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Paschi Has Fifth Straight Quarterly Loss on Bailout Costs

Banca Monte dei Paschi di Siena, the Italian bank seeking to persuade European regulators it deserves a bailout, is the worst performer in Europe’s benchmark banking index after reporting a bigger-than-estimated quarterly loss.

Monte Paschi dropped as much as 3.8 percent to the lowest in more than a month. The bank was down 2.7 percent to 20.3 cents as of 10:55 a.m. in Milan, extending declines this year to 17 percent and giving the bank a market value of 2.36 billion euros ($3.15 billion). The 47-company STOXX 600 Banks Index climbed 10 percent this year.

The lender’s net loss narrowed to 279.3 million euros from 1.64 billion euros a year earlier, when Monte Paschi wrote down goodwill and intangible assets by more than 1.5 billion euros. That was more than the average estimate for a 149.7 million-euro loss among six analysts surveyed by Bloomberg.

“ The shocking loss in the second quarter is mainly due to the collapse of net interest income, following the sharp de-leverage and increasing cost of funding,” Anna Maria Benassi, an analyst at Kepler Cheuvreux who has a “reduce” recommendation on the stock, wrote in an e-mailed comment today. She cut her target price to 10 cents from 14 cents.

Chief Executive Officer Fabrizio Viola is waiting for European regulators to approve the latest restructuring plan for Monte Paschi to retain rights to 4.1 billion euros of state aid, which it got from selling bonds to the government. The Siena-based bank, which must pay 9 percent annual interest on the bonds, plans more asset disposals, branch cuts and savings to return to profit this year, a necessary condition under the plan to avoid surrendering a stake to the government.

Income Declines

Revenue in the second quarter fell 22 percent to 1.02 billion euros from a year earlier, hurt by higher costa of funding and the state-aid costs. Net-interest income fell 38 percent to 486.5 million euros, below the 576 million euros expected by analysts.

“Results were affected by a challenging macro environment,” Viola said on a conference call yesterday. The bank’s funding costs are 50 basis points higher than the average of Italy’s top ten banks, while de-leveraging and the 152 million euros of interest paid in the first half on bonds sold to the government hurt net interest income, he said.

Monte Paschi is among lenders in the country suffering from Italy’s longest recession in more than 20 years, as stricter rules by local and international regulators are forcing banks to set aside more money for non-performing loans.

Loan-loss provisions grew to 544.8 million euros from 408.7 million euros in the second quarter of 2012 and compared with an estimate of 468 million euros. Monte Paschi increased its bad-loan coverage ratio by 70 basis points to 41.1 percent in the second quarter from the previous three months.

Restructuring Plan

Monte Paschi’s restructuring plan submitted to the European Commission in June “reflects a more fragile macroeconomic scenario as a result of the persisting economic crisis in Europe, with negative repercussions on revenue generation and loan loss provisions,” the company said in a statement yesterday.

The bank plans additional actions, targeting cost savings of 140 million euros in 2013 and 190 million euros in 2015. “The bank is ready to accept indications from the EU Commission aimed at improving the restructuring plan under review,” Viola said.”

Europe’s regulators may insist on tougher measures on cost-cutting, executive pay and treatment of creditors to approve the restructuring, according to a letter sent by EU competition Chief Joaquin Almunia to Finance Minister Fabrizio Saccomanni on July 16.

“There is a high risk that the European regulator will ask for stricter measures from Paschi to turn around the bank and repay state aid,” Vincenzo Longo, a Milan-based strategist at IG Markets, said by telephone. “This would imply higher execution risks that may add pressure on the stock.”

Viola, 55, and Chairman Alessandro Profumo, 56, appointed last year to turn the bank around, cut more than 1,800 jobs in the first half and plan to reach a 2015 target of closing 400 branches by next month. The pair are trying to revive profit after the acquisition of Banca Antonveneta SpA in 2008 and investments in sovereign debt and derivatives hurt capital and finances.

Share Sale

Last month, Monte Paschi shareholders agreed to remove a requirement for owners to hold a 4 percent stake in order to win voting rights. The step was designed to make a 1 billion-euro share sale to help repay state aid and avert nationalization more attractive. The bank hasn’t been approached by any potential investors, Profumo said last month.

Prosecutors are probing whether former managers at Monte Paschi, which piled up losses of 7.9 billion euros in the past two years, used derivative contracts to obscure more than 700 million euros of losses.

Magistrates are accusing former executives, including ex-chairman Giuseppe Mussari, of withholding information from regulators about how the bank financed its purchase of Antonveneta in 2008. Mussari has denied any wrongdoing. Former General Manager Antonio Vigni, also under investigation, said through his lawyer that he always acted in good faith and in the interests of the bank.

The executives allegedly withheld documents that showed how a 1 billion-euro securities sale arranged by JPMorgan Chase & Co. to finance the purchase consisted of debt instead of equity, the prosecutors said in a court filing last week.

Prosecutors say JPMorgan and at least one member of its staff obstructed regulators. The U.S. investment bank said it acted correctly.

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-- Editors: Dan Liefgreen, Mark Bentley

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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