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Monte Paschi Seen Boosting Cost Goals to Meet EU Demands

Banca Monte dei Paschi di Siena SpA Headquarters
Banca Monte dei Paschi di Siena SpA agreed with authorities earlier this month to more than double the amount of capital it must raise to repay state aid. Photographer: Alessia Pierdomenico/Bloomberg

Banca Monte dei Paschi di Siena SpA, the bailed-out bank embroiled in a fraud probe, may approve tougher cost-cutting measures to win European regulators’ support for state aid and attract new investors.

Monte Paschi’s board will meet today to revise its reorganization plan, which may include more asset sales, branch closings and savings than originally announced. The bank needs to comply with the European antitrust regulator’s requirements for a 4.1 billion-euro ($5.5 billion) bailout this year.

Undisclosed losses from financings carried out in previous years forced Chief Executive Officer Fabrizio Viola, 55, and Chairman Alessandro Profumo, 56, to seek additional state aid and prompted demands from regulators for a deeper reorganization of the world’s oldest bank. The pair, appointed last year to turn the company around, must convince investors they can meet the goal, which includes luring buyers to a 2.5 billion-euro stock sale over the next year, an amount that’s similar to Paschi’s current market value.

“There are too many risks related to this plan,” said Emanuele Vizzini, who manages $1.2 billion as chief investment officer at Investitori Sgr. “The uncertainty on the capital increase execution and the return to profitability make Monte Paschi an improbable investment case,” said Vizzini, who doesn’t own shares in the bank.

New Capital

Civil and criminal trials related to the hidden losses, first reported by Bloomberg News in January, start in London and Siena this week.

Monte Paschi agreed with authorities earlier this month to more than double the amount of capital it must raise to repay state aid. On Sept. 20, the lender said it suspended interest payments on about 481 million euros of three hybrid notes that are part of its Tier 1 capital, the most junior layer of debt capital securities, forcing bondholders to contribute to the restructuring.

The company may also decide to act on its 2.6 billion euros of more senior Upper Tier 2 debt, on which it is still paying coupons, according to analysts including London-based Eva Olsson at Mitsubishi UFJ Securities. An offer to buy back the securities at a discount to face value, creating a capital gain that will bolster its Tier 1 ratios, is a possibility, she said.

The company may also be able to suspend interest payments on the securities if it chooses, said John Raymond, an analyst at CreditSights Inc. in London.

Voting Rights

Shareholders agreed in July to remove a limit that capped voting rights at 4 percent to make the share sale attractive.

The European Union resisted Italy’s original bailout blueprint and insisted in recent months on changes. In a July letter sent to Italian Finance Minister Fabrizio Saccomanni, the regulator recommended executive pay caps, lower costs and cutting Italian sovereign-debt holdings and trading activities.

The letter also pointed out that state aid rules require beneficiaries to stem cash outflows to holders of hybrid and subordinated debt “to the maximum extent legally possible.” It added that that the rules apply to the outstanding Upper Tier 2 subordinated bonds.

The bank had 29 billion euros of Italian sovereign debt on June 30, the most among the nation’s biggest banks relative to its tangible equity. Between 2009 and 2011, Monte Paschi bet on sovereign debt, buying government securities and arranging structured deals underpinned by Italian bonds, which led to a capital shortfall.

Sovereign Debt

“The bank’s future is linked to the sovereign-debt spread,” said Marco Elser, a partner at investment bank Advicorp Plc in Rome.

Monte Paschi may approve today the closing of 200 more branches, Il Sole 24 Ore wrote Sept. 22, citing the bank’s advisers. Management cut more than 1,800 jobs in the first half and closed 400 branches.

Monte Paschi, whose biggest shareholder is Fondazione Monte dei Paschi di Siena, posted a loss of 279.3 million euros in the second quarter after net interest income dropped. The lender, which pays 9 percent interest on the bonds it sold to the government in the bailout, must pay with stock if it’s unprofitable this year.

State Ownership

“Monte Paschi will continue to be loss making, so we consider unavoidable the entrance of the state into the capital,” Elser said. “It’s not a question of if, but a question of when.”

At the current price of about 21 cents, the government would receive some 1.74 billion shares, or about 13 percent of Monte Paschi, according to Bloomberg calculations. The state would become the bank’s second-biggest shareholder after the foundation that currently owns 35 percent of the firm.

The lender may have an annual loss of 625 million euros for 2013, according to the average of nine analysts’ estimates.

Moody’s Investors Service downgraded Monte Paschi’s long-term debt and deposit ratings in May by three steps to B2, with a negative outlook, and said it wasn’t confident about Monte Paschi’s plans to repay state aid.

Prosecutors are probing how 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. On Sept. 26, three former executives face trial for allegedly obstructing regulators by hiding a document on a deal signed with Nomura Holdings Inc. in 2009.

Nomura, JPMorgan

Paschi told a London court yesterday that Italy was the proper venue for its dispute with Nomura over the financing that’s at the center of the criminal probe. Monte Paschi sued Nomura in Florence saying the lender colluded with former managers to conceal losses, prompting Nomura to file a complaint in London to have the contracts upheld.

In a separate probe, magistrates are accusing JPMorgan Chase & Co. and at least one of its employees of withholding information from regulators about how the bank financed Monte Paschi’s purchase of Banca Antonveneta SpA in 2008. JPMorgan said in a statement last month that it believes its employees “acted correctly at all times,” and that it planned to “vigorously” defend itself.

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