Low prospects for revenues and poor macro expectations make the softening of the austerity stance
the clear consensus request emerging from our survey.

Italy
17 June 2013 ◆ 13
Stocks ideas and rating changes
Pair trades by sector
Following a weak set of Q1 results, we ended up downgrading our 2013 and 2014 estimates by 5% on
average on our Italian coverage. We remain cautious on the growth prospects for 2013 and 2014, and
expect further downgrades in 2H 2013, driven by the macro outlook further deteriorating. As a result,
we maintain a cautious stance on Italy, which leads us to favour defensive stocks and names with high
earnings diversification outside of the country or stocks with corporate action/ restructuring potential.
Our key high conviction pair trades are:
 Banks: long UCG, PMI and UBI vs short ISP, BP and BPER
 Cement: long Cementir vs short Buzzi
 Capital goods: long Prysmian and Danieli vs short Trevi and Finmeccanica
 Oil: Long ENI vs short Saras
 Branded and consumers: long Autogrill vs short Geox
 Insurance and asst gatherers: long Unipol and Azimut vs short Cattolica
 Telecom and media: long El Towers and Cairo vs short Mediaset
 Auto: long Fiat Industrial vs short Pirelli and Piaggio
Rating changes
In light of our incrementally negative view we downgrade the following stocks:
 Banco Popolare (Underperform from Neutral, TP € 0.95 )
 Beni Stabili (Neutral from Outperform, TP € 0.60)
 BPER (Neutral from Outperform, TP € 5.80)
 Saras (Underperform from Outperform, TP € 0.95)
 Trevi Fin. (Underperform from Neutral; TP €4.45)
 Yoox (Neutral from Outperform, TP € 18.10)

Italy
17 June 2013 ◆ 14
Recession heading for the worst
Time is a very scarce resource for Italy. Five years into recession mean that the
economy is now heading for the worst with unemployment subsidies up to more than
1bn hours from 185m hours in 2007. April data show a rise of €2.3bn in NPLs in the
banking system, VAT collection down 7% YoY, consumer expenditures down 4.4% YoY
(versus -3.3% YoY last year), and further credit tightening (-1.1% YoY lending in April
versus -0.7% in March). Not only is the second derivative turning more negative and
signalling further deterioration ahead, but if SMEs and households were hit first by the
crisis, it looks like the time has now arrived for large corporates to pay their toll as well.
Some 160 large Italian corporates are now under special crisis administration.
In this note, we take a closer look into the ILVA environmental case, probably the most
problematic large corporate situation in Italy today. The good news is that banks’
exposure to ILVA seems to cap the capital erosion risk to 12bps of CT1. The bad news
tough is that it looks very difficult to square the circle between job security (12,000
employees of ILVA at risk) and respect for EU environmental directives (high mortality
rate in the area proved to be due to the plant’s emissions of a carcinogenic polluting
agent).
We see many similarities between the situation in the country today and that of 20 years
ago, when political instability and macro meltdown forced Italy to exit the European
Monetary System in spite of the Lira devaluation, of some Lit 100bn (50bn) austerity
measures undertaken by the Amato government, and of a privatization plan of
Lit180trn (€90bn). We think the situation is worse today as the macro headwinds are
hurting the economy more heavily, and Italy cannot leverage on currency devaluation
anymore. This is why we think the next six months will be crucial to assess if the country
can leverage on the ‘low spread QE driven momentum’ to reverse the poor macro trend
of the last decade, or if it will inevitably end up in a EU bailout request. The potential
default of Argentina, the likely bailout of Slovenia, the recurring risk for the Letta
government to fall short of support from the Parliament or the unplugging of the FED
QE measures are just few examples of potential events triggering renewed market
concern on the sustainability of the Italian debt.
Turnaround story or is it too late?
Little has changed in Italy . . .
Four months after the inconclusive elections at the end of February, Italy offers a mixed picture. On
the one hand it is difficult to indentify major discontinuity signs:
 Same President. After several attempts, the Italian parliament ended up appointing Mr
Napolitano as President of the State for the second time – based on no agreement among the
various parties on any other potential candidate. It is the first time in the history of the
Italian Republic that the same President has secured a double-seven years mandate.
 Same large coalition government. PD and PDL, the two opposite parties that reluctantly
supported Monti’s technocrat cabinet in 2011/2012 have now both agreed to fully endorse a
new large coalition government under the premiership of PD deputy head Letta. This is in
line with our expectations set out in our Perfect Storm note (26 February) when immediately
after the elections we attached a 70% probability to a Grosse Koalition outcome.
 Same macro picture. The Italian macro situation has not improved over the last quarter,
rather the contrary, as we show later.

Italy
17 June 2013 ◆ 15
 Same high public debt issues. The Italian debt has reached record levels of €2.035trn
and is now expected to reach 135% of GDP in 2014. This was, still is, and will remain, in our
view, the priority number one for the country.
. . . but much has changed outside Italy
 Spread contraction. The contraction of the Italian spread could become a real game
changer if it were to prove sustainable. The OMT announcement from the ECB and the QE
strategies in place at FED, BoE and most importantly at BoJ provided a significant window of
opportunity for the Italian momentum to build up on the back of spread contraction. Since
Japan’s QE announcement at the beginning of April, the spread versus German bunds
contracted by almost 100bps.
 EDP. The removal of the EU excessive deficit procedure (EDP) on Italy could we believe pave
the way for Italy to access EU funds aimed at providing some support to its economy.
 Softening austerity. France and Spain have recently been given extra time from Europe to
revert to the 3% deficit threshold. Whether Italy has sufficient argument to aim for the same
remains to be seen, but France and Spain represent the precedent on which Italy could rely to
obtain similar concessions.
Some €15bn gift on the table but . . .
Our back-of-the-envelope calculation suggests that spread contraction + EDP removal + extra deficit
spending allowance might create a ‘little treasury’ in the hands of the Letta government in the region
of €15bn – offering scope for a nice spending boost to the economy without harming Italy’s fiscal
targets. This means some 1.0 p.p. of GDP, which couples with the boost potentially stemming from the
€40bn late payments of the public administration debt (the total amount being estimated by
Confindustria above the €100bn region) to Italian SMEs. Were we facing a marked positive u-turn in
EU growth prospects (to potentially benefit the Italian export driven GDP) coupled with a clear
roadmap towards EU convergence, we could conclude that the new government has a nice window of
opportunity to try and push for Italy to become a successful EU restructuring story. Unfortunately
though, this is far from being our base case scenario.
. . . time is running out fast
We actually think the reality is quite different, and we have little faith in the above materialising:
 Spread. Relying on low spreads for extra budget spending is risky. The yield on Italian BTP
rose sharply in few days last couple of weeks on market concern on the unplugging of QE
measures from the FED and on the German court ruling on OMT, showing that it is far too
early to assume the EU sovereign crisis has normalised. We do not believe Italy can rely in
the long term on lower interest service of its debt as a driver of extra deficit spending.
 EDP. Accessing EU funds is a potential 2014 option which needs local authorities (regions
and municipalities) to be operating with best practice in terms of governance and public
accounts in order to gain access to such funds.
 It remains very unlikely to us to expect that Italy will be allowed to temporarily exceed the 3%
deficit cap in light of its high public debt.
 Recent macro data point to further deterioration. Chances are high in our view that macro
data, recently revised downwards both for Italy and Europe, will face further downgrades in
2H 2013.
 Also, as we argued in our recent downgrade of the EU banking sector to Underperform
(Banks Briefing – Risk up and capital not enough, dated 25 March) we fear the speed
towards EU convergence is slowing down too much, and we believe the risk for the sovereign
crisis to resurface is high. The potential delay or the weak implementation of the banking
union project for instance would be particularly negative for Italy in our view.

