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Monte Paschi May Post Fourth Straight Loss on Lower Income

Banca Monte dei Paschi di Siena, the bailed-out Italian bank embroiled in a fraud probe, will probably report a fourth straight quarterly loss as lending income falls.

Monte Paschi may post a net loss of 154 million euros ($200 million) when it publishes results tomorrow, compared with a profit of 88.5 million euros a year earlier, according to the average estimate of nine analysts surveyed by Bloomberg.

Chief Executive Officer Fabrizio Viola must return the bank to profit this year under Monte Paschi’s 4.1 billion-euro rescue plan to avoid handing a stake to the government. In the meantime, prosecutors are probing whether former managers at the Siena-based bank, which piled up a total loss of 7.9 billion euros in the past two years, used derivative contracts to obscure the losses.

“For the time being, the bank’s revenue generation is insufficient to cover the deteriorating asset quality,” Luigi Tramontana, an analyst at Banca Akros in Milan, said in an e-mailed report to clients last week. “The management is working on further restructuring, but asset disposals will be difficult to achieve in the current context.”

Monte Paschi fell 0.5 percent to 20.83 cents at 10:37 a.m. in Milan trading. The stock has declined 14 percent in the past 12 months, giving the bank a market value of 2.4 billion euros. The 40-company Bloomberg Europe 500 Banks and Financial Services Index gained 36 percent in the period.

Probe Impact

The bank, founded in 1472, won shareholder approval last month to sue former managers over derivatives that hid more than 700 million euros of losses and lie at the center of a fraud probe by Italian prosecutors. Viola said on April 29 that the swaps are now fully reflected in the bank’s accounts and there are no more losses that weren’t booked correctly.

Even so, “the probes may have an impact on Paschi’s accounts in terms of lower deposits and are also hurting the ability of the new management to attract investors,” said Jacopo Ceccatelli, a partner at financial advisory firm JC & Associati SIM in Milan.

Viola, 55, and Chairman Alessandro Profumo, 56, appointed last year to turn the bank around, are selling leasing and consumer credit units, closing 400 branches and eliminating 4,600 jobs by 2015. They must submit a revised strategy to the European Banking Authority (BMPS) by the end of June.

Their mission is complicated by Europe’s financial crisis and Italy’s longest recession in 20 years, which are affecting loan quality and profitability.

Government Stake

Revenue may drop 31 percent to 1.04 billion euros in the first quarter from a year earlier, hurt by lower income from lending and the cost of state aid, according to the average estimate of seven analysts. Net interest income probably fell to 546 million euros from 883 million euros. Loan-loss provisions probably amounted to 424 million euros compared with 430 million euros a year before, analysts estimated.

“We expect internal capital generation to be wiped out by the servicing of government support,” Manuela Meroni, a Milan-based analyst, said in an e-mailed report today. The payment of interest on the government support in the form of shares “may generate a stock overhang,” he said.

The bank is paying an annual coupon of 9 percent on the 4.1 billion euros of debt sold to the government in the bailout. Should Monte Paschi post a 2013 loss, it will have to pay the coupon in the form of new shares, issued at market value.

At the current price of about 21 cents, the government would receive some 1.74 billion shares, or about 13 percent of Monte Paschi, according to Bloomberg calculations. The state would hence become the bank’s second-biggest shareholder after Fondazione Monte dei Paschi di Siena, a Siena-based foundation that currently owns 35 percent of the firm.

Persistent Losses

The lender may have an annual loss of 262 million euros for 2013, according to the average of 14 analysts’ estimates.

“Monte Paschi will be loss making in both 2013 and 2014,” wrote Andrea Vercellone, an analyst at Exane BNP Paribas SA (BNP), in an e-mailed report to clients earlier this month. “We expect the 2013 coupon on Monti bonds and a portion of that for 2014 will be paid in newly issued shares.”

Investors will almost certainly see their shareholdings diluted and will probably not receive a dividend until 2019, when the bank will free itself of government support, he said.

Moody’s Investors Service downgraded Monte Paschi’s long-term debt and deposit ratings last week by three steps to B2, with a negative outlook, and said it wasn’t confident about Monte Paschi’s plans to repay state aid.

There are “questions around internal capital generation and uncertain prospects for external capital raises,” the ratings company said on May 9.

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net Francesca Cinelli at fcinelli@bloomberg.net

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

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