Paschi Swings to Quarterly Profit on Lower Bailout Costs

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Banca Monte dei Paschi di Siena SpA, which tapped Italy for two bailouts since 2009, reported a profit after 11 straight quarterly losses as interest costs on state aid fell.

Net income in the first three months of the year was 72.6 million euros ($81 million) compared with a net loss of 174.1 million euros a year earlier, the bank said Friday. That beat the 44 million-euro average of seven analyst estimates compiled by Bloomberg.

Chief Executive Officer Fabrizio Viola is cleaning up the balance sheet, reducing risk and selling assets to restore profit at the world’s oldest bank, engulfed in legal probes of alleged misconduct by former managers. The lender, which had the biggest capital shortfall among the banks that failed the European Central Bank’s health check last year, said Friday it’s delaying and lowering profitability targets as it prepares to raise 3 billion euros from shareholders over coming weeks.

The change in targets was necessary because of the economic environment, the outcome of the comprehensive assessment and target capital requirements imposed by the regulatory authority, Monte Paschi said. The bank will “explore M&A opportunities in order to accelerate the achievement of higher profitability targets.”

Lower Profit

The ECB gave an unfavorable assessment of Monte Paschi in its supervisory review this year. It cited the bank’s high credit risk, difficulty of achieving adequate levels of profitability and an inability to generate capital organically, in addition to reputational and legal risks.

The bank now targets net profit of about 880 million euros in 2018, compared with 900 million euros in 2017 it sought previously. Monte Paschi expects a return on tangible equity, a measure of profitability, of about 8 percent in 2018 and a 4.8 percent compound annual growth rate in revenue in the four years through 2018.

Monte Paschi, which was requested by the ECB to cut its exposure to Nomura Holdings Inc. by July, said it started talks with the central bank on how that exposure is calculated. Recent European Banking Authority rules and the planned share sale may eliminate the current breach of the regulatory limit, the bank said.

Nomura Deal

Paschi’s exposure to Nomura, including a 2009 derivative transaction dubbed Alexandria, was about 35 percent of its regulatory capital base at the end of 2014, exceeding the 25 percent limit set by regulators.

Closing Alexandria would cost Monte Paschi about 1 billion euros, according to a letter the bank sent to Milan prosecutors dated Feb. 18 and seen by Bloomberg.

Bad-loan provisions in the first quarter were almost unchanged at 468.2 million euros compared with 476.6 million euros a year earlier. The bank’s common equity tier 1 ratio pro forma, including the approved share sale, fell to 10.9 percent as of March 31 from 11.4 percent at the end of December.

The bank’s net interest income rose 37 percent to 611.9 million euros from 445.8 million euros, after the lender repaid part of state aid reducing the interest cost.

The bank’s shares fell 1.3 percent to 59.2 cents in Milan trading Friday, valuing the bank at 3 billion euros.

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