Nov. 16 (Bloomberg) -- Nestled in the hills of Tuscany, Banca Monte dei Paschi di Siena SpA, the world’s oldest bank, once hosted shareholders with its own vintage Chianti and mounds of beef brisket.
At its last annual general meeting in October they got sandwiches and mineral water.
Chairman Alessandro Profumo and Chief Executive Fabrizio Viola have little time to savor Monte Paschi’s priceless art collection and its vino di Toscana “Rosso 1472,” grown just outside its base in the city of Siena. Appointed this year, they’re slashing costs to reverse a decade of missteps that brought the 540-year-old lender to its knees.
Monte Paschi’s Italian owner, a foundation by the same name, once lavished 2 billion euros ($2.5 billion) on art, science and culture in Siena, located 240 kilometers north of Rome, and helped expand its airport. Former Chairman Giuseppe Mussari, who stepped down in April, spent 9 billion euros in 2007 to acquire rival Banca Antonveneta SpA, a price that exceeded Monte Paschi’s own market value. A losing 27 billion-euro bet on Italy’s sovereign bonds followed.
Mussari is now head of the Italian Banking Association, representing the nation’s 699 banks.
Shareholder Gianni Acciughi, 60, who took early retirement from Monte Paschi in 2009, was scathing about the management style of the time. They were working on “slides and reports and not on reality,” he says.
Acciughi turned up at the shareholders’ meeting in Siena on Oct. 9 with his 25,000 shares. At 20.3 cents apiece, they’d net him just over 5,000 euros today, an eighth of what they were worth in September 2008, the month Lehman Brothers Holdings Inc. pushed the global economy into financial crisis.
“We used to get Tuscan beef brisket and the local hand-made ‘Pici’ pasta on China plates, along with award-winning wines in fine crystal glasses,” Acciughi said by telephone from his home in the city. “This year I had to go out to buy a slice of pizza because I only found crumbs of sandwiches.”
Profumo, speaking at the meeting, told shareholders the lunch symbolized the new diet the bank is on.
Profumo and Viola are cutting 4,600 of the bank’s 31,170 staff by 2015 and closing 400 branches as part of a rescue plan. They’re now asking the Italian government to lend them 3.4 billion euros, the second bailout in three years. The deal is currently under European antitrust regulator scrutiny.
“The financial assets, the inability to value the risks correctly, that was the biggest mistake,” Viola, 54, said in an interview at Monte Paschi’s headquarters on Nov. 6. “We have to clean things up and turn the bank into an engine of renewal.”
Monte Paschi’s offices are based at the 12th-century “Palazzo Salimbeni,” a neo-gothic landmark it owns in Siena’s historic center. The palace is home to paintings and sculpture spanning five centuries of Tuscan art, including works by Il Sassetta, Pietro Lorenzetti and Beccafumi.
Monte Paschi’s biggest shareholder is Fondazione Monte Paschi, a non-profit entity set up in 1995. Pressure on Monte Paschi’s finances is forcing the Fondazione to break with traditions such as appointing managers from within the bank and its own directors to run operations.
Profumo, 55, hired in April when Mussari stepped down, was CEO of UniCredit SpA for 13 years. Viola, who had arrived at Monte Paschi three months earlier, previously ran two Italian cooperative banks in northern Italy focused on retail and corporate clients.
Profumo and Viola’s job of turning the bank around is being made harder by a slump in Italy’s 1.6 trillion-euro economy, where the jobless rate is 10.8 percent and households and businesses are defaulting on loans in increasing numbers. Monte Paschi’s focus on local tradesmen and mortgage financing means asset quality deteriorated at a faster pace than peers.
In its third-quarter earnings on Nov. 13, Monte Paschi made a loss of 47.4 million euros. Nine analysts surveyed by Bloomberg expected a profit of 103.4 million euros. Provisions for bad debt almost doubled.
The bank’s ratio of non-performing loans to total lending was 12 percent in September, greater than UniCredit’s 8.3 percent and the 7.3 percent of Intesa Sanpaolo SpA, Italy’s two biggest banks, according to calculations based on the lenders’ earnings statements.
Monte Paschi’s commercial loans exceed its deposits by 30 percent and that’s “unsustainable,” Profumo told reporters in Milan on Oct. 9.
The stock fell 2.2 percent to 19.81 cents, valuing the firm at 2.3 billion euros as of 12:20 p.m. in Milan. Monte Paschi’s shares have fallen 85 percent since Jan. 1, 2009, compared with a 2 percent decline in the 38-member Bloomberg Banks and Financial Services Index.
“The biggest challenge for the pair is to eradicate bad habits and change the bank’s culture that is so deeply rooted,” Marco Elser, a partner at investment bank Advicorp Plc in Rome, said in an interview. “You can’t ride two horses at same time. Paschi should have made a choice between the past and the future, its hybrid behavior just brought it to disaster.”
Monte Paschi has disposed of assets this year, including its north Italian unit Biverbanca, and is in talks to sell its leasing business to an “industrial partner,” Viola said in the interview.
In June, Profumo and Viola presented their plan to turn the bank around, saying revenue would contract 1 percent through 2015.
The two men are seasoned Italian bankers. Profumo led a $60 billion expansion of UniCredit into central and eastern Europe that helped it become the largest lender in the region and Italy’s biggest by assets.
The expansion, however, meant UniCredit was short of capital when confidence in the finance industry collapsed in 2008. Profumo was forced to resign in September 2010 after turning to investors for extra money twice in 18 months.
