Photographer: Marc Hill/Bloomberg

Monte Paschi Rebounds as Authorities Edge Closer to Bad Bank

  • Deal to create state-backed bad bank said to be imminent
  • Government to provide up to 40 billion euros as collateral

Banca Monte dei Paschi di Siena SpA rebounded in Milan trading after losing almost half its value this week, as European Union officials signaled they’re ready to speed up the creation of an Italian bad bank.

Monte dei Paschi, bailed out twice since 2009, was up 37 percent to 70 cents at 2:58 p.m. in Milan. The rebound pared losses this year to 40 percent, giving the bank a market value of about 2.03 billion euros ($2.2 billion). The Stoxx 600 Banks Index rose 1.4 percent.

Investors fled Italian banks this week, spooked by delays in the country’s plans to set up a bad bank and by European Central Bank demands for more data from lenders. With Monte dei Paschi slumping 22 percent on Wednesday, EU Competition Commissioner Margrethe Vestager told Italian newspaper Corriere della Sera in an interview published Thursday that it’s “time to move to an agreement” on a vehicle for non-performing loans.

“The size of sell-off was unjustified by the bank’s fundamentals,” said Massimiliano Romano, an analyst at Concentric Italy. “The rebound is helped by expectations that turmoil speeds a quick solution to set up a bad bank and from the ECB’s reassurance that it’s not planning any further specific action on Italian banks’ bad loans.”

Shares pare losses in Milan trading
Shares pare losses in Milan trading

‘Deal Imminent’

Italy has proposed setting up a state-backed asset management company to offload bad loans weighing on the country’s lenders. The European Commission, the EU’s anti-trust authority, has blocked the project for months on concern it could violate rules against state aid.

The two sides are likely to reach agreement by the weekend, according to two people in Italy with knowledge of the matter. Monte dei Paschi would be one of the first to benefit from the new institution, they said, asking not to be identified because the discussions are private. They said the bad bank would receive up to 40 billion euros in state collateral.

The commission declined to comment when contacted by Bloomberg. Earlier Thursday,  spokesman Ricardo Cardoso said the commission was in contact with the Italian authorities and a meeting was scheduled for later this week. “We will of course work as quickly as possible,” he said.

Italy’s stockpile of bad bank loans reached a high of 201 billion euros in November, with record-low interest rates and a struggling economy squeezing profit margins. Vestager said it was important to “send the signal” that authorities are working in a “constructive way” to set up a bad bank, while Italian Prime Minister Matteo Renzi told Il Sole 24 Ore that it’s a “matter of a few weeks and everything will be more clear.”

Monte Paschi Chief Executive Officer Fabrizio Viola said Wednesday the bank is making an extraordinary effort to clean up its balance sheet. The bank suffered “limited” deposit withdrawals during the selloff, he said.

Customers withdrew 128 million euros over a few days this month from Monte dei Paschi branches in Lombardy, Piedmont and Liguria, Italian newspaper Il Fatto Quotidiano reported Thursday. The three regions represent 13 percent of the bank’s deposits nationwide.

ECB Review

Italy’s government said the requests for data don’t mean the ECB has specific concerns about the banks. “It is just a study to identify the best practices for the management of non-performing loans,” Finance Minister Pier Carlo Padoan said in a statement on Tuesday.

The review by the ECB’s oversight arm, the Single Supervisory Mechanism, will be carried out in the coming weeks. Banco Popolare SC, Banca Popolare di Milano Scarl and Banca Carige SpA, UniCredit SpA and Banca Popolare dell’Emilia Romagna are among Italian lenders asked to submit data on their non-performing loans.

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