Italy
17 June 2013 ◆ 16
Next six months will give us the answer – stay cautious on Italy in the meantime
This is why we maintain our cautious stance on Italy for now. Time is the crucial variable here, as five
years into recession has put Italy in a border-line situation now. We think the next six months will be
crucial in assessing the final outcome. Either Italy will soon build momentum in terms of growth by
cashing in on the benefits of Monti’s reforms and leveraging on its export-driven GDP, or it will face a
likely worsening of the macro and sovereign crisis that might force the country into a bailout request.
The spread improvement is mainly related to exogenous monetary factors
The Italian spread has halved since the resignation of Berlusconi in November 2011. Roughly one-
third of this improvement came after the appointment of the Letta large coalition government in April.
Hence, at first sight the market seems to have appreciated the austerity measures proposed by Monti
and the large coalition backing the recent Letta cabinet. However, as we try and show in the chart
below, such spread improvement has little to do with the Italian political landscape, and much more to
do with monetary action around the world.
Italian spread (vs German Bund, blue line lhs axis) and yield gap between BTP and BOT
(as a % of BOT yield, red line rhs axis)
-200%
-100%
0%
100%
200%
300%
400%
0
100
200
300
400
500
600
OMTLTRO 2 Japan QE
European sovereign crisis with
Greece
Monti fiscal
consolidation
package
inconclusive
Italian election
Italian market
labour reform
ESM becomes
operative
ECB starts buying Italian
govies under the
Security Market Program
Monti appointed
Italian Prime
Minister
Source: Bank of Italy, Bloomberg, Mediobanca Securities analysis
 The Monti government took office in November 2011, which basically coincided with Draghi’s
LTRO 1 announcement in early December (see Europe’s last minute deal, 5th December
2011). Equity and fixed income markets rerated on the back of such newsflow, so that the
Italian spread enjoyed three months of marked improvement.
 It is with the LTRO 2 announcement in March 2012 that the market started questioning such
a facility: if three months after providing €490bn funding to EU banks through LTRO 1 the
ECB felt the need of an extra €530bn injection, it clearly meant the problem was not fixed.
But more importantly, ECB deposits’ data in Q1 2012 confirmed that the vast majority of
LTRO funding ended up being parked at the ECB, hence providing tangible evidence of how
the monetary transmission mechanism was not properly functioning. It appeared evident
that the ECB’s ability to stimulate the economy in the lack of printing power was capped. The
Italian spread reflected such concern, widening back to pre-Monti levels just three months
after the LTRO 2 announcement.
LTRO 1

Italy
17 June 2013 ◆ 17
 In November 2012 we would have expected the market (and the spread) to negatively react to
the end of the Monti government. Rather, we noticed that the spread kept narrowing until the
February 2013 elections, clearly showing the benefit of the ‘whatever is needed’
announcement of Draghi backing his OMT plan as announced at the end of the summer 2012
(see Time to Call the German Bluff, 6th June 2012). Not only was OMT the only reason of
such spread improvement in 2H 2012, but even today it is on the back of the ECB potentially
activating such a tool that sovereign funding conditions remain relatively benign in
peripheral Europe.
 The February inconclusive elections followed by two months of negotiation to form a
government and to appoint the president of the State started to be reflected in spread
widening (see Election approaching, uncertainty raising, 18th February 2013). However, it is
the ‘Abenomics’ massive QE announcement from the BoJ at the beginning of April that seems
to have provided another window of spread relief for Italy.
Don’t look at the spread but monitor the yield gap between BTP and BOT
The conclusion from the above is that the Italian political uncertainty of the last 18 months played
more like a second derivative on the spread, whilst it is monetary newsflow from NY, Frankfurt and
Tokyo that seems to have represented the first derivative of the spread contraction Italy has enjoyed.
This means:
 The low spread does not necessarily mean the market is rewarding the Italian austerity stance
or the unusual Letta grand coalition Government.
 If we agree that an accommodating monetary policy around the world ended up becoming the
first ally for the Italian spread, we believe it must follow now that Italy runs the risk of
becoming a key victim of market concern on the FED starting to unplug its five years’ QE
measures.
 Post OMT announcement, the spread lost its relevance as a ‘barometer’ of solvency risk
perception on any EU country, given the backup of the ECB.
This is why in our recent update on Italy (see Elections approaching, uncertainty raising, of 18
February) we introduced a new measure for the Italian solvency risk. This is the yield difference
between BTP and BOT. Such a gap has no reason to exist unless the market wants to differentiate
between bonds at risk of restructuring (BTP) and bonds not subject to restructuring (BOT as any
money market instrument).
The chart above shows such a gap (red line) in relative terms, i.e. as a percent of the BOT yield.
Reconstructing a proper time series is not an easy exercise, which is why we only show such ratio at
specific times where available data allowed us to construct such ratio minimising the margin of error.
The key message is that since 2010, i.e. when the Greek deficit problem emerged and the sovereign
crisis started, the relative yield gap in Italy between BTP and BOT ranged between 1x and 3.5x the
yield on BOT, far too much. We interpret such finding as the real underlying solvency concern of the
market, which would have otherwise closed such a profitable arbitrage.
A déjà vu of 1992 – we have been here before
History repeating itself . . .
History repeats itself and Italy seems to make no exception to this. It is interesting, in our view, to note
the many similarities between the Italian situation today and 20 years ago:
 Dissatisfaction with politics. Now, as in 1992, the dissatisfaction towards the existing
political class has brought Italians to openly and publicly criticise its politicians.
 Implosion of existing parties. In 1992 the Christian Democrats and the Socialist parties
essentially disappeared under corruption scandals, paving the way for Berlusconi’s arrival.
Additionally, the former PCI (Communist party) broke down in its social democrats

