Monte Paschi’s Exposure to Nomura Said to Drop Toward Limit

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Banca Monte dei Paschi di Siena SpA cut its exposure to Nomura Holdings Inc. to as low as 25 percent of total capital to meet requests by the financial regulator, three people with knowledge of the matter said.

Ties to Nomura dropped to between 25 percent and 28 percent from about 49 percent at the end of March, said the people, who asked not to be identified because the matter is private. While that’s still above the European Central Bank’s 25 percent threshold, it may be enough for the regulator to refrain from taking actions for breaching rules, two people said.

Under Basel III rules, a company cannot have ties with a single counterpart exceeding a fourth of regulatory capital. The ECB set a July 26 deadline for Monte Paschi to lower its exposure to Nomura to within the limit.

“The reduction of the exposure to Nomura would be a major milestone in the bank’s de-risking process,” Luigi Tramontana, an analyst at Banca Akros SpA in Milan with a buy recommendation on the stock, wrote in a note Monday.

Officials at the ECB and Monte Paschi declined to comment. Reuters reported Saturday that Monte Paschi cut its exposure to Nomura to within the 25 percent regulatory ceiling.

Monte Paschi fell 1.1 percent to 1.83 euros as of 1 p.m. in Milan. The shares have dropped about 5 percent this year, while the Stoxx Europe 600 Banks Index gained 15 percent.

Under Investigation

The bank cut its counterparty exposure to Nomura relative to capital after a 3 billion-euro ($3.3 billion) stock sale and a lower mark-to-market value due to a drop in Italian sovereign bond yields, said the people. The bank also closed some asset-swap deals with Nomura valued about 500 million euros, according to one person.

Monte Paschi is maintaining ties with Nomura through a deal known as “Alexandria,” a transaction allegedly used to hide losses in its accounts, after having explored options to cut exposure, two people said. The bank has said it’s reviewing all possible options to cut ties with the Japanese bank.

The deal, which had a negative mark-to-market value of about 300 million euros as of May 11, is currently under investigation by Milan prosecutors who suspect former officials at the two banks of false accounting and market manipulation.

Monte Paschi had to restate its accounts in 2013 to reflect a loss allegedly masked by the Nomura transaction and a similar deal with another lender. The bank was twice bailed out by the Italian government and had to raise 3 billion euros from investors after an ECB health check revealed a 2.1 billion-euro shortfall in capital.

The ECB gave an unfavorable assessment of Monte Paschi in its supervisory review earlier this year, urging it to merge with other banks in addition to the capital increase. Monte Paschi returned to profit in the first quarter.

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