HSBC sees 'no' vote in Italy referendum, Renzi to stay and no early elections

Markets appear to be positioned for a ‘no’ vote in Italy’s referendum on constitutional reform on Sunday, HSBC said, with banks there underperforming their European peers by 9% and the European stock market by 11% over the past month.

The bank reckons a ‘yes’ outcome would prompt a 5-10% rally in the Italian equity market in the short term, while a ‘no’ vote might trigger a 5% to 10% correction if Prime Minister Matteo Renzi remains and a 10% to 20% correction if he goes.

HSBC’s central case is for a ‘no’ vote, with the PM remaining and no early elections. However, the bank has explored the implications of three possible scenarios.

A ‘yes’ win could trigger outperformance from banks, driven by expectations of a lower cost of funding and possibly higher-than-expected lending growth compared to HSBC's current estimates.

“This, coupled with better funding costs driven by an improved spread on the Italian sovereign, may underpin banks’ revenue.”

In the event of a ‘no’ vote and Renzi’s departure, banks should be heavily penalised, at least in the short term.

“We believe the uncertainty and the political vacuum created by a caretaker government would limit the upside potential in the medium term.

“In addition, the possibility of early elections in 2017 would probably impact growth more negatively than expected, ultimately slowing down any earnings recovery. During the Monti government (the last technocrat government, November 2011-April 2013) for example, Italian banks underperformed European banks by 13%.”

In the final scenario, and HSBC’s central case – a ‘no’ vote but Renzi holds on – a selloff in banks would most likely ensue, as investors would perceive it as a lack of willingness to implement reforms in the country.

“Most likely Italian banks would underperform the general domestic index and European bank index given their dominant market exposure and the impact from sovereign spreads, which would probably widen. We believe that a price set-back could represent an opportunity for long-term oriented investors.”

Italy’s FTSE MIB was down 0.8% to 16,959.01 at 0915 GMT.