Italy
17 June 2013 ◆ 18
component (today PD) and its more leftish representation. Equally today, we have had the
dissatisfaction towards Monti and all the central catholic parties disappearing coupled with
the ongoing tension within the PD party, which leads many commentators to expect the PD to
potentially break down. It is the strong leadership of Berlusconi that makes the PDL immune
for the time being from internal tensions, but one could reasonably expect that the PDL is
also destined to internal attrition when Berlusconi decides not to lead the party anymore
after 20 years of strong leadership.
 New parties. The consequence of such turmoil was dissatisfaction towards existing parties.
In early nineties this led to Berlusconi’s new Forza Italia party and the Northern League
success at the expense of Socialist and Christian democrats parties, which essentially
disappeared or converged into Berlusconi’s new party. Twenty years later the two traditional
parties (PD and PDL) together lost almost 10m votes in the February 2013 elections, which
ended up rewarding a brand new movement, Five Star, which became the first party at its
first election catalysing the Italians’ dissatisfaction against the political class.
 Institutional bottleneck. Now as then, Italy faced a dangerous institutional bottleneck
with the overlapping between national elections (April 1992) and the appointment of the new
president of the state (May 1992). It took a record 16 attempts at that time for the newly
appointed Italian Parliament to find a convergence on Oscar Luigi Scalfaro as the new
President. This time around it only took six attempts, but simply because it appeared
immediately clear there was no room for convergence on any new name but Napolitano.
 Letta versus Amato. Today (Letta) as then (Amato) it is the former number 2 of the social
democrats party to take the lead of the Government.
. . . hopefully not in full
We firmly hope that the similarities will stop here, because what happened next 20 years ago proved
very painful. Then as now the economic situation of Italy was particularly difficult (in the early 1990s
it was the emerging markets bubble that triggered the macro slowdown) so to challenge the
sustainability of its public debt.
 The Amato government remained in power for only 10 months.
 The market speculation against the Lira forced Amato in July 1992 to pass a very painful
decree (worth almost €50bn in Lira equivalent at that time) aimed at calming down the
markets: from higher retiring age to real estate tax and most importantly a 0.6% tax on bank
deposits.
 In spite of such austerity measures, three months later Italy was forced to exit the European
Monetary System and devaluate its currency.
 This was followed by Amato’s resignation, who was replaced by a technocrat government
headed by the governor of the Bank of Italy Ciampi.
The situation is worse today
Italy transformed the Euro from opportunity to threat
We believe the situation is more problematic today than it was 20 years ago, as the recession is denting
GDP growth much more heavily than in 1992.
 The lack of room to manoeuvre on currency devaluation today is probably the most negative
difference versus 20 years ago. It is due to the Lira devaluation and assets’ disposals that Italy
managed to put its debt / GDP on a virtuous path starting from 1994 – as shown below. The
Euro straitjacket is clearly not providing a similar currency adjustment flexibility today.

Italy
17 June 2013 ◆ 19
Italian growth vs debt evolution
 It was due to a Lit 180trn (€90bn) disposal plan that the country managed to improve its
debt-to-GDP ratio in the following 10 years. But as we show below, that proved short lived
and as soon as the crisis started denting Italian GDP growth again, Italy reverted to the
>120% debt / GDP region. Essentially over the last ten years Italy has managed to waste the
double benefit of low funding rates following the Euro introduction and of its disposal plan.
Or to put it differently, Italy took the luxury of remaining sited over the last decade rather
than using the Euro low rates relief as a key opportunity to implement painful but well
needed structural reforms. The lack of action in leveraging on the Euro-driven low cost of
funding and the assets disposal plan, largely explain Italy’s lack of competitiveness today, in
our view.
Debt / GDP, 1992-2005 Debt / GDP, 2001-12e
100
105
110
115
120
125
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Withoutprivatizations Withprivatizations
95%
100%
105%
110%
115%
120%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Mediobanca Securities, Bank of Italy data
Recent macro data do not help
On the one hand, one should note that the interest service on debt today amounts to ‘just’ 6% of GDP,
exactly half of the level registered in 1992. However, with the Lira devaluation Italy managed to inflate
debt away, which it clearly cannot do today. This is why we think the major difference between today
and 20 years ago is that the current recession is the worst ever seen in Italy – as recently stated by the
Minister of Finance Saccomanni. Most recent data unfortunately support such a stance:
 As recently highlighted by the BoI, over the 2007-12 period Italian GDP contracted by 7 p.p.,
disposable income by 9 p.p., and industrial production by 25 p.p. It could take more than 10
years to revert to pre-crisis output levels.

Italy
17 June 2013 ◆ 20
 The ECB just revised downwards its 2013 GDP growth expectations for the Eurozone to
-0.6% from -0.5%. We see downside risk to such a number putting Italy at risk of further
downgrades.
 Low R&D investments explain part of the competitive gap of Italy, given that investments
have not exceeded 1.2% of GDP over the last decade, versus the EU average of 1.9%.
 Banks’ asset quality remains a source of major concern. Recent BoI data point to NPLs in
April up 22.3% YoY versus 21.7% YoY growth in March reaching €133bn, i.e. c9% of the
Italian GDP. Hence the system generated €2.3bn new NPLs in the month. Additionally,
coverage decreased to 50% in April from 51% in March.
 Unemployment rate reached 12% with 40% youth unemployment. This means 3m people out
of the job market in 2012, half a million more than in 2011.
 Unemployment subsidies may best capture the fast deterioration of the Italian economy:
rising to more than 1 billion hours of unemployment subsidy burdening public accounts
today from 185m hours in 2007.
 It follows that consumers’ expenditure keeps contracting so that in the first four months of
2013 it is down 4.4% YoY versus - 3.3% YoY recorded over the same period last year.
 This explains why VAT tax collection in Q1 2013 is down 7% YoY.
 Also, credit contraction continues to cap the room for investments. Banks loans were down
1.1% YoY in April versus - 0.7% in March.
It follows that what really worries us is not the negative picture per se but the fact that the second
derivative keeps turning negative – signalling further deterioration ahead. If households and SMEs
have been hit first, it is for sure now the large corporates that are adding further concern to the Italian
economy, as confirmed by the ILVA case study proposed below.
The crisis is moving from SMEs to large corporate – the ILVA case
More NPLs and less lending for corporates
If Italian households and SMEs have been the first to suffer from credit contraction, recent data show
that the problem is now expanding to large corporates. The delta €2.3bn NPLs generated in April, for
instance, come entirely from corporates versus a flattish trend in households. Construction and real
estate, for instance, show NPLs +33% YoY and +35%, respectively. Lending contraction clearly does
not help either. BoI data show that if households are facing a stable lending availability scenario now
versus last year, it is the corporate world that is facing an acceleration in shrinkage to lending access:
to –4.3% YoY in April from -3.3% YoY in March.
Not surprisingly, in our view, some 160 large corporates in Italy are now under special crisis
administration, and ILVA, the eighth largest steel plant in the world, based in Southern Italy, is
probably the most relevant case.
ILVA recent events: from the 2010 environmental problems managed by Berlusconi . . .
Troubles at ILVA, which is part of one of the main European steel producer groups RIVA FIRE, began
in 2010 when the largest company’s plant (located in Taranto, Southern Italy, and on which some 75%
of city’s GDP – directly and indirectly – depends) was blamed by a local association for environment
protection to be the source of a carcinogenic polluting agent above the limits set by the Italian law. The
problem was temporary solved by Berlusconi’s government, which waived the law with a decree
(155/2010). However, since then the focus on the pollution released by the plant has increased
exponentially and subsequently drawn the attention of public prosecutors. In light of the results of
several technical reports showing a clear correlation between the plant’s emissions and the mortality
rate of the area, Italian magistrates disposed the sequestration of all the products coming from the
plant as being not compliant with the legal standards.

