Monte Paschi Jumps as Italy Favors Receiving Stock as Interest

  • Deputy Finance Minister says confident about bank strength
  • Morando says Treasury’s stake would rise to about 7 percent

Banca Monte dei Paschi di Siena SpA surged after Italy’s deputy finance minister said the Treasury favors receiving stock instead of cash as interest on aid the lender was given by the state, signaling optimism about the bank’s turnaround by boosting its stake.

The shares jumped 8 percent to 60.1 cents at 3:21 p.m. in Milan. That’s the best performance among 47 lenders tracked by the Stoxx 600 Banks Index. Monte dei Paschi, bailed out twice since 2009, must pay by July some interest on a portion of the 4.1 billion euros ($4.6 billion) in government funds it received in 2013, and which it has already reimbursed.

“In the current context we could go for shares,” Deputy Finance Minister Enrico Morando told Bloomberg in an interview at his Rome office on Monday. “I am confident about the reinforcement of this bank.”

Monte dei Paschi, led by Chief Executive Officer Fabrizio Viola, has lost about half its market value this year as bad loans eroded capital strength and profit. A slump in Italian banks, which are among the European industry’s worst performers this year, prompted the government to set up a rescue fund, known as Atlante, designed to buy shares of lenders that need to raise capital in an effort to restore investor confidence.

‘Positive Catalyst’

“If so, this is great news for Paschi, because it’s as if the bank did a capital increase for the Italian state -- free of charge,” said Stefano Girola who helps manage about 40 billion euros at Syz Asset Management in Lugano, Switzerland. “A positive catalyst for shares.”

The Treasury already owns about 4 percent of Monte dei Paschi after the bank paid past interest with new shares, an option it was given in the event of annual losses. The lender in 2015 posted a profit after restating accounts at the request of regulators. It would have posted a loss before adopting the new accounting measures.

Interest payments in shares would increase the Treasury’s stake to about 7 percent, Morando said.

‘Useful Solution’

“That is more or less the size of it,” he said. “It’s not a problem in a context in which that stake is not necessarily destined to last for centuries. Right now, it could be a useful solution which would not create any particular embarrassment.”

Morando said he didn’t know when the Treasury will decide whether to take cash or stock, though he predicted a decision “is not far away.”

“The news eases pressure on Monte Paschi for several reasons,” said Vincenzo Longo, a strategist at IG Markets in Milan. “If the government take shares instead of cash, this is good for the bank’s income statement. It is also a signal of the government’s confidence, and last but not least it implies that the government can exercise more influence on the bank’s governance.”

Paschi, which has had to tap investors twice for funds in two years, could turn to Atlante for backing, he said, adding there is no plan to do that now and it’s up to the rescue fund rather than the government. Atlante is designed to buy shares of troubled lenders that need to bolster funds, while also helping buying bad debt from banks.

Atlante Fund

“This role cannot be played by Atlante in an unlimited way, because its resources are limited, but they are in any case significant resources,” which could have a “reassuring” influence on other investors, Morando said. “The aim is that needs for capitalization are met through the intervention of many parties.”

Atlante, which has raised 4.25 billion euros from domestic and foreign institutions, can invest as much as 70 percent of its funds to recapitalize banks with ratios below regulatory requirements.

Monte Paschi’s common equity Tier 1 ratio on a transitional basis stood at 11.7 percent at the end of March, above the 10.2 percent minimum threshold set by the European Central Bank for 2016. Bad-loan provisions declined to a four-year low, helping the bank beat analysts’ estimates by posting a first-quarter profit of 93.2 million euros.

Morando wouldn’t comment on how much funding Atlante could commit to Paschi.

“I am not able to say, because we need to see the nature of the operation of reinforcement” at the bank, he said. “For now, this is still to be defined. We will also see if other banks that end up needing to capitalize themselves solicit an operation in which Atlante could be a protagonist.”

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