Deutsche Bank AG is forfeiting 221 million euros ($302 million) to end a derivative contract with Banca Monte dei Paschi di Siena SpA as regulators in Germany and Italy probe the transaction.
The German bank, which was poised to earn 746 million euros, will instead receive 525 million euros from Monte Paschi to terminate the contract 17 years early, the Siena, Italy-lender bank said in a statement yesterday.
The transaction dubbed Santorini came to light in January, when Bloomberg News disclosed how the contract masked losses, setting off a scandal that affected the outcome of national elections and prompted regulators to investigate. Santorini masked a 430 million-euro loss from an older contract with Deutsche Bank, according to Monte Paschi. The Italian bank lost money on the deals because it made a money-losing bet on the country’s government bonds.
“It’s highly unusual after a transaction that there would be a discount,” said Mark Williams, a former bank examiner for the Federal Reserve and now a lecturer at Boston University’s School of Management, who reviewed the original transaction. “This money is going back to Italian taxpayers and the bank has a duty to shareholders to explain why they are paying for it.”
Officials at Deutsche Bank declined to comment on the details of the settlement. Monte Paschi gained 4.5 percent to 16.15 cents. The stock has fallen 28 percent this year, leaving it with a market value of 1.9 billion euros.
“We see this transaction positively” for Monte Paschi, said Anna Maria Benassi, a Milan-based analyst at Kepler Cheuvreux. “It reduces uncertainty and improves the risk profile of the bank, particularly considering the reduction of its excessive portfolio of Italian government bonds.”
Monte Paschi cut its Italian government bond holdings by 2 billion euros with the accord. The lender’s common equity ratio under Basel 3 rules, a key gauge of financial strength, will increase 25 basis points, it said.
Santorini is part of a series of transactions used by former managers to hide losses at the bank, forcing the lender to restate its accounts in February. Prosecutors in Siena are scrutinizing the deals, and Monte Paschi had sued Deutsche Bank in Florence to recover its losses on the 2 billion-euro deal. In that month’s national elections, the Democratic Party saw its lead eroded because of its ties to Monte Paschi, according to SWG Institute, a polling company.
“This mutual agreement concludes the litigation related to these transactions and restores the relationship between Deutsche Bank and Banca Monte dei Paschi di Siena,” Deutsche Bank said in an e-mailed statement.
Deutsche Bank in October said it is cooperating with regulatory agencies and Siena prosecutors. Deutsche Bank kept the Monte Paschi deal and others off its balance sheet in a practice that German regulators are reviewing, two people familiar with the deals said in August. Officials at Bafin declined to comment yesterday.
“I’d like to see more transparency at Deutsche Bank,” said Philipp Haessler, an analyst with Equinet Bank AG in Frankfurt, who has a hold recommendation on Deutsche Bank shares. “Still, transparency is tough when it comes to litigation. There may be some banks that entered into similar deals as Monte Paschi that would make a decision on whether to sue depending on how much they stand to gain.”
Three former executives of Monte Paschi are being tried for allegedly obstructing regulators in a case related to another transaction, dubbed Alexandria, arranged with Nomura Holdings Inc. in 2009. The Nomura and Deutsche Bank arrangements, which were bets on Italian government bonds, have backfired for Monte Paschi, forcing new management to seek additional state aid.
Monte Paschi may be nationalized if it’s unable to meet European regulator demands that it tap private investors to repay part of the bailout next year. Chief Executive Officer Fabrizio Viola and Chairman Alessandro Profumo, appointed last year to turn around the bank, plan to sell 3 billion euros of new shares to partially reimburse 4.1 billion euros of state aid.
The bank has called an extraordinary shareholders’ meeting for Dec. 27 to gain approval for a stock sale in the first quarter. Fondazione Monte dei Paschi di Siena, which owns a 33.5 percent stake, wants to delay the sale until after the first quarter to gain more time to repair its own finances. Monte Paschi’s management prefers to raise the capital in January to get ahead of other Italian banks that might need to raise capital as the European Central Bank reviews lenders’ balance sheets.
After the relatively good news on the unwinding of Santorini, “the main issue now remains the clash between the foundation and the management about the timing of the rights issue,” said Fabrizio Bernardi, an analyst at Fidentiis Equities in Milan.
The bank pays 9 percent annual interest on the bonds it sold to the government in the bailout and must swap the debt for stock if it doesn’t have the cash for the annual coupon.
Monte Paschi also plans to cut its sovereign-debt holdings and trading activities and reduce its consumer credit and leasing portfolios. The bank will reduce the assets on its balance sheet to 181 billion euros by the end of 2017 from about 207 billion euros on Sept. 30. The company had a sixth straight quarterly loss on state-aid costs and provisions for bad loans in the third quarter.