Italy
17 June 2013 ◆ 21
. . . to the 2012 temporary fixing by Monti . . .
In 2012 Mario Monti’s government passed a decree (213/2012) to bypass the verdict of the public
prosecutors, thus allowing ILVA to restart production. Despite this move and the resulting inability to
reorder the seizure of production, the prosecutors did not give up and disposed the seizure of €8.1bn
of assets belonging to the Riva family (owner of ILVA), accused of environmental disaster and
therefore asked to compensate for the damages created.
. . . followed by recent Letta decree
Although the seizure did not directly affect the production of Taranto’s plant, fears of indirect
repercussions and of cash flow problems led Letta’s government a few weeks ago to pass a decree to
un-seize the €8.1bn assets and to appoint a special commissioner (Mr Bondi) to lead the company and
to elaborate a plan to tackle the environmental issue, while keeping operations running.
Potential clash with EU directive
The substantial importance given by the last three Italian governments to ILVA derives from the high
level of employees at risk in the case of a shutdown of the plant: currently some 12,000 people directly
work at ILVA’s plant, but the total number of workers at stake could reach the 40,000 threshold when
considering all the Italian companies directly and indirectly linked to ILVA. As shown above, for the
time being the Italian governments have managed to avoid the shutdown of the plant and the
consequent unavoidable bankruptcy of the company with ad-hoc decrees aimed at buying time. That
notwithstanding, Italian measures could clash with some EU directives (for example, directive
2010/75, which sets limits on industrial emissions, or directive 35/2004, which affirms the ‘polluter-
pays’ principle) so that the efforts of the respective Italian governments might still be nullified.
According to press reports, ILVA is currently losing some €50m per month and the lack of final fixing
plus the potential clash with EU discipline, forces us to attach high probability to the worst case
scenario for ILVA.
Banks’ potential losses in 3-12bps CT1 region
Analysing ILVA’s accounts in order to determine the current banks exposure is not an easy exercise for
the following reasons:
 FY2012 Annual Report for both ILVA and RIVA FIRE (the controlling company) are still not
available.
 In 2012, the Riva Group was largely reshaped following a massive restructuring plan aimed at
separating the two main activities of the group, the so-called ‘long products’ from hot and
cold rolls, the latter produced in ILVA’s plants.
 FY2012, ILVA perimeter does not correspond to that in FY2011, as some foreign activities
have been conferred to another holding, leaving only the Italian operations at ILVA.
 In FY2011, RIVA FIRE consolidated Annual Report showed €2.7bn of bank debt, of which
€0.7bn was allocated to ILVA. As the RIVA Group has been split into two holdings – one of
which retaining ILVA activities – the debt of the Group might have been re-allocated, but we
do not know in what way.
 In 2011, ILVA reported an additional c.€2.2bn debt exposure to Group’s companies. At the
current stage, it is not possible to assess whether the beleaguered financial position of ILVA
may put at risk the financial strength of the other entities of the Group.
As such, the above-mentioned restructuring of the group means that our calculations should be taken
with considerable caution. Mindful of the fact that the reshaping of the Group may have significantly
altered the financial position of the different entities within the RIVA Group, we attempt to make
some calculations starting from ILVA’s FY2011 Annual Report.
As at the end of FY2011, ILVA’s bank debt exposure amounted to €719m, split as follows:
 €120m of short term debt.

Italy
17 June 2013 ◆ 22
 €599m of long term debt, €175m of which is due to expire within one year (i.e. in 2012).
 The company had a negligible amount of cash and cash equivalents on balance sheet.
As a consequence, at the end of FY2012 we could infer ILVA’s bank exposure to range between €424m
(assuming the full repayment and no renewal of the €295m credit lines expired 2012) and €719m (in
case of roll-out of maturing debt). In both cases, such amounts should not represent a threat for the
Italian banking system: assuming the whole of ILVA’s bank debt is classified as NPLs and covered 66%
(we would expect some kind of collateral/guarantees backing the credit line), we calculate the amount
of provisions could stand in the €450m region for the system, equal to €350m impact on CT1 capital
as at Mar-13, i.e. 3bps of the aggregate CT1 of the nine Italian banks under MB coverage.
Should we expand such a simulation to the entire group, i.e. to the RIVA FIRE consolidated accounts,
the potential losses for the banking system could reach the still manageable 12bps region given banks’
exposure of €2.7bn, i.e. more than 4x the €720m banks’ exposure of ILVA on which we based our
exercise.
Argentina the next source of concern for Italy?
The 2001 default secured 93% backing from bondholders . . .
Following the 2001 financial crises, Argentina was unable to roll over its debts and following the
resignation of President de la Rua the country defaulted on $81.8bn debt, which at that time was the
largest sovereign default in history. Following negotiations with the IMF, the country moved to a
tender offer on the debt outstanding in 2005 and in 2010. This managed to secure the backing of 93%
of the defaulted debt holders who agreed to exchange their holding for new securities at a 65% loss.
. . . but litigation on the remaining 7% could open up to a new default . . .
The remaining holdouts have been targeting better payment terms or a repayment in par, utilising
litigation. The old bonds had pari passu clauses, which means that should Argentina be in a position
to pay bondholders of the new securities then the holdouts should also be paid. As such, the holdouts
have proceeded to sue the country for $1.3bn, which was given the backing of US courts. The amount
has been derived from past principal and past interest. Argentina’s reaction so far has been to reject
the verdict and reiterate the offers of 2005 and 2010, which unsurprisingly have not been accepted.
The current Argentine President Cristina Fernandez has vowed not to pay the “vultures”, however, so
that a feasible way to end this story would be to enter another technical default in order to avoid
having to make any payments to any holder.
. . . which is why yields are rising
The yield curve for Argentina is somewhat limited given its reputation as a serial defaulter, but we
show in the chart below how the observable yield levels have increased since the start of the year as
investor fears increased.
Argentina Sovereign curve price (rhs) and yield (Lhs)
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
10/06/2013 01/01/2013
101.3
87.8
79.7
100.7
89.3
83.6
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
Price
10/06/2013 01/01/2013