Viola joined Monte Paschi after spending more than 20 years as CEO of lenders including Banca Popolare dell’Emilia Romagna Scarl and Banca Popolare di Milano Scarl.
“They are on the right track for a turnaround, focusing on costs and capital,” Marco Giorgino, a professor of finance at MIP Politecnico di Milano university, said in a phone interview. “Their competences are among the best in Italy and can help attract investors.”
The pair not only have to bolster the bank’s finances, but also deal with officials in Siena who are used to having sway over how the bank is run and by whom.
While Monte Paschi became a listed company in 1999, Fondazione Monte Paschi is partly run by the region’s politicians. The foundation traditionally kept half the bank’s dividends for itself to fund local philanthropic programs.
‘Grip on Power’
“That level of control via a big stake, in retrospect looks like a mistake,” Gabriello Mancini, chairman of the Fondazione Monte Paschi, said in an e-mailed response to questions. “The city and province of Siena traditionally issued guidelines on board nominees with the goal of maintaining their grip on power.”
Fondazione Monte Paschi is among Italy’s 88 regional foundations created 20 years ago when the charitable arms of savings banks were split from lending operations to help pave the way for their sale by the government.
It was the only institution of its kind to have a majority stake in a listed bank until debt forced it to reduce its holding earlier this year. In 2010, it gave 10.7 million euros to the Province of Siena, according to a statement at the time.
“They milked Monte Paschi for what it was worth,” Guido Antolini, a member of Associazione di Piccoli Azionisti Azione Banca Monte dei Paschi di Siena, an association of Monte Paschi’s small investors, said in an interview by telephone. “A strategy led by a foundation whose interests were tied to politics and local interests just couldn’t work.”
To its critics, Monte Paschi’s board caused the financial disaster that erupted when it tried to expand the bank beyond Siena.
Speaking of Monte Paschi’s acquisition of Banca Antonveneta five years ago, Mussari said at the time that he was “making history.”
Monte Paschi’s shares fell as much as 15 percent that day and never recovered.
The price Monte Paschi paid Banco Santander SA for Antonveneta, based near Venice, was 36 percent more than the Spanish lender had paid for it just two months previously. Monte Paschi was forced to write down 4.5 billion euros of Antonveneta’s value last year as part of its restructuring plan.
“Monte Paschi’s problems were directly linked to the Antonveneta purchase,” said Flavio Piccolomini, CEO of the southern and central Europe division of Marsh Inc., a U.S. insurance broker, and member of a family prominent in Siena since the start of the 13th century.
Prosecutors in the city are probing allegations of market manipulation and obstruction of regulatory activity surrounding Antonveneta’s purchase.
Monte Paschi’s influence is felt throughout the city of Siena, home to 55,000 people.
The city’s most prominent event is the Palio di Siena, a horse race held twice a year since the 17th century around the central Piazza del Campo square. The balcony of Palazzo Sansedoni, a historic building owned by Fondazione Monte Paschi, offers perhaps the best view of the proceedings.
Ten riders dressed in the colors of the contrade, or city districts of Siena, ride horses bareback for three laps of the square. The race, which lasts less than two minutes, is preceded by months of preparation and a medieval parade with grooms, trumpeters, musicians and flag-wavers.
Mussari’s own horse, seven-year-old Gia del Menir, won the event in 2008.
Monte Paschi sponsors Siena’s professional soccer club and the basketball team. It’s invested in local businesses such as an expansion of the city’s airport.
In 2010, Monte Paschi bought a 19 percent stake in Aeroporto di Siena SpA to help finance an international terminal. Mussari and a former member of the Fondazione are among suspects that city prosecutors say manipulated the airport’s sale by the state in 2007.
Mussari denied any involvement when the probe was announced in 2010. He didn’t respond to emails sent to his personal account or calls to the Italian Banking Associations’ headquarters in Rome for this story.
In January 2011, Mussari led Monte Paschi into the fashion business, starting a clothing line called “1472.” The brand, still in existence today, is named after the year of Monte Paschi’s founding. Products also include Tuscan olive oil and local truffles.
Bet on Debt
In 2009, at a time when banks around the world were starting to emerge from the post-Lehman credit crunch, Monte Paschi made its ill-fated bet on Italian sovereign debt.
The bank tripled its holdings of the bonds to 15 billion euros from 5 billion euros and by 2011 the total was 25 billion euros. The bank still holds 22 billion euros of the bonds, with an average 10-year maturity, though may sell some should its losses be erased, Viola said in the interview.
Ten-year Italian government debt yielded 4.14 percent in December 2009. Two years later, the yield peaked at 7.26 percent. European Central Bank President Mario Draghi’s bond-buying program has helped push yields down to 4.89 percent.
In the second-round of stress tests by the European Banking Authority last year, Monte Paschi had a capital shortfall of 3.3 billion euros due to its Italian bond holdings.
At the end of the second quarter, the nominal value of the bonds was equal to almost four times the bank’s assets, excluding the value of its brands and know-how, according to data compiled by Bloomberg. The debt Intesa Sanpaolo held was worth 47 percent more than its tangible assets and UniCredit’s was equal to 84 percent.
Viola now says the new management’s commitment to cost-cutting and responsible banking means Monte Paschi’s culture is changing, and with it the lender’s financial future.
“People have started to understand this year that the bank needs to be managed differently, as a listed company, without outside influence,” he said. “All decisions are now taken free of political influence and we’re focused on the core business to improve the capital position, liquidity and profitability.”
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