Banca Monte dei Paschi di Siena SpA, Italy’s third-biggest bank, pledged to cut an extra 3,360 jobs and increase capital to win European Union support for 4.1 billion euros ($5.6 billion) in aid. The shares surged.
Monte Paschi will shed 8,000 staff by 2017, up from a previous goal of 4,640 reductions by 2015, it said on its website yesterday. The Siena-based company will also carry out a 2.5 billion-euro share sale next year and reduce administrative costs by 440 million euros by 2017.
“This is a solid restructuring plan, built upon a strong turnaround track record, clearly identified actions and prudent macroeconomic assumptions,” Chief Executive Officer Fabrizio Viola said on a conference call with analysts yesterday.
Viola, 55, and Chairman Alessandro Profumo are being forced by European regulators to conduct a more rigorous overhaul of the world’s oldest bank than initially planned to secure the state aid. Viola and Profumo, 56, appointed last year, sought the cash after their predecessors lost billions of dollars on Italian sovereign debt and derivatives contracts.
Monte Paschi’s shares advanced as much as 6.7 percent in Milan, the biggest gain in almost two months. They climbed 3.3 percent to 23.9 cents at 10:37 a.m., valuing the company at 2.8 billion euros.
The plan also sets a profit goal of about 900 million euros for 2017 and caps management pay at 500,000 euros annually. The bank already reduced its workforce by 2,700 to 28,473 as of the end of June.
Monte Paschi expects EU approval of its restructuring plan by Nov. 14, it said yesterday.
While management’s track record shows the cost target could be achieved, the rights issue carries “strong execution risk,” Manuela Meroni, an analyst at Banca IMI SpA in Milan, said in an e-mailed report today.
The bank, whose former managers are the subjects of a fraud probe linked to derivatives contracts, had pledged to present the strategy to EU regulators two weeks ago.
The delay came amid protracted negotiations between Italian and EU officials. In a July letter to Finance Minister Fabrizio Saccomanni, the European regulator recommended executive pay caps, lower costs and cutting Italian sovereign-debt holdings and trading activities.
Massimo Masi, head of the Uilca employees’ union for banks, said he’s concerned the job reductions “will have a devastating impact” on the bank’s labor force. Banking unions are planning to meet Viola today to discuss the restructuring measures, he said in an e-mailed statement.
Monte Paschi said it will use the capital increase to help repay 3 billion euros of government funds next year and the rest by 2017. UBS AG (UBSN) is advising on the offering.
The state aid will be converted into new shares for the government “should market conditions prevent the completion of the capital raising within the time frame set,” Chief Financial Officer Bernardo Mingrone said on yesterday’s conference call with Viola.
“The capital hike and the plan’s execution risk remain very high, unless a strategic investor shows interest in participating,” Carlo Tommaselli, a Milan-based analyst at Societe Generale SA (GLE), wrote in an e-mailed report today. “Failing the capital hike, nationalization would be necessary. We remain cautious.”
Monte Paschi is open to alliances in Italy and abroad, though “there’s nothing concrete for now,” Profumo told Il Sole 24 Ore (S24) in an interview.
The company agreed last month to more than double the planned capital increase to repay the government. It also said two weeks ago that it suspended interest payments on about 481 million euros of three hybrid notes that are part of its Tier 1 capital, thereby requiring bondholders to contribute to the restructuring.
The bank’s capital shortfall came after it made loss-making bets on Italian sovereign debt between 2009 and 2011, either by buying government securities or arranging structured deals underpinned by Italian bonds.
Monte Paschi said it plans to reduce its 23 billion euros of Italian sovereign debt, the most among the country’s biggest banks relative to tangible equity, to about 17 billion euros in 2017. The lender has paid back 1 billion euros from the 29 billion euros it borrowed in the European Central Bank’s long-term refinancing operations, it said in the statement.
Monte Paschi, whose largest shareholder is the Fondazione Monte dei Paschi di Siena, posted a loss of 279.3 million euros in the second quarter as net interest income dropped. The bank, which pays 9 percent annual interest on the bonds it sold to the government in an initial bailout, must substitute the debt for stock if it’s unprofitable this year.
Monte Paschi is asking for the financial support as prosecutors probe how former managers at the company, 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. Three former executives are on trial for allegedly obstructing regulators by hiding a document on a deal signed with Nomura Holdings Inc. (8604) in 2009.
In a separate probe, magistrates are accusing New York-based JPMorgan Chase & Co. (JPM) and at least one of its employees of withholding information from regulators about how it financed Monte Paschi’s purchase of Banca Antonveneta SpA in 2008. JPMorgan said in a statement last week that the bank and its employees “acted correctly at all times,” and it planned to “vigorously” defend itself.
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