Italy
17 June 2013 ◆ 23
In the rhs chart below, we also outline the current debt maturity schedule for the country. Whilst the
majority of the debt is zero coupon securities, we note there are two floating securities maturing in
July and August and a fixed coupon in September, which could trigger a technical default in case of
no-coupon payment to the holdouts. Not surprisingly, the risk of an Argentina default coupled with
the Asian and China slowdown and with the recent S&P downgrade of the outlook in Brazil to negative
from stable have triggered a severe correction, which brought the emerging markets index back to
summer 2012 levels (lhs chart below).
Emerging markets index Argentina debt maturity schedule, $bn
679.23
640.88
580.00
600.00
620.00
640.00
660.00
680.00
700.00
JPMorgan Emerging Global Total Return Index
2.6 2.5 2.2
4.2
1.7
1.1
1.7
15.3
14.4
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 2014 2015
$bns
Tenaris and TI the Italian companies most exposed to Argentina
The potential default of Argentina could have a double negative impact on Italy, in our view. On the
one hand it could reignite concern on debt sustainability in peripheral Europe, while on the other it
could directly affect the Italian economy particularly exposed to Argentina.
The table below summarises the key companies under MB coverage with exposure to Argentina, none
of them on an Outperform rating.
Italian companies’ exposure to Argentina
Rating TP Turnover exposure EBITDA exposure EPS exposure
Tenaris Underperform 13.6 30.0% 23% 20%
Telecom Italia Not Rated - 13.0% 10% 2%
Campari Neutral 5.45 2.9% 2.5% 2.5%
Fiat Neutral 4.5 2.0% n.m. n.m.
Pirelli Underperform 7.0 4.0% n.m. n.m.
Trevi Underperform 4.45 3.2% 5.9% 7.9%
Generali Neutral 15.0 0.8% n.m. n.m.
Source: Company data, Mediobanca Securities
It can be seen that the exposure to Argentina ranges from 1% of turnover at Generali up to 30% at
Tenaris.
Some 50% chance of a government crisis in Italy this year
In conclusion, this introductory chapter points to what we consider the most scarce resource for Italy
today – time. Five years into the most severe recession of the past century means that without
inverting the trend soon Italy could be facing a very problematic situation ahead. It is fair to argue that
Italy’s destiny is now in EU hands more than in Italian hands. Without Europe, i.e. the ECB, to keep

Italy
17 June 2013 ◆ 24
buying the required time and without Italian politicians using such time for painful but inevitable
structural reforms, we think the country might end up requiring a European bailout support. The large
coalition government is facing a crucial role in implementing structural reforms. But its ability to
deliver is dependent on a number of moving parts, which is why Italian commentators and opinion-
makers are split:
 The bullish argue that for various reasons this government can stay together for a long time
and deliver what is needed: the common interest of both PD and PDL in buying time, some
70% of new PMs appointed willing to secure their future, Napolitano threatening his
resignation in the case of government crisis, and the time required to implement
constitutional reforms all seem to call for a long life of this government.
 However, the list of obstacles potentially forcing a short term government is equally if not
more convincing to us: Berlusconi’s trials make the government road particularly bumpy in
the case of conviction, potentially forcing him to unplug his party’s support to Letta and to
advocate new elections. Also, the potential implosion and break-down of the PD party at his
winter congress could pave the way for this. But more in general, we think that any external
factor turning against the Italian spread could affect the government: from the unplugging of
the QE measures to reigniting the sovereign crisis triggered for instance from Argentina or
Slovenia or the OMT constitutional debate.
Given the above, we think it fair to attach no more than 50% chance for this government to remain in
power longer than this year. This means that the many uncertainties surrounding this unusual large
coalition government could implode any time leaving the market with a totally unpredictable situation
on what would happen next.

Italy
17 June 2013 ◆ 25
Real Estate – Italy is no Spain, but . . .
Recent data show an ongoing marked slowdown of the Italian real estate market, with
residential transactions down 26% YoY to 430k – the lowest level since 1985. Real estate
prices in Italy have contracted by 12% since their 2008 peak versus a 25% correction in
Spain. We believe there are very good reasons for Italy not to fear a ‘Spanish-like’ real
estate contraction: 1) some 40% of the national value added in Spain came from real
estate in 2007, 10 p.p. higher than Italy; 2) housing completion over the last decade was
2.5x larger in Spain than Italy despite 30% larger population in Italy; 3) Italian
household indebtedness is the lowest in the EU; and 4) Average loan-to-value stands at
65% in Italy versus 72% in Spain.
In spite of such differences, we fear that further real estate price correction could affect
Italian banks’ balance sheets, which are currently sitting on a cash coverage of 41%,
some 10 p.p. below the 2007 levels within our coverage. We propose two approaches. In
the first, we investigate how much real estate prices could drop in Italy without its
banks suffering total coverage (cash + collateral) dropping below 100%. Our reassuring
answer is that by our estimates Italian banks could bear up to 45% downward revision
of the fair value of their real estate collaterals and still maintain coverage above 100%.
In our second approach, we aim to quantify the capital erosion stemming from 10% real
estate prices drop subject to keeping unchanged total coverage ratios at current levels.
The result is that some 10% lower collateral value at constant coverage ratio would wash
out some 17% of the aggregate 2012 Basel II.5 CT1 capital of our banks with CT1 ratio
dropping by 170bps to 8.7%. Five banks would sit below 8% CT1: MPS, BP, BPER, BPM
and CVAL, but the last three show room to restore capital ratios through IRB models’
adoption. ISP and UCG would remain anchored above 9% 2012 Basel II.5 CT1 ratio. In
summary, although we recognise that Italy is no Spain, we foresee further balance sheet
clean-up ahead for Italian banks, possibly triggered by the asset quality stress test that
the ECB is set to carry out next year. Draghi’s recent cooling on the ECB potentially
buying SMEs loans does not help. ECB-eligible SME loans in our coverage range between
€45bn (AA rated) and €145bn (A rated), i.e. between 6-15% of Italian corporate loans. No
delivery here will be a big missed chance for Italy to sustain growth.
Marked slowdown in Italian real estate
With an owner occupation rate of 80%, Italian households remain among the most exposed to the
residential real estate among large European countries.
Selected European Countries – Owner Occupation Rate (%)
0
10
20
30
40
50
60
70
80
90
Source: EMF, Mediobanca Securities

