Nestled in the hills of Tuscany, Banca Monte dei Paschi di Siena, 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, it served sandwiches and mineral water. Chairman Alessandro Profumo told shareholders the lunch symbolized the bank’s new diet.
Profumo and Chief Executive Officer Fabrizio Viola, appointed this year, are slashing costs to reverse a decade of missteps that brought the 540-year-old lender to its knees. They’re cutting 4,600 of 31,170 staffers by 2015 and closing 400 branches. Monte Paschi has sold assets including its north Italian unit, Biverbanca, and is in talks to sell its leasing business. The bank is also seeking €3.9 billion ($5.1 billion) in government loans, its second bailout in three years. Says Viola: “We have to clean things up and turn the bank into an engine of renewal.”
Much of the bank’s troubles stem from 2007, when then-Chairman Giuseppe Mussari spent €9 billion to acquire rival Banca Antonveneta, based near Venice, from Spain’s Banco Santander. That price exceeded Monte Paschi’s own market value and was 36 percent more than Santander had paid for Antonveneta just two months earlier. Monte Paschi was forced to write down €4.5 billion of Antonveneta’s value last year as part of its restructuring. “Monte Paschi’s problems were directly linked to the Antonveneta purchase,” says Flavio Piccolomini, CEO of the southern and central Europe division of Marsh, a U.S. insurance broker, and member of a family prominent in Siena since the 13th century. City prosecutors are probing allegations of market manipulation and obstruction of regulatory activity around Antonveneta’s purchase.
That wasn’t the bank’s only controversial purchase under Mussari, who stepped down in April. In 2010, Monte Paschi bought a 19 percent stake in Aeroporto di Siena, which runs the local airport, to help finance an international terminal. Mussari and a former member of the Fondazione Monte Paschi, a nonprofit that is the bank’s biggest shareholder, are among the suspects city prosecutors say manipulated the price of the airport’s sale by the state in 2007. Mussari, now head of the Italian Banking Association, denied any involvement when the probe was announced in 2010 and didn’t respond to requests for comment. In January 2011, Mussari led Monte Paschi into the fashion business, starting a clothing line called 1472, after the year of Monte Paschi’s founding. The bank also sells Tuscan olive oil and local truffles under the 1472 name.
Monte Paschi has been hobbled by an awkward relationship with the Fondazione, which was set up in 1995 and is partly run by the region’s politicians. The foundation traditionally kept half the bank’s dividends for itself to fund local philanthropic programs and controlled the appointment of bank executives. From 1995 to 2010, Fondazione lavished €2 billion on art, science, and culture in Siena. “They milked Monte Paschi for what it was worth,” says Guido Antolini, a member of an association of Monte Paschi’s small investors. “A strategy led by a foundation whose interests were tied to politics and local interests just couldn’t work.” Monte Paschi’s shares have fallen 85 percent since Jan. 1, 2009.
Having the foundation as the bank’s biggest investor “in retrospect looks like a mistake,” Gabriello Mancini, chairman of Fondazione Monte Paschi since 2006, 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.”
The bank has suffered too from a more conventional misstep: a losing bet on Italy’s debt. In 2009, when banks around the world were starting to emerge from the post-Lehman Brothers credit crunch, Monte Paschi tripled its holdings of sovereign bonds to €15 billion from €5 billion. The total reached €25 billion in 2011. The bank decided to seek another €500 million of state aid on Nov. 28 to cover potential losses from “structured transactions” linked to its Italian government bond portfolio. Monte Paschi still holds €22 billion of the bonds, with an average 10-year maturity, though it may sell some should bond prices rise, CEO Viola says.
Monte Paschi’s main offices are in the 12th century Palazzo Salimbeni, a neo-Gothic landmark it owns in Siena’s historic center that’s home to paintings and sculpture spanning five centuries of Tuscan art. The new management’s commitment to cost-cutting and responsible banking means Monte Paschi’s culture is changing, Viola says, and with it the lender’s financial future. “People have started to understand this year,” he says, “that the bank needs to be managed differently.”