Paschi Cut ECB Funding After Reducing Italy Bond Holdings

Banca Monte dei Paschi di Siena, Italy’s third-biggest bank, reduced borrowing from the European Central Bank in the third quarter after cutting its Italian sovereign bond holdings to 22 billion euros ($28 billion).

Monte Paschi cut its ECB funding by 4 billion euros to 29 billion euros, wiping out all borrowing to other than its three- year borrowings obtained through the Longer Term Refinancing Operation, Chief Executive Officer Fabrizio Viola said in an interview yesterday. In the quarter, the bank lowered holdings of Italian government bonds by 3 billion euros.

“The improvement of the bank’s liquidity position, in particular in the third quarter, allowed us to reduce the ECB position, maintaining only the LTRO,” Viola said. The bank’s deleveraging and asset disposals will allow the Siena-based lender to pay down the remainder over two years, he said.

Monte Paschi is one of the 10 biggest users of the ECB’s 1 trillion-euro Longer-Term Refinancing Operation, which can be repaid starting January. The lender also turned to Italy for 3.4 billion euros of funds to fill a capital shortfall identified by the European Banking Authority, caused by potential losses linked to its exposure to the country’s sovereign debt.

“A reduction of 4 billion euros in terms of ECB exposure is great news for Monte Paschi,” said Fabrizio Bernardi, a Milan-based analyst at Fidentiis Equities.

The bank rose as much as 1.8 percent in Milan and climbed 0.9 percent to 22.3 cents at 12:20 p.m. The Bloomberg Banks and Financial Services Index increased 0.5 percent. Monte Paschi has lost 11 percent this year compared with the index’s 19 percent gain.

Further Cut

Monte Paschi will shrink its securities portfolio as Italian government bonds mature, Viola said. It may also consider selling some of that debt to repay LTRO should the spread between the fixed-rate securities and German Bunds fall further and eliminate losses, he said.

“We could be able to break even on our Italian sovereign bonds portfolio at a point between a spread of 150 to 200 basis points,” he said. “At that point, if this will happen, and we hope it will happen soon, we will decide” whether to sell.

A narrower spread on the debt in the three months to September allowed Monte Paschi to reduce unrealized losses on its available-for-sale securities by about 400 million euros to 2.9 billion euros, Viola said. The difference between the yields of 10-year Italian bonds and German bunds narrowed 59 basis points, or 0.59 percentage point, to 365 basis points in the third quarter.

Sale Talks

Monte Paschi is in talks with a potential “industrial partner” to sell its leasing unit, Viola said. He said the bank aims to transfer the unit to a partner, keeping a minority stake and deconsolidating the unit from its accounts.

“We are working very intensely in order to close a deal on the leasing as soon as possible,” Viola said.

Monte Paschi, which expects revenue to fall 1 percent through 2015, is selling assets, closing 400 branches and eliminating 4,600 jobs as part of its three-year plan to boost profit and repay state aid. Paschi, which posted a second- quarter loss of 1.67 billion euros after a goodwill writedown, will publish third-quarter results Nov. 13.

Monte Paschi will resume talks with unions to cut jobs, Viola said, adding that he is confident that they will reach an agreement. Viola reiterated the bank’s target to reduce personnel costs to 1.9 billion euros in 2015 from 2.2 billion euros in 2011.

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net; Flavia Rotondi in Rome at rotondi@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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