Italy
17 June 2013 ◆ 26
Residential transactions are down 26% YoY in 2012 . . .
In 2012 the total number of residential transactions dropped by 26% YoY to 448,000, the highest drop
recorded to-date and the lowest amount since 1985 when residential transactions were 430,000 (Lhs
chart below). In value terms, residential transactions declined 26.3% to €74.4bn. The magnitude of
the drop in the number of transactions largely exceeded expectations. In the first months of 2012,
Nomisma still expected 594,000 transactions in the year, 33% above the actual number. The picture
worsened during the year as shown by the acceleration in the quarterly drop (Rhs chart below).
Number of transaction (000) – Residential Number of quarterly residential transactions, YoY
464
558
687
769
835
866 877
816
689
614617
603
448
400
450
500
550
600
650
700
750
800
850
900
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-3.0%
-2.6%
-1.5%
0.0%
1.2%
1.5% 1.7% 1.8% 1.6%
1.3%
-0.1%
-1.9%
-3.4%
-4.2%
-4.6%
-4.1%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
Source: Agenzia del Territorio, Mediobanca Securities
The number of mortgage loans for house purchases fell by 38.6% in 2012, even more than the overall
number of transactions. Consequently, transactions that involved a mortgage loan declined to 37% of
the total, eight percentage points below that in 2011. The amount of total mortgage loans granted to
households for house purchases declined by 43% in 2012 to €19.6bn; and the ratio between mortgage
loans and the total value of transactions decreased to 26% from 34%.
. . . due to several factors
Lower prices coupled with lower interest rates helped to sustain the so-called affordability index,
which was unchanged in 2012 at the 2011 level. In light of the stable affordability index, worsening
expectations, higher taxes on houses (IMU), and lower credit availability appear to be the main drivers
of the drop in transacted volumes.
Average number of yearly salary to buy a house House Affordability index for Italian households
Source: Agenzia del Territorio, Mediobanca Securities

Italy
17 June 2013 ◆ 27
Commercial real estate does not provide a better picture
Transactions in commercial real estate among large professional corporations declined below €2.0bn
in 2012, down from around €4.0bn p.a. in the prior three years. Insufficient re-pricing, especially for
non-core assets, is the main driver of the low volumes. Low liquidity in commercial real estate is a
problem in view of the relevant amount of funds approaching maturity and of the potential sale of real
estate assets held as guarantees by the banks.
Commercial real estate – transaction volumes (€ bn) Transaction volumes by quarters (€ bn)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2006 2007 2008 2009 2010 2011 2012
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
Source: Nomisma, Quotidiano Immobiliare,JLLS, Mediobanca Securities
So far, 2013 point to flat/slightly increasing investment volumes. According to JLLS, in the first
quarter of 2013 total transaction volumes amounted to around €0.6bn, up from €0.5bn in 1Q 12 while
some important negotiations are ongoing on the market (mainly involving foreign opportunistic
investors) and should be closed during the year.
Real estate overview - Italy versus Spain
The magnitude of Spain’s residential real estate bubble was twice that of Italy
Using the European Mortgage Federation (EMF) data, we calculate that Spanish residential real estate
prices ballooned by c.135% in seven years, a rise that is twice the magnitude of that of Italian real
estate (c.+70% in eight years). Since their highs, real estate prices have fallen by c.25% in Spain as of
September 2012, and we expect they have kept falling over the past few months.
According to EMF data, residential real estate prices in Italy have stabilised over the period 2008-
2011, fluctuating at level c.70% higher than in 2000. As the EMF does not provide quarterly updates
on Italy’s real estate prices progression, we cannot provide an exhaustive comparison based on a
homogeneous dataset for what happened in 2012 in Italy.
Nomisma data show that the increase in Italy’s retail real estate prices hit 70% of 2000 levels in 2008,
similar to that flagged by the EMF. With two different sources showing a maximum 70% increase in
real estate prices in Italy, we conclude the magnitude of Italy’s real estate bubble was much smaller
than that of the Spanish one. Unlike the EMF, Nomisma data show a different picture since the peaks,
with retail real estate correcting by c.12% at the end of 2012 from the peak hit in 2008. We regard such
an indication as more realistic than a substantial stabilisation at peak-prices (as shown by the EMF
data till 2011). In addition, such a correction would be equal to 50% of that of Spain’s, i.e. equivalent to
a growth of roughly 50% of the Spanish one.

Italy
17 June 2013 ◆ 28
Italy and Spain – EMF Residential RE Prices, 2000-07 Italy – Nomisma Retail RE Prices, 1992-2012
80
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 III 12
Spain Italy
70
80
90
100
110
120
130
140
150
160
170
180
190
200
1H
92
1H
93
1H
94
1H
95
1H
96
1H
97
1H
98
1H
99
1H
00
1H
01
1H
02
1H
03
1H
04
1H
05
1H
06
1H
07
1H
08
1H
09
1H
10
1H
11
1H
12
Source: EMF, Mediobanca Securities analysis, Nomisma
Differences in Italian and Spanish real estate markets
In our view, the prices of real estate collateral are theoretically safer in Italy than in Spain, for a
number of reasons listed below.
 Italian economy less dependent upon real estate and construction. The Spanish
economy relies more on real estate and construction activity than Italy: at the peak of the real
estate market (2007), we calculate that real estate/construction sector accounted for c.40% of
the national value added in Spain (the EU second highest after the UK), c.10 percentage
points higher than Italy. In addition, the interdependence between the Spanish economy and
the real estate sector is exacerbated by the ongoing government cost-cutting programmes in
infrastructure after years of heavy spending. Unlike in Spain, Italy’s investment in
infrastructure has been relatively poor, while the so-called Stability Pact imposed by the
Central Government to regions and municipalities virtually stopped any local spending and
investments.
 Housing completions 2.5x larger in Spain than Italy. Over the period 1999-2010,
housing completions exceeded five million units in Spain versus less than three million in
Italy, despite a population 30% larger in Italy. In 2011 housing completions in Spain
collapsed by 75% from the peak hit in 2007 versus -50% in Italy on a number already 50%
below Spain’s peak (317,000 in 2006 versus 640,000 in Spain in 2007). Over the period
2000-2010, we calculate that Spain completed the construction of 0.11 houses per inhabitant
versus 0.044 per inhabitant in Italy, i.e. 2.5x .
RE/Construction % of Value Added, 2007 Housing Completions, 2000-11
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
UK
Spain
France
Netherl.
Denmark
Sweden
EU-27
Belgium
Austria
Italy
Germany
Finland
Ireland
Norway
Poland
Greece
CzechR.
Hungary
Slovakia
Construction/Total VA RE, Rent. and bus. activ./Tot VA
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
600,000
650,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Spain Italy
 Household indebtedness much lower in Italy. The personal indebtedness in Spain is
much higher than in Italy. A higher level of debt by definition translates into higher
probability of default and in a higher quantity of real estate assets up for sale. Aside from

