Paschi Has Unexpected Third-Quarter Loss on Bad Loans

Monte Paschi Has Unexpected Third-Quarter Loss on Bad Loans
Customers use a Bancomat automated teller machine at a Banca Monte dei Paschi di Siena SpA bank branch in Rome. Photographer: Alessia Pierdomenico/Bloomberg

Banca Monte dei Paschi di Siena SpA, Italy’s third-biggest bank, unexpectedly reported a third-quarter loss as provisions for bad loans almost doubled.

The bank had a net loss of 47.4 million euros ($60 million) compared with a profit of 42.2 million euros a year earlier, the Siena, Italy-based company said in a statement today. The average estimate of nine analysts surveyed by Bloomberg was for net income of 103.4 million euros.

Monte Paschi, the world’s oldest bank, is the only Italian lender still missing minimum capital requirements set by the European Banking Authority. Chief Executive Officer Fabrizio Viola is seeking 3.4 billion euros from the Italian government in return for bonds to help bolster its balance sheet. He’s also selling assets, reducing risks and cutting costs as part of a three-year plan to restore liquidity.

“Monte Paschi posted another very bad quarter on the back of further balance sheet clean-up,” Luigi Tramontana, a Milan-based analyst at Banca Akros, wrote in an e-mailed note. He rates the bank hold with a price estimate of 26 euro cents.

The bank’s shares fell as much as 4.9 percent, and were down 4.5 percent at 20.24 cents at 11:13 a.m. in Milan, giving the company a market value of 2.4 billion euros.

Higher Provisions

Paschi’s loan-loss provisions increased to 461 million euros in the quarter from 269 million euros a year ago. The lender’s Tier 1 capital ratio, a key measure of financial health, decreased to 11.4 percent on Sept. 30 from 11.7 percent at the end of June.

“This is the most difficult quarter of 2012, both from an economic and financial system standpoint,” Viola said during a conference call today. “That translated into higher credit costs and a deterioration in asset quality.”

Revenue rose an annual 5 percent to 1.38 billion euros in the third quarter as the bank made a profit of 233 million euros from trading compared with a loss of 4 million euros a year ago. The earnings included 190 million euros from a 1.25 billion-euro bond swap announced on July 6, the bank said.

Monte Paschi held 22 billion euros of Italian sovereign bonds at the end of the third quarter, cutting the amount by 3 billion euros from the previous three months,

Financial Aid

The lender is one of the 10 biggest users of the European Central Bank’s 1 trillion-euro Longer-Term Refinancing Operation, which can be repaid starting in January. It owes 29 billion euros.

Viola said the bank’s liquidity position is improving, shown by a 2.2 percent quarterly increase in funding including deposits compared with the previous three months.

Monte Paschi, which has sold bonds to the government in return for financial aid, expects to sell 3.4 billion euros of the debt by the year-end “even if talks between European authorities and Italy are still ongoing to get the approval,” Chief Financial Officer Bernardo Mingrone said during the conference call.

While the Italian Parliament approved a bill allowing the state aid in August, the terms of the new bonds haven’t been defined yet because the rules are under review by European antitrust authorities.

Book Value

Analysts are concerned that EU regulators may rule that the measure is unfair because it would allow Monte Paschi to give shares to the Italian Treasury at their book value, instead of interest on the debt, should the bank report an annual loss.

“The EU commission’s position is known -- it aims to have shares given to the Italian state in case of loss at market value,” Mingrone said. “This is part of the negotiations between the government and the authority.”

Monte Paschi’s aid request is the second in three years. It obtained 1.9 billion euros in 2009 through the issue of so-called Tremonti bonds. That debt would be converted into the new securities and form part of the amount requested.

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