Italy
17 June 2013 ◆ 29
Norway, data show that the country with the highest debt (residential mortgage per capita) is
Denmark (€43k), followed by Netherlands (€38k), Ireland and Sweden (€30k). Italy actually
has the lowest level of debt per capita in Europe. The debt per capita must be put in context
with the disposable income in each country. In this respect, the highest ratios are shown by
Denmark, Ireland, Netherlands, Portugal, Spain, Sweden and the UK. Again Italy is the most
virtuous country in this respect.
Res. Mtg. Debt/Gross Disposable Income per Capita,
2005-10
Res. Mtg. Debt per Capita,
2005-10 (€’000)
15%
25%
35%
45%
55%
65%
75%
85%
95%
105%
115%
Netherlands
Ireland
Denmark
UK
Sweden
Norway
Spain
Germany
Belgium
Finland
France
Italy
2005 2006 2007 2008 2009 2010
0
5
10
15
20
25
30
35
40
45
Norway
Denmark
Netherlands
Ireland
Sweden
UK
Belgium
Spain
Finland
Germany
France
Italy
2005 2006 2007 2008 2009 2010
Source: Eurostat, EMF, Mediobanca Securities analysis
 Loan-to-Value (LTV) below the average in Italy. Generally, a high LTV is associated
with high default risk, and a high default risk may translate into a larger number of forced
sellers, i.e. into a larger amount of properties coming to the market. Using the LTV of first
time buyer provided by the ECB for Eurozone countries and various indications from Central
Banks, we calculate approximately c.73% LTV in Europe, peaking at c.100% in the
Netherlands. Italy stands below the EU average and below Spain.
Loan-To-Value, 2007-10
Country Loan-to-Value %
Austria 84
Belgium 80
Czech Republic 45
Denmark 80
Finland 81
France 91
Germany 70
Greece 73
Hungary 61
Italy 65
Ireland 83
Netherlands 101
Norway 48
Poland 65
Portugal 71
Romania 68
Slovakia 80
Slovenia 65
Spain 72
Sweden 70
UK 80
AVERAGE 73
Source: ECB, Central Banks, Statistical Offices, Mediobanca Securities analysis

Italy
17 June 2013 ◆ 30
Broad definition of financial distress in Italy
Financial distress is captured one way or another within the four categories
The definition of impaired loans (sofferenze, incagli, ristrutturati, scaduti) in Italy is broader than in
most European countries, as it comprises insolvency, temporary financial difficulty, restructuring
(with or without a loss for the lender) and payment overdue. On past-due loans, Italy also looks to be
in line with its European peers. Current Bank of Italy guidelines specify that, after 90 days of arrears, a
loan must be classified at least as past due, in line with EU best practice. However, management has
the discretion to classify it as incaglio or sofferenza after just one day of delay in the loan payment. As
such, we believe that the possibility of not capturing a situation of distress in one of the four Italian
categories is limited. Outside of Italy, the 90-day past due rule dominates as the main criteria to
classify a loan, generally causing the exposure to be classified as Non-Performing and possibly
assigning a 100% probability of default. On the other hand, loans less than 90 days overdue and
restructured loans are generally regarded as performing outside of Italy and not impaired.
Italy – Criteria of Classification of Problematic Loans
Category Definition
Sofferenza
Non-Performing Loan: on- and off-balance sheet exposures to borrowers in a state of insolvency (even when not
recognised in a court) or in an essentially similar situation, regardless of any loss forecasts made by the bank,
irrespective of whether any collateral or guarantees have been established to cover the exposures. Also included are
Italian local authorities in a state of financial distress for the amount subject to the associated liquidation
procedure.
Incaglio
Doubtful Loan: on- and off-balance sheet exposures to borrowers in a temporary situation of difficulty, which may
be expected to be solved within a reasonable period of time; irrespective of whether any collateral or guarantees
have been established to cover the exposures. Sub-standard loans should include exposures to issuers who have not
regularly honoured their repayment obligations (capital or interest) relating to quoted debt securities.
Ristrutturato/
In Ristrutturazione
Restructured Loan: on- and off-balance sheet exposures for which a bank, as a result of the deterioration of the
borrower’s financial situation, agrees to amendments to the original terms and conditions (for example, rescheduling
of deadlines, reduction of the debt and/or the interest) that give rise to a loss. These do not include exposures to
corporates where the termination of the business is expected. The requirements relating to the “deterioration in the
borrower’s financial situation” and the presence of a “loss” are assumed to be met when the restructuring involves
exposures already classified under the classes of substandard or past due exposures. If the restructuring relates to
exposures to borrowers classified as “performing“ or to unimpaired past due/overdrawn exposures, the requirement
relating to the “deterioration in the borrower’s financial situation” is assumed to be met when the restructuring
involves a pool of banks. This is irrespective of whether any collateral or guarantees have been established.
Scaduto
Past due Loan: on- and off-balance sheet exposures, other than those classified as doubtful, substandard or
restructured exposures that, as at the reporting date, are past due or overdrawn by over 90 days on a continuous
basis. This is irrespective of whether any collateral or guarantees have been established to cover the exposures.
Source: Intesa Sanpaolo, Bank of Italy, Mediobanca Securities analysis
Cash coverage ratio of problem loans is down 10 pp in five years
By our calculations, the cash coverage ratio of Italian banks’ problematic loans dropped by 10
percentage points in five years (see table below) to 41% in 2012 from 51% in 2007 within our coverage.
Such a calculation does not include the allowance on performing loans, which could add a few
additional points of coverage ratio. We would point the following:
 The drop in gross problem loans coverage ratio is partially explained by the fact that the
problem loans category with the highest coverage ratio (i.e. sofferenze) has reduced its weight
over time to 55% in March 2013 from 67% of problem loans in 2007.
 The aggregate data of the sample of banks under MB coverage show that the secured problem
loans have only marginally increased in five years, to 76% in 2012 from 75% in 2007.

Italy
17 June 2013 ◆ 31
 The aggregate data of the sample of banks under MB coverage show that the fully secured
problem loans (i.e. where the secured exposure is larger than the net residual exposure)
ballooned to 63% of total net secured loans in 2012, from 40% in 2007. In our view, this
could explain why the aggregate data of the sample of banks under MB coverage show a
declining coverage ratio in all the four categories, with the exclusion of past due loans.
Italian Banks: Cash Coverage Ratio of Gross Problem Loans, 2007 – March 2013
2007 1H 08 2008 1H 09 2009 1H 10 2010 1H 11 2011 3M 12 1H 12 9M 12 2012 1Q 13
Aggregate 51% 50% 48% 44% 41% 41% 41% 41% 41% 40% 40% 39% 41% 40%
ISP 54% 51% 49% 43% 41% 42% 43% 45% 46% 43% 43% 43% 43% 43%
UCG 54% 55% 52% 50% 46% 45% 45% 45% 45% 44% 44% 43% 45% 44%
MPS 38% 44% 43% 39% 40% 40% 42% 41% 42% 40% 39% 38% 41% 40%
BP 37% 31% 35% 34% 27% 27% 27% 27% 26% 25% 25% 24% 27% 26%
UBI 37% 37% 36% 32% 29% 30% 30% 28% 27% 26% 26% 25% 26% 26%
BPER 46% 44% 43% 40% 37% 37% 37% 36% 34% 32% 32% 32% 37% 36%
BPM 47% 46% 42% 32% 27% 26% 24% 24% 28% 28% 29% 28% 34% 34%
CREDEM 39% 43% 39% 39% 36% 35% 36% 36% 36% 35% 35% 34% 35% 35%
CREVAL 51% 49% 45% 43% 36% 35% 39% 37% 33% 30% 31% 29% 35% 33%
Aggregate Italian Banks: Cash Coverage Ratio of Gross Problem Loans, 2007 – March 2013, break down
2007 1H 08 2008 1H 09 2009 1H 10 2010 1H 11 2011 3M 12 1H 12 9M 12 2012 1Q 13
NPL 67% 65% 62% 55% 52% 54% 55% 56% 57% 55% 55% 54% 54% 55%
Doubtful 23% 24% 27% 31% 34% 33% 31% 29% 28% 28% 28% 28% 30% 30%
Restructured 3% 3% 3% 7% 7% 8% 9% 10% 10% 10% 10% 9% 9% 8%
Past Due 6% 8% 7% 7% 8% 6% 5% 5% 5% 7% 7% 8% 7% 7%
TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
IT Banks – Breakdown of Secured and Unsecured
Net Problem Loans, 2007
IT Banks – Breakdown of Secured and Unsecured
Net Problem Loans, 2012
40%
35%
25%
Fully Secured Net Problem
Loans
Partially Secured Net Problem
Loans
Unsecured Net Problem Loans
63%
13%
24%
Fully Secured Net Problem
Loans
Partially Secured Net Problem
Loans
Unsecured Net Problem Loans
Source: Company Data (UCG, ISP, MPS, BP, UBI, BPER, BPM, CE, CVAL), Mediobanca Securities analysis

Italy
17 June 2013 ◆ 32
Fair value of collaterals cover 100% of the gross deteriorated exposures
The fair value of collaterals backing deteriorated assets tends not to be disclosed in most of the EU
countries outside of Italy. In 2012, Italian banks’ value of collateral covered c.100% of gross problem
loans, bringing the total coverage ratio to well above 100% in all the banks under scrutiny. Italian
banks disclose the fair value of collateral as follows:
 Since 2012 banks disclose the fair value of collateral backing deteriorated exposures, not just
up to a contractual limit (generally the exposure itself). This explains why the fair value of
the collaterals is above the gross deteriorated exposure. The limit of such disclosure is that it
is not possible to ascertain whether a valueless collateral is allocated to a large NPL and vice
versa.
 Italian banks disclose the fair value of collaterals, breaking it down in real estate collaterals,
securities collaterals, other real collateral and personal guarantees. Real estate accounts for
c.75% of the fair value of collaterals, while personal guarantees account for an additional
20%.
 Banks disclose the fair value of collateral covering >100% of the secured exposure and the fair
value of collateral offering just a partial coverage. In 2012, c.90% of the collaterals’ fair value
was allocated to exposures whose collaterals cover >100% of the exposure itself.
Coverage Ratio of Problem Loans Including Fair
Value of Collaterals, 2012
Breakdown of Fair Value of Collaterals, 2012
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
Aggregate
UBI
CREDEM
CREVAL
BP
BPER
ISP
MPS
UCG
BPM
Cash Coverage Ratio Fair Value of Collaterals
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
Aggregate
UBI
CREDEM
CREVAL
BP
BPER
MPS
ISP
BPM
UCG
Fair Value of Collaterals as % of Gross Deteriorated Exposure
Fair Value of RE Collaterals as % of Gross Deteriorated Exposure
Breakdown of Fair Value of Collaterals, 2012 Breakdown of Fair Value of Collaterals, 2012
74%
1%
4%
20%
Real Estate
Securities
Other Real Guarantees
Personal Guarantees
93%
7%
Fair Value of Collaterals
Allocated to Exposures
Covered >100% by Collaterals
Fair Value of Collaterals
Allocated to Exposures
Covered 0% - 100% by
Collaterals

Italy
17 June 2013 ◆ 33
Stressing Italian banks capacity to cope with R.E. correction
Nominal prices fell by just 4% in 2012 in Italy
In 2012, nominal real estate prices decreased 4% and, as we show below, the consensus expectation is
for further de-rating this year and a modest pick-up in 2014.
Nominal Real Estate Prices - YoY change
-11%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013e
2014e
Source: Nomisma, Mediobanca Securities
As shown in the table below, nominal real estate prices dropped by a low double-digit figure since their
peak in 2007. Although Italy is nowhere near the real estate bubble that Spain is currently
experiencing, it is not impossible to expect further real estate price contraction. What would be the
impact on the collateral value of Italian banks?
Italy – Real Estate Prices Drop from 2007 Peak
Nominal prices -12.3% -10.2% -12.5%
Real prices -19.8% -17.2% -19.4%
Source: Nomisma, Mediobanca Securities analysis
Option 1: extra 45% RE price drop would still leave total coverage above 100%
We run a simulation on the fair value of real estate collaterals aiming at showing what kind of
devaluation would be needed to reduce the overall coverage ratio to 100%. We proceed as follows:
 We start from the stock of gross problem loans, as disclosed by each bank at the end of 2012.
 We assume the cash coverage (allowance for loan impairments) as at 2012 unchanged. Such
allowance includes the evidence of the inspections carried out by the Bank of Italy at the end
of 2012, and hence should account for the partial repayment of problem loans and the
updated fair value of collaterals (real estate and personal guarantees).
 We leave 2012 fair value of personal guarantees unchanged, as we assume the financial
strength of the counterparties providing personal guarantees unchanged.
 We start from the fair value of collaterals, as disclosed by each bank. We flag that in 2012
Italian banks’ reporting was homogeneous, as all banks under scrutiny reported the total fair
value of collaterals (in 2011 some banks were still reporting the value of collaterals up to a
contractual limit).
 We simulate what reduction in the fair value of real estate collaterals would be required for
the overall coverage ratio (unchanged cash allowance for loan impairments plus unchanged
fair value of personal guarantees plus revised fair value of real estate collaterals) to hit 100%.
If the coverage fell below 100%, a replenishment of the cash coverage would be necessary.

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